Over the first few trading days of August, investors have again been reminded that markets don’t just rise. From Thursday, August 1 through Monday, August 5, stocks have declined about 6%. While this level of decline feels  somewhat “pedestrian”, it has certainly attracted attention.

It’s important to note that the media is always looking for reasons to explain the movements of financial markets. When stocks rise, it’s caused by some recent optimistic factor. When stocks declined, it’s attributed to some downbeat headlines. As humans, we seek explanations for everything.

This time, general recession fears have been pegged as the proximate cause for the market’s recent decline. In part, these fears have been driven by a few items.

The July jobs report was a bit weaker than expected. This report was joined by another negative reading of a closely-watched index of manufacturing activity. And, finally, investors are growing impatient with the Federal Reserve. There is a growing concern that the Fed is already “behind the curve” and has waited too long to cut interest rates to avoid a recession.

Recession worries have been constant since the Fed quickly raised interest rates in the spring of 2022 after their very slow response to the post-Covid rise in inflation. They steadily raised interest for about 18 months. Since August 2023, however, they’ve paused and have vowed to watch how things unfold.

The economy has continued to grow through it all. Yes, the latest job report showed a decline to only about 115,000 new jobs in July. But, the statistical margin of error of the jobs report is wide. Monthly reports should be viewed with some perspective. Over the past year, the US economy has added about 200,000 new jobs per month. Over the past six months, the monthly average is about 190,000. And, over the past three months, the monthly average was about 170,000. Yes, the jobs picture is slowing. But, things certainly don’t appear to be falling off the proverbial cliff.

Now, with inflation readings having steadily and significantly fallen since hitting their peak in late 2021, the Fed is expected to begin cutting rates at their September meeting. And, with the unemployment rate now finally rising after staying stubbornly low in face of substantial interest rate hikes, there is sufficient reason for the Fed to cut rates to help support the economy.

Without sounding like a Pollyanna, my current take on the recent stock market decline is investors are behaving like a person who shoots first and asks questions later. The fact is, as hard as we may try to explain the inexplicable, nobody really knows what causes markets to suddenly rise or decline.

The list of services of a wealth manager is always expanding. The job now goes well beyond the basics of investment management, tax planning, and estate planning. Notably, I’ve now committed to conducting online financial security audits, starting with my most vulnerable clients.

These audits cover four key elements: (1) Managing Passwords, (2) Identifying Scams, (3) Protecting Your Credit, and (4) Tapping Trusted Contacts. While nothing is fail-safe, the layering of these four elements works to lower the risks of falling victim to online fraud.

Password Management: There are many different ways to manage your passwords, ranging from using a simple notebook to using a password management software. Regardless of your chosen method, there are three principles that need to be followed. First, you should use different passwords for your key finance-related logins. Second, you should change your passwords regularly. Third, you should always use two-factor authentication for all your financial accounts and your primary shopping websites.

Scam Identification: Criminals are always looking for new ways to separate you from your money. Their primary goal is to get you to divulge your sensitive personally-identifiable financial information, such as your Social Security number, your credit card and bank account information, or your login credentials. In the end, your awareness and constant vigilance are the only realistic methods to avoid falling for a suspicious email, text, call or mailing. Given this, repeated reminders of the types of scams out there are the only defense. As silly and as simple as it may seem, you should consider having a list of common scams near any device you use to access your most sensitive, online accounts.

Protecting Your Credit: As I wrote about in a recent column, one way to limit the damage after you inadvertently divulge some of your sensitive personally-identifiable information is to freeze your credit reports. This process is a little bit time-consuming, but it can be accomplished in less than an hour with help. Freezing your credit file can help stop any attempts to open new loans in your name.

Trusted Contacts: Perhaps most important, you should identify key people in your life willing to act as a second set of eyes for you. Whenever you are in doubt, just pick up the phone and ask for their take on what to do (or not do!) Your trusted contacts should be included on your list posted next to your computer or devices. Reaching out to your trust contact just might provide you with enough pause to save you a lot of pain and worry.

Jason P. Tank, CFA, CFP®, EA is the owner of Front Street Wealth Management, a purely fee-only advisory firm in Traverse City. Contact him at (231) 947-3775, by email at Jason@FrontStreet.com and at www.FrontStreet.com

Q: I’m nearing retirement, but I’m worried about Social Security’s financial health. How likely is it that I won’t receive my full benefits? What should I be doing now to protect myself from potential benefit cuts?

A: Your concern is all-too-common, especially as the health of the Social Security system is increasingly viewed through a political lens. That really is a shame.

In May, the trustees of the Social Security system published their 2024 annual report. Each year, their report only shows subtle changes in the financial picture. Given the inherent, long-range set of assumptions used in their analysis, it’s a system that isn’t designed for abrupt changes over time.

Now, it’s true the Social Security “trust fund” is projected to be “depleted” in 2033. That’s the headline that gets the most attention each year. However, the term “depleted” is too strong. This simply means that, with no changes, the excess revenue that the Social Security system has accumulated over past decades will officially be used up. If there are no changes made to the level of benefits paid or the payroll taxes collected, in 2033 Social Security payroll taxes will only be sufficient to pay about 80% of the promised benefits.

