Do You Remember Your First Time?

Do you remember your first time? The words awkward, exciting, and clunky come to mind. The fear of the unknown is only surpassed by the seemingly unlimited future reward. We of course are talking about the internet…

The sound of the AOL sign-in, floppy disks, paying for online minutes…that was the beginning of the internet. The internet in the mid 1990’s was awkward, exciting, and clunky. On some level, we all knew it would radically change our world and thirty years later, it has, as we are basically carrying our entire lives in our pocket.

Silicon Valley, and then naturally Wall Street, are both showing the same level of almost hysteria about the great expectations for Artificial Intelligence (AI) as they did for the internet. Is it the next really big thing? It is early in the game, and current applications are far from perfect, but the key words are compounding, speed, and generative. Data is being processed at incredible multiples and speed. Picture the 173 million items contained in the Library of Congress accessed in literally seconds to render a decision. Consider facial recognition to diagnose strokes and other diseases. Imagine genetic testing for new life saving drugs and procedures that could knock years off the approval process. Finally, electric vehicles are obviously top of mind right now, but AI has already begun to transform agriculture, logistics, and a wide array of ever day functions in dramatic fashion.

The point is, as investors we need to overlay the huge potential effects of AI on society, both good and bad, as we develop our investment plans. Like the magic of compounding our investments, the compound effect of generative data and information management is happening right now. Sir Francis Scott Bacon, “Knowledge itself is power”.

For the first quarter of 2023, volatility continued but we were able to see some bounce-back gains across the equity board on the heels of what was a brutal prior year. For the record, Nasdaq stocks paved the way, gaining about 16.9%, followed by the Russell 1000 Growth up 14.2%, the large cap S&P 500 gaining about 7%, and the venerable Dow basically unchanged. Of note, and piquing our interest, the developed international markets had a strong showing to begin 2023, benefiting from lower-than-expected winter energy prices, a positive interest rate environment, China’s re-opening, and comparatively lower stock valuations.

We continue to monitor our portfolios to take advantage of current financial trends, including high short-term yields (inverted yield curve), potentially positive news internationally, and near record low employment rates. We appreciate your confidence in our firm, and we look forward to helping you navigate the financial scene for many years to come. Finally, while looking at the current state of AI, we are reminded of a quote by author James Surowiecki, “The history of the internet is, in part, a series of opportunities missed.”

April 18, 2023|Commentary|

Bruce “The Boss” Springsteen and the Anatomy of a Value Stock

Bruce Springsteen continues to have a prolific six-decade career as a Rock and Roll mega star.  He has sold over $140 million records, which makes him the Warren Buffett of contemporary music.  His long-term success can only be envied by investors as long-term is our overriding mantra.  But Bruce as a value play, let’s look…

Plant on pile coins in the bottle, Money growing concept and the goal success.

Value investing can easily be described by a quote from Charlie Munger…”All intelligent investing is value investing…acquiring more that you are paying for.  You must value the business in order to value the stock.” It involves going against the favored crowd, anticipating the prospects years down the road, the ability of a company to scale, and the opportunity for long-term wealth generation.

The Wall Street Journal recently highlighted the 50-year anniversary of the release of the Bruce Springsteen studio album “Greetings from Asbury Park, N.J.” in January of 2023.  Upon its release, the album garnered little fanfare as compared to the “shiny new” progressive rock bands of the time like Jethro Tull and the Moody Blues.  The album only managed at its best to reach 60th place on the US charts (two years after its release) and did not even chart in the UK.  The reviews were good, but the masses did not see the value.  Springsteen was well known in his market and extremely diligent at his craft, but was considered “a cheap, bar band take-off of Bob Dylan”.  The rest is history…after tireless touring all over the country, the band became more than the east coast leader of the Jersey Shore Sound and after the release of “Born to Run” they were off to the races.  The “Greetings” album, which took years to even chart, ultimately did chart in the UK at 41 in 1985 and is ranked 37th on the Rolling Stone’s list of greatest debut albums.  Value is in the eyes and the ears of the beholder, whether the art form is music or investing.

As for 2022, the recap is well known now.  It was a very difficult year for both stocks and bonds (fixed income) as the Fed realized they missed the mounting inflation problem and continues to attack higher prices with interest rate hikes to slow the economy.  We continue to believe that current inflation is a direct result of the record amounts of stimulus added to the economy because of the Pandemic and will most likely just need time to dissipate through the system.  For the record, value investing was the best house in a bad neighborhood as the Dow was down 8.78% last year versus a drop of 33% for the Nasdaq, 19% for the S&P 500, and not to be outdone, a drop of 11% for fixed income.  Looking ahead, we believe that a combination of earnings that are stable, mixed with a significant drop in prices from peak inflation could help us bounce back in the year ahead.  Whatever happens on Wall Street, we will continue to search for value in our investments and look forward to seeing everyone personally in the New Year.  Thank you again for your confidence in our firm.

