Looking Back at 2016 and Forward to 2017

Looking back at 2016: A Year to Remember

Donald Trump is going to be president and the Chicago Cubs are World Champions. And once again, financial markets did some notable things as well. 2016 will be hard to forget.

2016 provided several fitting examples of why we preach against trying to move money around in portfolios based on what is put forth by the media. Those who follow market news closely saw the year begin with a falling stock market. The financial press was full of stories pointing out how 2008 was the last time a year started badly, thus implying markets in 2016 would perform poorly as well. The first 10 days of trading in 2016 were in fact the worst in the 90-year history of the S&P 500 but 2016 was anything but a disaster.

There were two apt examples of how dicey it is to trade based on world or political news in the form of two surprise election results: the British people voted to leave the European Union (aka Brexit) and Donald Trump won our presidential election.

The consensus from media pundits was Britain would stay and Hillary Clinton would win the presidency. Before the election, in both cases, the proponents for Britain staying in the European Union and the opponents to Trump usually claimed that if the vote did not go their way, it would be bad for the economy and markets would collapse.

…true long-term diversified investors thrived in the second half of 2016. Traders, on the other hand, had a rough go of it.

It turns out the pundits were wrong about the election results. The British economy is suffering. The U.S. economy is not. More importantly, true long-term diversified investors thrived in the second half of 2016.

stocksTraders, on the other hand, had a rough go of it. With Brexit, traders would have had to go against the consensus and believe the British people would vote to leave and position themselves for a fall by getting out of the market. Then, because the markets absorbed the shock of the vote so fast, traders had less than a week to buy while the market was down. It is highly unlikely that someone who so was convinced that the markets would collapse would think the crisis was over that fast, especially since the market did not collapse.

Let’s suppose someone was right about the vote and market decline and actually bought in fast enough – how much would they have made? Not much. The day of the vote, June 23, the Dow closed at 18,011. Two days later, it bottomed out at 17,140. That 871-point drop is less than a 5% difference if you bought at the absolute bottom.

Interestingly, while the British Pound declined significantly, British stocks did quite well. The FTSE 100 index of UK shares closed at 6338.10 on the day of the vote, dropped only to 5982.20, had fully recovered from the initial shock by the close on June 29, and finished the year at 7142.80. British investors who focused on the long term had a good year. British traders, however, had little chance.

With the U.S. election, the window of opportunity didn’t really exist at all. As it became clear Trump was going to win, the overnight futures dropped. But by the time the market opened, it opened flat and finished up 257 points and never looked back. Traders who got out of the market assuming Trump would win and the markets would collapse missed out on a nice run.

True long-term diversified investors ignored all this – or at least didn’t act on the news or the speculation on what the news would be – and were rewarded for their discipline and patience. Because these investors did not radically change their positioning as a trading news follower might, they also did not incur the additional costs such as trading fees or especially taxes.

Mid-way through 2016 at the height of speculation about Brexit and just as the election rhetoric was heating up, one could have easily become gloomy about their portfolio. Large U.S. stocks were barely positive for the trailing twelve months. Small company stocks, value stocks and overseas stocks were generally down.

Investing can be hard. It requires perspective, resilience, discipline and patience. Trading is even harder.

But by year end, overseas stocks were in the black and small companies and value stocks significantly beat large U.S. companies for the year. Financially speaking, we will remember 2016 as yet another year in which we saw markets absorb new information and move quickly. Staying diversified, patient and disciplined is a more reliable way to handle portfolios than trying to trade on the news of the day or guessing which parts of the world’s markets will do well in any given period.

Investing can be hard. It requires perspective, resilience, discipline and patience. Trading is even harder. It requires predicting news and the market reactions to news, buying before things look good, overcoming higher costs, and paying more taxes along the way. 2016 was distinctive in some ways but not when it comes to investing. Invest, don’t speculate.


Looking forward to 2017

While trying to move money around based on the news remains a poor idea, there are some personal finance related issues coming in 2017 to keep an eye on. First, interest rates are rising. Toward the end of 2016, interest rates finally rose by a significant amount. This started well before the Federal Reserve increased the super short term rates they control.

Many of the headlines surrounding this rise such as “Bonds Suffer Post-Trump Bloodbath” can be disturbing. After all, we own bonds for stability and “bloodbath” does not connote stability. To illustrate the concept, we look at TLT, an exchange traded fund holding long-term treasuries. It dropped in price from $137.50 to $119.13 for a 13.36% drop during the last three months of the year. In contrast, SHY, an exchange traded fund holding short term treasuries dropped a mere .69% in the same period. Hardly a bloodbath.

