Author: Blakely Financial

Presented by Robert Blakely, Emily Promise, and Steve LaFrance

The next phase in the  Russia-Ukraine crisis has begun, as Russia has launched attacks on Ukraine. With a war underway, it’s unsurprising that the markets are reacting. Before the market opened on Thursday, U.S. stock futures were down between 2 1/2 percent and 3 1/2 percent, while gold was up by roughly the same amount. In addition, the yield on 10-Year U.S. Treasury securities has dropped sharply. International markets were down even more than the U.S. markets, as investors fled to the more comfortable haven of U.S. securities.

The Markets Are Being Hit Hard

News of the invasion is hitting the markets hard right now, but the real question is whether that hit will last. It probably will not. History shows the effects are likely to be limited over time. In retrospect, this event is not the only time we have seen military action in recent years. And it’s not the only time we’ve seen aggression from Russia. In none of these cases were the effects long-lasting.

Historical Context and Current Events

Let’s look back at the Russian invasion of Georgia and the Russian takeover of Crimea, which is part of Ukraine. In August 2008, Russia invaded the Republic of Georgia. The U.S. markets dropped by about 5 percent, then rebounded to end the month even. Then, in February and March 2014, Russia invaded and annexed Crimea. Again, the U.S. markets dropped about 6 percent on the invasion but rallied to end March higher. In both of these cases, the initial market drops were erased quickly.

We essentially see the same pattern when looking at a broader range of events. For example, the chart below shows market reactions to other acts of war, both with and without U.S. involvement. Historically, the data shows a short-term pullback—as we will likely see today—followed by a bottom within the next couple of weeks. Exceptions include the 9/11 terrorist attacks, the Iraqi invasion of Kuwait, and, looking further back, the Korean War and Pearl Harbor attacks.

Still, even with these exceptions, the market reaction was limited both on the day of the event and during the overall time to recovery. Moreover, comparing the data provides valuable context for recent events. For example, as tragic as the invasion of Ukraine is, its overall effect will likely be much closer to that of the Russian invasion of Ukraine in 2014, in which Russia annexed Crimea than it will be to the aftermath of 9/11.

Capital Market Returns During Wartime

But even with the short-term effects discounted, should we fear that somehow the war or its impact will derail the economy and markets? Here, too, the historical evidence is encouraging, as demonstrated by the chart below. Returns during wartime have historically been better than all returns, not worse. Although the war in Afghanistan is not included in the chart, it too matches the pattern. During the first six months of that war, the Dow gained 13 percent, and the S&P 500 gained 5.6 percent.

Sources: The indices used for each asset class are as follows: the S&P 500 Index for large-Cap stocks; CRSP Deciles 6-10 for small-cap stocks; long-term U.S. government bonds for long-term bonds; five-year U.S. Treasury notes for five-year notes; long-term U.S. corporate bonds for long-term credit; one-month Treasury bills for cash; and the Consumer Price Index for inflation. All index returns are total returns for that index.

Returns for a wartime period are calculated as the index’s returns four months before the war and during the entire war itself. Returns for “All Wars” are the annualized geometric return of the index over all “wartime periods.” Risk is the annualized standard deviation of the index over the given period. Past performance is not indicative of future results.

Expect a Headwind

This data is not presented to say that the Russia-Ukraine crisis won’t bring real effects and hardship. Oil prices are up to levels not seen since 2014, which was the last time Russia invaded Ukraine. Higher oil and energy prices will hurt economic growth and drive inflation worldwide, especially in Europe and the U.S. This environment will be a headwind as we advance.

Economic Momentum Going Forward

Will we see effects from the headwind caused by the Ukraine invasion? Very likely. Will they derail the economy? Not likely at all. During recent waves of Covid-19, the U.S. economy demonstrated substantial momentum, which should move us through the current headwind until markets normalize. Moreover, as has happened before, we already see U.S. production increase, which should help bring prices back down.

The Ukraine invasion has created current market turbulence; we should look at what history tells us. First, past conflicts have not derailed either the economy or the markets over time. Historically, the U.S. has survived and even thrived during wars.