On the surface, an immediate 20% in benefits is not a comforting thought. But, of course, the supposition that absolutely no changes will be made is wildly unrealistic. It’s just not going to happen. Too much is at stake and the solutions are too obvious.

Changes to Social Security will undoubtedly be made to both the long-term funding model and the benefit side of the equation. Fortunately, the changes that will be made will only need to be relatively minor. “Fixing” Social Security is akin to navigating a ship across the ocean. Small course corrections can lead to a vastly different destination. Long-range financial projections for Social Security are highly impacted by very small tweaks.

According to the most recent report, if the only dial to turn was Social Security’s funding model, all it would take to reset its course is to boost the dedicated payroll tax rate from the current 12.4% of wages (combined employer and employee contributions) to a level closer to 15.7% of wages.

Naturally, there is another dial to turn besides raising payroll taxes. Small changes to the benefit formula could take multiple forms. For example, making a change in how the annual cost-of-living adjustments are calculated is a particularly gentle way to alter the system’s long-run trajectory.

If I had to guess, I expect our elected officials to form a non-partisan “blue-ribbon commission.” That seems just like the kind of politically easy route they love to take when decisions simply must be made. But, don’t hold your breath quite yet. We still have a few election cycles ahead of us! 

Q: I’ve been having trouble managing every password in my life. Is there a service you can recommend that will help me keep track of them all and also keep me safe online?  

A: There are multiple ways people deal with the nuisance of passwords, ranging from unsafe to cumbersome. I believe the best solution is to use an online password manager like LastPass. The worst solution is to use the same password for every website or service. 

An online password manager can be used across all your devices and it will allow you to easily create complex passwords to ensure enhanced security. With one master password to remember, along with a second layer of added security known as two-factor authentication, it effectively lifts the burden of password management. 

Q: Unfortunately, I fell for an online “phishing” scam. I’m now worried that someone could open a credit card or take out a loan in my name. What should I do to limit the damage?

A: You should create accounts with each of the three credit bureaus and place a credit freeze on each of them. This will block all future credit inquiries, effectively making it impossible for fraudsters to open a card or borrow money in your name. 

Transunion, Equifax and Experian have now made this process much easier to set up and free. The old process was too complex and carried a cost. Today, it’s free. If you haven’t frozen your credit files, you should do it now.

Q: My father died last year at 70 and I inherited his IRA. I’ve read some confusing advice on how much I need to distribute from my Inherited IRA each year. Can you clear it up for me and explain the tax implications of my inheritance?

A: In 2020, Inherited IRA required minimum distribution rules changed. Essentially, there are now two sets of rules: one for non-spousal beneficiaries who inherited an IRA from someone already required to take minimum distributions (RMDs) and another for those who inherited from someone too young to start their RMDs.

Since you inherited an IRA from your father, and he was under the starting RMD age of 73, you don’t have to distribute money from your Inherited IRA until the end of the 10th calendar year following the year of his death. By the end of the 10th year, you must fully distribute the entire account balance and pay any tax due. 

Timing those distributions for the lowest tax obligation is the ultimate goal. You should seek expert tax advice on how to best manage the tax implications of your Inherited IRA distributions. Waiting until that final 10th year is likely a bad plan as it may cause much higher taxes. 

Most memories of the Great Financial Crisis have faded. Except the lingering effects of zero interest rates. For 13 years, savers received no interest on their cash savings. Then, in a blink, we experienced a surge in post-Covid inflation and the Fed raised rates. Suddenly, cash feels really good. Does it feel too good?

Today, it’s easy to get over 5% interest on your cash savings. Checking accounts pay far less. That portion won’t earn much. After all, banks have to make money, too. For your excess cash, most banks have finally stepped up to the plate to keep your money.

If you have excess cash sitting around that is earmarked for some relatively near-term purchase, the advice to follow is not for this money. But this part is definitely for you. For your near-term money, take a quick look at what you’re earning on your excess cash in your bank accounts. If you aren’t earning close to 5% interest on it, you’re essentially donating money to your bank. That’s never a good plan.

For your cash without a near-term purpose, it may be time to develop a plan to invest it for the longer-term. Why? Because the days of earning over 5% in cash are probably approaching an end. The Fed is expected to lower rates as their fight with inflation is reaching the endgame.

To start 2024, when inflation was falling quickly, investors had thought we’d have already seen some rate cuts in the late-winter, early-spring. But, the Fed hit the pause button as the decline in inflation hit a temporary speed bump. Now, the current expectation for the first interest rate cut is at the Fed’s September meeting. A second and possible third rate cut is expected in November and December. Fast forward to summer 2025, investors are now betting that rates will be about 1% lower than today.

While this might not seem like much of a cut in rates, these expectations aren’t really factoring in the possibility of a recession. In that event, the Fed will very likely speed things up. With that, today’s comfy 5% cash savings rates will be in the rear view mirror and the question of what to do with excess cash will become more urgent.

Naturally, the time for the sense of urgency is before interest rates get cut or a possible recession is underway. Shifting some cash into medium-term, high-quality bonds might help you to “lock in” today’s interest rates. Certainly, this transition isn’t easy to consider while making 5% without any real risk. That sense of uneasiness is, perhaps, a subtle sign to begin moving outside of your comfort zone.