January 13, 2023|Commentary|

Actively Stick to Your Plan

Are you a Builder? Protector? or Distributor of wealth? During times of market volatility, what adjustments if any to your portfolio or financial plan should you consider? Before we discuss potential financial plan moves, let’s briefly review the current state of global markets.

woman written plan on notepad

The third quarter was a quarter to forget. It began with a strong rebound for risk assets as the stock market roared back during July and early August, but as inflation data, interest rates and the Federal Reserve became top of mind the stock market began a downward trend and finished lower for the quarter. Investors had a hard time finding any support in financial assets as growth equities, value equities, international equities, and investment-grade bonds all ended lower.

The S&P 500, NASDAQ, and Dow Jones are now down 24%, 32%, and 20% respectively year-to-date (YTD). So, the question that investors are now asking themselves and their wealth management teams is what do we do now? The cliché answer that a financial pundit may say is “stay the course” and “invest for the long-term.” Well, we believe there is value in this message during times of volatility, however it is prudent to take into consideration an investor’s unique circumstance. We would answer Actively Stick to Your Plan. An investor may be a wealth builder, wealth protector, or wealth distributor, and based on their financial plan there may be opportunities in today’s markets to strengthen their financial foundation.

Wealth Builders are investors who may have just started investing or have been investing for over 20 years. These individuals or households are actively trying to grow their net worth through contributions to savings accounts, retirement plans, investment accounts, real estate, etc… Wealth Builders typically have a long-time horizon before they need income from their portfolios, which allows them to potentially take on more risk. Wealth Builders should welcome opportunities like today as a market pullback provides an opportunity to buy more shares of an investment. We believe today is an opportunity for Wealth Builders to reevaluate their monthly budget to increase their investing contributions. Furthermore, investors may want to consider a Roth conversion, where it may make sense to pay taxes now compared to in the future for their retirement savings.

Wealth Protectors are investors who have grown their net worth over time, are usually still working, but can see and smell retirement around the corner. These investors are usually not withdrawing from their investment portfolios during this stage but have begun the planning process of withdrawals. Wealth protectors should use a market downturn to analyze the risk and income of their portfolio as they plan for retirement withdrawals. Furthermore, wealth protectors may find contributing to a Health Savings Account (HSA) beneficial to lower current taxes and to access another investment vehicle that can grow tax deferred.

Wealth Distributors are investors that have reached retirement or are using their portfolio for current income. Wealth distributors may want to check-in on their current withdrawal strategy and adjust if they are taking more income from their portfolio than needed or look for opportunities to increase their income on their investments. Wealth distributors have opportunities to buy equities and bonds at higher current yields. Therefore, investors may want to re-balance their portfolios based on current income needs and risk tolerance.

We look forward to our next conversation to review your financial plan or possibly create one for your family, to see what adjustments, if any, may help you build a strong financial foundation. We thank you for your continued support of our firm. As always, “you do the dreaming, we’ll do the math.”

October 5, 2022|Commentary|

The Longest Shot Has Won the Kentucky Derby

The unimaginable happens. If you didn’t catch the Kentucky Derby this year, we suggest that you check it out on YouTube. For context, Rich Strike’s chances of winning the Kentucky Derby were 80 to 1, which means that if someone bet $10, their bet would have returned $818. Furthermore, the likelihood of this happening was a little over a 1% chance, almost unimaginable. To spoil your YouTube search, Rich Strike not only won the Kentucky Derby, but he came from behind to win possibly the greatest race in our lifetime. Rich Strike’s victory proves that anything can happen even if you are behind, or the odds are stacked against you.

We look forward to closing the books on the worst start for the stock market in over 50 years. Global equity markets continue to face headwinds of Russia’s invasion of Ukraine, supply chain disruptions from COVID lock downs in China, high inflation, and rising interest rates. Furthermore, fixed income markets have provided little protection for portfolios as the correlation between equities and bonds remains positive in 2022. The gates opened, the race began, and investors feel that they are behind the pack.

The S&P 500 and NASDAQ reached bear market territory in the second quarter and the indexes are down about 20% and 30% year-to-date (YTD) respectively. The Dow Jones Industrial Average has fared better to start the year helped by its tilt toward value companies with the index down about 15% YTD. The performance dichotomy between the NASDAQ and Dow can be partly explained by their sector allocation. The NASDAQ Composite has an allocation over 60% to Information Technology and Communication Services, whereas the Dow has less exposure to technology and a higher allocation to Health Care. The information technology, communication services, and health care sectors are down about 27%, 30%, and 9% YTD.

It is during times of high market volatility where we must rely on data over emotions as investors. Since 1942, a bear market has occurred about every six years for the S&P 500 and last on average just under a year. Whereas bull market periods last about 4.5 years and on average have a cumulative total return of over 150% (First Trust). Therefore, instead of preparing your portfolio for a bear market today, it may be more prudent to upgrade your portfolio to quality companies for the bull market of tomorrow.

