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The RFG Weekly Wealth Report

September 25, 2017

Domestic indexes were mixed last week, as the Dow gained 0.36%, the S&P 500 eked out a 0.08% increase, and the NASDAQ lost 0.33%. International stocks in the MSCI EAFE added a solid 0.68%.

Three stories that have dominated conversations and driven investor attention in 2017 continued last week:

  • Healthcare policy: The Senate's continuing discussion of healthcare reform impacted stock performance in connected industries.
  • Tension with North Korea: The markets responded quietly to continuing conflict between President Trump and Kim Jong Un, although some investments saw a bump later in the week.
  • Interest rate updates: While the Fed chose not to raise interest rates in its most recent meeting, it indicated that a December hike is definitely still on the table.

When announcing its latest interest rate perspectives, the Federal Reserve also indicated that it would begin to reduce its balance sheet next month.

But, what does that really mean - and why does the Fed have a $4.2 trillion balance sheet, anyway?

A Look Back on Quantitative Easing

During the financial crisis and recession, the Fed took an unprecedented and controversial approach to stabilizing our economy and the world's markets. By buying trillions of dollars of Treasury and mortgage bonds between 2008 and 2014, it aimed to encourage hiring, economic growth, and investing. This action is commonly known as Quantitative Easing (QE).

Through the three rounds of QE, the Fed added trillions of dollars of new money to the financial markets. Since QE first began almost a decade ago, we have seen unemployment reach a 16-year low and the S&P 500 more than triple from its bottom in 2009. Although economic growth is still slower than before the recession, the Fed believes the economy is now strong enough to handle more normal monetary policy.

In October, the Fed will start the gradual process of lowering its balance sheet - currently equal to about a quarter of Gross Domestic Product (GDP). Thus far, investors have had a mild response to this plan. As the Fed begins slowly allowing billions of dollars of bonds to roll off, we will closely monitor the economic impact.

We know that monetary policy can seem like an incredibly complex topic - and, frankly, it is. However, we think you deserve to understand the large forces at play in your financial life. If you have any questions about the Fed's latest announcement, or any other financial details, we're always here to talk.

Quote of the Week

"Never mind what others do; do better than yourself, beat your own record from day to day, and you are a success."

--William J. H. Boetcker

Golf Tip of the Week

Hit a Knockdown Lob Shot

It may seem counterintuitive to use "knockdown" and "flop shot" in the same sentence, but it works. Hitting a good, go-to flop shot is easier than you think. First, make sure you notice the loft of your lob wedge. Most hover in the 58- to 60-degree range, meaning you should have no problem lifting the ball into the air. There's no need to try to lift the ball upward.

To hit the knockdown flop shot, position the ball front of center in your stance, with your hands just ahead of the golf ball. Because you already have plenty of loft, there's no need to rotate the face open. Keep it square to the target.

As you initiate your backswing, cock your wrists so the club is already parallel to the ground when your hands reach your thighs. Continue your backswing as you normally would, and keep that angle.

As you transition from the top of your swing to impact, here's the most important bit of info: Keep your hands ahead of the ball and stay low. If you try to flip the ball up, you might occasionally hit a lobber, but you probably won't be able to control it. Instead, stay low both at impact and through the finish. The result will be a nice mid-high lob shot that trickles a few feet forward once it hits the green.

Tips Courtesy of GolfTips Magazine

Financial Question of the Week

What is wrong with the 4% rule?

The standard rule of thumb for many years was 4%. That's how much you supposedly could withdraw every year from your retirement accounts - even on an inflation-adjusted basis - and not run out of money.

But the problem with that approach is that it's based on a single point in time. You make the decision once, and follow it for your entire retirement. And that may not be optimal because the one thing we can always count on is change. As you age, you will potentially live longer. You could experience an extended market downturn at the beginning of your retirement. Unexpected expenses could appear.

An examination of five different types of withdrawal strategies found this strategy is often the least efficient approach to maximizing lifetime income for a retiree.

The best strategy incorporates mortality probability, where the projected distribution period is updated based on the mortality expectations of the retirees and the withdrawal percentage is determined based on maintaining constant probability of failure.

Every year you are alive, figure out how much longer you are expected to live. You do it every year because the longer you live, the longer you are likely to live. As an example: the average life expectancy for a new born is approximately 74 years, the average life expectancy for someone 65, though, is 85.

A recent Retirement Adviser panel also urged retirees and pre-retirees to make sure they work with advisers who are familiar with using all the tools available for building a retirement-income plan. Some might focus solely on using a systematic withdrawal plan while others might focus solely on using annuities. To have a really good plan you need an adviser who understand both.

You have to strike a balance between taking too much money early and being broke later, and taking too little money early and having too much leftover later. The goal should be to smooth your consumption over time and build a plan broadly based around lifestyle changes.