Rest assured, the bonds we favor didn’t suffer that fate. Rising rates are not good for bonds but the bonds we like and the way we invest in those bonds are simply not likely to suffer large losses. Plus, whatever declines they do incur should be temporary.

The second personal finance issue to watch during 2017 is tax reform. President-elect Trump campaigned on significant tax cuts for all Americans. Specifically, he proposed to simplify the tax bracket structure by reducing the number of personal tax brackets from seven (ranging between 10% and 39.6%) to three (12%, 25% and 33%). Capital gain rates for high income households would change from 18.8% or 23.8% to 20%. Additionally, corporate rates would come down significantly. Also, he would cap itemized deductions but wants the standard deduction to go up substantially so low-income households would pay less than in prior years.

Nonetheless, the president does not write tax law, as that is the role of Congress. Members of both houses of Congress want to make changes to the tax code but many think President-elect Trump’s proposals cut taxes too much or in the wrong areas. The speculation about how this disconnect between Congress and the new president will shake out is likely to be widespread and impassioned. Media outlets should have little trouble filling time after the inauguration.

If you enjoy political drama, you should have a fine array of episodes to view. But for most, following the back and forth, rumors, leaks and trial balloons that will inevitably get coverage is an excellent way to raise their blood pressure. It is not likely to be helpful in making sound financial decisions. Making dramatic changes to your plans based on how pundits believe the negotiations will be resolved is simply not wise. Rest assured, we will keep apprised of matters and advise you when appropriate, based on your specific situation.


News & Notes

Tommy Lucas became an Enrolled AgentTommy EA: Tommy Lucas became an  Enrolled Agent, the highest credential the Internal Revenue Service awards, giving him unlimited practice rights representing taxpayers before the IRS. Tommy is the third EA on the team at Moisand Fitzgerald Tamayo, joining Ron Tamayo and Mike Salmon.

New numbers and tax issues for 2017: The IRS announced the official numbers for a slew of new thresholds and limits which vary every year based on inflation adjustment provisions. With inflation low, changes were minimal or non-existent. For instance, for the third consecutive year, the maximum contribution to an IRA remains $5,500 ($6,500 if age 50 or older) and the maximum employee contribution to a 401(k) stays at $18,000 ($24,000 if over age 50). For a more extensive list see: https://www.irs.gov/uac/newsroom/irs-announces-2017-pension-plan-limitations-401k-contribution-limit-remains-unchanged-at-18000-for-2017

2017 tax brackets were also announced. See the following chart from the Tax Foundation: http://taxfoundation.org/article/2017-tax-brackets

Please remember to call us: When anything significant happens in your life, including changes in your finances, family, or health that could affect your financial plan, please let us know so that we can adapt our planning and portfolio work for you accordingly. Also, if you ever fail to receive a monthly statement for one of the Schwab Institutional or TD Ameritrade Institutional accounts under our management, please let us know so we may assure the respective custodian delivers your statements promptly.

Yours truly,

The Team at Moisand Fitzgerald Tamayo, LLC



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Moisand Fitzgerald Tamayo, LLC is an Orlando, Tampa and Melbourne, Florida based fee-only financial planner serving central Florida and clients across the country. Moisand Fitzgerald Tamayo, LLC specializes in providing objective financial planning, retirement planning, and investment management to help clients build, manage, grow, and protect their assets through all phases of one’s life and the many transitions in between. If you have any questions or would like to discuss anything further, please give us a call or send us a note. If you are not a client and wish to receive emails notifying you of new posts – no more than once per month – fill out the subscription information in the sidebar to the right. For more frequent updates, follow us on FacebookLinkedIn, or Twitter.  

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About Dan Moisand

Dan Moisand is a fee-only financial advisor with Moisand Fitzgerald Tamayo, LLC. He is a regular contributor for multiple outlets, including Florida Today, MarketWatch, and The Wall Street Journal. His writing and financial advice have also been featured in Financial Planning, Investment Advisor, Wealth Manager/Advising Boomers, Forbes, Smart Money, and The New York Times, among other publications. He is the only two-time winner of the Journal of Financial Planning’s “Call for Papers” competition and has been named a top financial planner and advisor by multiple publications. Investment News named Dan one of the “twenty most influential men and women” in the history of financial planning. He currently serves on the Board of Directors for the CFP (Certified Financial Planner) Board.


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