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Bear With Us

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Happy Thursday,

The biggest financial news story this week is that the stock market is, as the kids like to say, spiraling. Investors are hitting the panic button and selling as they take in a series of serious threats to the economy: a still-raging war in Europe, record-high inflation, supply chain shortages, rising interest rates (you will hear the term 75 basis points a lot this week…), and COVID cases climbing once again in many places.

Is a recession on the horizon? Many economists, Wall Street analysts, and company executives seem to think so. The S&P 500 index, regarded as a broad proxy of the US stock market, is in bear market territory as it’s down by more than 20% from its peak. Since the 1920s, the average bear market has lasted 19 months and dropped an average of 38% so there could be more turmoil ahead. Experts are also forecasting a “Crypto Winter,” and it’s pretty chilly already: the largest digital currency, Bitcoin, has lost half its value in the last six months, and it’s not even among the worst crypto performers.

The temptation to check your investing account multiple times a week (or day!) is natural, but whatever you do, don’t over react. It’s hard to watch and it’s even harder to keep investing, but experts say that the simplest path to long-term financial success is to protect your portfolio with the two sacred rules: diversification and rebalancing. Combine this with wearing sunscreen every day, and your future self will thank you.

News you can use

Graphic of newspaper with magnifying glass

Electric flying cars, an inflatable e-scooter that fits in your backpack, automated, sustainable greenhouses for the Earth and Mars, virtual concerts in the metaverse… These are some of the innovations being presented at the VivaTech conference in Paris, France this week. Grab a croissant and get a glimpse at the future of areas like low carbon, mobility, robots, and health.
Juneteenth is just around the corner. As many celebrate and take the day to reflect, it is also a great day to check that your investing is aligned with your values. There is a long way to go, but — as we noted a few weeks ago — many corporations are putting in place strong racial and ethnic diversity policies. Another option if this is an area you prioritize: Check out the NAACP Minority Empowerment ETF (NACP), created by a non-profit that tracks many of these companies.
As ESG comes under attack for greenwashing, regulators are busy keeping fund managers honest. German authorities raided Deutsche Bank last month, and now the SEC is reportedly looking into the ESG claims of Goldman Sachs’ mutual funds. One lawyer called these actions the “first ripples of a wave of regulatory interventions that we are likely to see in the coming months.”

401(k): A Tax Shelter for Your Retirement Egg

Financial experts generally advise that people start putting aside money for retirement as early as their 20s and let the magic of compound interest (your returns reaping more returns) do its thing. The earlier you start, the more time your money has to grow — and perhaps afford you a cushy retirement by the sea. The primary way Americans do this is through a 401(k) retirement plan offered by their employers.

What is it?

A 401(k) is an investment account offered by employers. The money is automatically deducted from your paycheck and gets invested in funds, which helps you develop a saving habit and think long-term. Your 401(k) contributions and investment returns are allowed to grow tax-free, and contributing a chunk of your salary could put you in a lower tax bracket. You do have to pay income taxes later when you begin withdrawing funds in retirement.

How much should I contribute?

There’s an annual limit on how much you can put into your account (this year it’s $20,500), but no minimum. Many employers show their appreciation by matching employee contributions to your 401(k), effectively doubling your savings. You should aim to contribute enough to take advantage of this perk. It’s free money that should not be left on the table if you can help it! You usually “own” these matching funds after only a few years. You can also use a retirement income calculator to gauge if you’re putting in enough for the golden years you’re hoping for.

Can I dip into it early?

If you find yourself in need of money and your emergency fund is depleted, you can take a loan from your 401(k) and pay it back with interest in a fixed amount of time. If you wish to withdraw money before you reach the age 59.5, you will also have to pay a penalty and taxes on that amount.

What if I change jobs?

You can either leave the account where it is and start a new one at your new job or “roll over” your current 401(k) into your new 401(k). You can also take the cash accumulated, but there’s that penalty and taxes to pay.

How do I choose what to include in my 401(k)?

You’ll be able to pick from a set of investing options, mainly stock and bond mutual funds and ETFs. It’s always a good idea to research the individual funds online and check the fees they charge. How you allocate your money depends on your age and goals, and online calculators or an advisor can help you decide. You can also choose a single target-date fund that does the allocation part for you.

What about aligning my investing with my values?

We all invest with different values, but aligning your 401(k) with your priorities can sometimes be a challenge. For example, less than 5% of 401(k) plans offered an ESG option in 2020, so it’s far from straightforward. But there’s still things you can do:

Get a closer look at the funds on offer: Investors can check any fund’s sustainability credentials online with tools like those from As You Sow, MSCI’s ESG fund ratings, and Morningstar’s ESG Screener. Comparing different funds on offer based on what’s in them is a way to align your retirement account with your values.
Ask your company (nicely): Employers choose the funds offered in their 401(k) plan and have a responsibility to make sure they’re solid. Speaking to the person in charge may help. The New York Times recommends pointing to studies that show ESG and good returns are not mutually exclusive and requesting a socially responsible fund that focuses on large US companies. A good place to start: FWIW’s list of the largest sustainability-focused ETFs and Funds.
Get out and vote: Recently, shareholders at Amazon and Comcast asked the companies to evaluate whether their climate goals align with their retirement plan options. They were unsuccessful, but similar proposals in the future are opportunities to push for change.