What This Means for Portfolios

Although the current events with the Russia-Ukraine crisis have unique elements, they’re more of what we’ve seen in the past. Events like yesterday’s invasion do come along regularly. Part of successful investing—sometimes the most challenging—is not overreacting. If you’re comfortable with the risks you’re taking, you might not be making any changes—except perhaps to start looking for some stock bargains. Consider whether your portfolio allocations are at a comfortable risk level if you’re worried. If they’re not, talk to your advisor.

This material is intended for informational/educational purposes only. It should not be construed as investment advice, a solicitation, or a recommendation to buy or sell any security or investment product. Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. All indices are unmanaged and are not available for direct investment by the public. Past performance is not indicative of future results. The S&P 500 is based on the average performance of the 500 industrial stocks monitored by Standard & Poor’s. The Dow Jones Industrial Average (‘the Dow’) is a price-weighted measurement stock market index of 30 prominent companies listed on stock exchanges in the United States.

Engage with the entire Blakely Financial team at WWW.BLAKELYFINANCIAL.COM to see what other expert advice we can provide towards your financial well-being.

Blakely Financial, Inc. is an independent financial planning and investment management firm that provides clarity, insight, and guidance to help our clients attain their financial goals.

Securities and advisory services offered through Commonwealth Financial Network, Member FINRA/SIPC, a Registered Investment Adviser.

Diversification and asset allocation programs do not assure a profit or protect against loss in declining markets, and cannot guarantee that any objective or goal will be achieved.

Authored by Brad McMillan, CFA^®, CAIA, MAI, managing principal, chief investment officer, at Commonwealth Financial Network^®.

© 2022 Commonwealth Financial Network^®

You’ve been doing the right thing financially for many years, saving for your child’s education and your retirement. Yet now, as both goals loom in the years ahead, you may wonder what else you can do to help your child (or children) receive a quality education without compromising your own retirement goals.

Knowledge Is Power

Start by reviewing the financial aid process and understanding how financial need is calculated. Colleges and the federal government use different formulas to determine need by looking at a family’s income (the most crucial factor), assets, and other household information.

A few key points:

• Generally, the federal government assesses up to 47% of parent income (adjusted gross income plus untaxed income/benefits minus certain deductions) and 50% of a student’s income over a certain amount. Parent assets are counted at 5.6%; student assets are calculated at 20%.1
• Certain parent assets are excluded, including home equity and retirement assets.
• The Free Application for Federal Student Aid (FAFSA) relies on your income from two years prior (the “base year”) and current assets for its analysis. For example, for the 2023-2024 school year, the FAFSA will consider your 2021 income tax record and your assets at the time of application.

Strategies to Consider

Financial aid takes two forms: need-based aid and merit-based aid. Although middle- and higher-income families typically have a more challenging time receiving need-based aid, there are some ways to reposition your finances to potentially enhance eligibility:

• Time the receipt of discretionary income to avoid the base year.
• Have your child limit their income during the base year to the excludable amount.
• Use countable assets (such as cash savings) to increase investments in your college and retirement savings accounts and pay down consumer debt and your mortgage.
• Make a significant purchase, such as a car or home improvement, to reduce liquid assets.

Many colleges use merit-aid packages to attract students, regardless of financial need. As your family explores colleges in the years ahead, be sure to investigate merit-aid opportunities as well. A net price calculator, available on every college website, can give you an estimate of how much financial aid (merit- and need-based) your child might receive at a particular college.

Don’t Lose Sight of Retirement

What if you’ve done all you can and still face a sizable gap between how much college will cost and how much you have saved? To help your child graduate with as little debt as possible, you might consider borrowing or withdrawing funds from your retirement savings. Though tempting, this is not an ideal move. While your child can borrow to finance their education, you generally cannot take a loan to fund your retirement. If you make retirement savings and debt reduction (including a mortgage) a priority now, you may be better positioned to help your child repay any loans later.

Some Parents Use Retirement Funds to Pay for College

Source: Sallie Mae, 2021

Consider speaking with a financial professional about how these strategies may help you balance these two challenging and important goals. Of course, there is no assurance that working with a financial professional will improve investment results.

Withdrawals from traditional IRAs and most employer-sponsored retirement plans are taxed as ordinary income. They may be subject to a 10% penalty tax if taken before age 59½ unless an exception applies. (IRA withdrawals used for qualified higher-education purposes avoid the early-withdrawal penalty.)

1) College Savings Plan Network, 2021

Financing a college education with the least debt involves putting together various resources in the most favorable way for your family. It requires planning, savings discipline, an understanding of financial aid, innovative college research, and good decision making at college time.

Your College Fund

Your savings are the cornerstone of any successful college financing plan. It’s helpful to think of your college savings as a down payment on the total cost, similar to a down payment on a home. Then, you can supplement your savings with other available resources at college time.

Setting aside money for college over many years takes discipline, and in many cases, sacrifice, including lifestyle changes. Of course, every family’s situation is different. But if you save regularly over time, you might be surprised at how much you could accumulate in your college fund.

A College Fund Takes Shape

Financial Aid

Financial aid is the next piece of the puzzle. It’s a broad term that can mean many things, with concepts that are often used interchangeably. At its core, financial aid is money to help pay for college: loans, grants, scholarships, and work-study. Your overall goal is to get the most grants and scholarships (grant aid) and the least amount of loans.

Colleges are the largest source of grant aid, with annual need-based and merit-based grant awards that can be in the tens of thousands of dollars. By contrast, the federal government’s two central grants, the Pell Grant and the Supplemental Educational Opportunity Grant, are generally smaller and reserved for students with the greatest financial need.

To help find colleges with the most generous grant aid, use a net price calculator available on every college website. A net price calculator estimates how much grant aid a student might expect based on their financial information and academic profile. By completing a net price calculator for several colleges, you can compare what your out-of-pocket cost (net price) might be at different schools and rank colleges based on affordability.

The federal government’s main contribution to the world of financial aid is student loans. Regardless of financial need, all students are eligible for federal student loans.

Additional Funding Sources

Other potential resources at college time might help reduce the overall amount you’ll need to borrow: what you can contribute from current income during the college years; your child’s earnings from a school or summer job; education tax credits, which could be worth up to $2,500 per year; financial help from grandparents or other relatives; and scholarships from civic, private, or nonprofit groups.

On the cost-cutting side, your child might consider graduating in less than four years; attending community college for two years and then transferring to a four-year college; becoming a resident assistant to get free or discounted room and board; living at home for a semester or two; exploring all in-state public college options, and deferring enrollment for a year to earn money and take advantage of any employer educational assistance.

After taking everything into account — the amount of your college fund, the grant aid your child might receive at specific colleges, the amount of money you and your child can contribute from current income during the college years, and the availability of other resources and cost-cutting measures — you can determine how much borrowing would be required for specific colleges and make an informed choice.

Borrowing money to pay for college can quickly spiral out of control. Make sure your child understands the monthly payment for different loan amounts over a 10-year repayment term. If the numbers look daunting, don’t be afraid to say “no” to specific colleges. Unfortunately, most teenagers experienced in finance enough to understand the negative consequences of excessive borrowing fully, so it’s up to parents to help eliminate options that aren’t economically viable.

 

This material has been provided for general informational purposes only and does not constitute either tax or legal advice. Although we go to great lengths to ensure our information is accurate and useful, we recommend you consult a tax preparer, professional tax advisor, or lawyer.

Engage with the entire Blakely Financial team at WWW.BLAKELYFINANCIAL.COM to see what other financial tips we can provide towards your financial well-being.

Blakely Financial, Inc. is an independent financial planning and investment management firm that provides clarity, insight, and guidance to help our clients attain their financial goals.

Securities and advisory services offered through Commonwealth Financial Network, Member FINRA/SIPC, a Registered Investment Adviser.