It may surprise some investors, but international equities (down about 18% YTD) have outperformed the S&P 500 this year. International markets have faced major headwinds caused by the Russian invasion and Chinese lock downs, but some countries like Australia have benefited from the rise in commodity prices contributing positively to market performance. Furthermore, Chinese equities may be a horse you want as easing COVID restrictions and potential additional stimulus may boost their equity market in the near-term.

The race is not over until it is over and every household’s finish line is different. Some investors are focused on the finish line of retirement funding where others have education funding top of mind. Regardless of your household’s goal we work with our clients to create a plan and to stick to their plan during rain or shine. If a client abandoned their plan and missed just the 10 best days of the stock market from 1997 through 2021, they may have missed over 4% of annualized return (Invesco). Rich Strike was not the favorite, was not the leader, but he was the winner. Stick to your plan.

We thank you for your continued support of our firm and look forward to our next phone call, zoom call, or hopefully an in-person meeting. As always, “you do the dreaming, we’ll do the math.”

July 6, 2022|Commentary|

This Is Not Your Father’s Market

Oldsmobile Super 88 1959 in Cuba

We need to go back 34 years to remember the infamous Oldsmobile commercial where the slogan was “This Is Not Your Father’s Oldsmobile.” The idea was that Oldsmobile had changed and evolved and their new image would resonate with a younger client base. In short, the advertisement ended up being more of a slow lane to a dead end than a revitalization of the brand. Today, there are parts of the global markets where this slogan does resonate, as well as areas where the market appears to have changed, but after looking underneath the hood you may uncover an engine that looks just like the past.

Today is not your father’s bond market. On January 1st, 1988, the 10yr US Treasury Bond had a yield of 8.26% with inflation in 1988 at about 4.0% ( Therefore, a US Treasury Bond provided a real yield of about 4%. Fortunately, for bond investors, interest rates maintained a downward trend for the next 34 years. Today, the 10yr US Treasury Bond has a yield of about 2.4% with inflation red hot to start the year, coming in at nearly 8%. This combination produces a negative 6% real yield and creating a flat tire for your portfolio. While interest rates may remain in a trading range in the near term, they may likely rise as the Federal Reserve continues to raise rates. As interest rates rise, bond prices fall. Therefore, today’s fixed income climate has low, but rising yields and high inflation, which translated to about a -6% return for Investment Grade Bonds year to date (YTD). We believe it’s prudent to opportunistically manage your bond holdings to provide ballast for a portfolio without hindering your future growth.

International equities (about -6% YTD return) may be worth a second test drive. International equities began the year outperforming their US counterparts but gave back their outperformance after the Russian invasion of Ukraine. We continue to monitor the war and hope for a peaceful resolution soon. With that said, the current market environment may provide opportunities in Developed and Emerging Markets as they continue to trade at a discount to US equities on Price-to-Earnings ratios and may be well positioned to grow during a period of higher commodity prices. International equities have given investors multiple head fakes in recent years, causing our team to remain cautious and selective, but we think this is the right time for a second test drive.

The US equity markets are off to a choppy start for the year, with worries surrounding inflation, interest rate hikes, and the Russian invasion of Ukraine. Fortunately, March provided some relief as major indices rebounded off their lows. The Dow Jones and S&P 500 were down about 4% and 4.6% respectively, and the more technology and growth heavy NASDAQ is down about 9%. The US equity market today looks more like Tesla than Ford on the surface. However, it is legacy companies like Chevron, Berkshire Hathaway, and Coke that are providing strong returns for investors. Companies with the ability to adapt to the ever-changing marketplace, pass on cost to the consumer, and a strong balance sheet to weather a storm continue to deliver strong performance. We believe that the US equity market is still your father’s market. The market over time will continue to reward companies with strong earnings and fundamentals regardless of what the company looks like on the surface, as it is the numbers under the hood that will guide our decisions and future returns for our clients.

We thank you for your continued support of our firm and look forward to our next phone call, zoom call, or hopefully an in-person meeting. As always, “you do the dreaming, we’ll do the math.”

April 5, 2022|Commentary|

2022 Bucket Strategy

As each year ends, investors, business owners, and households alike begin thinking and maybe even dreaming about what the new year will bring. Will 2022 be an artist’s break out year, will “Buddy Buckets” shine in ACC basketball play, or will a household spend or save more? The latter begs to ask the question about budgeting and planning for the year ahead.

We advise clients to use a bucket strategy for budgeting based on their individual financial plan.  As one example, the 20-30-50 model suggests 20% savings, 30% wants (think socializing and travel), and 50% fixed bills like housing. Regardless, of what model works best for your family, we would like to focus on the savings portion today. Using a bucket strategy, we advise clients to break out their savings into three distinct buckets.

Bucket Strategy

Cash Bucket
(Rainy Day fund):

Depending on a household’s financial plan and investment phase the specific amount of cash we advise varies. However, an example may be 3 months of expenses for a young investor in the accumulation phase.

Medium-Term Bucket:

Comprised of an investment account or education planning (UGMA, 529 Plan, etc…). After your retirement bucket has been maxed out, this bucket can be used to invest the remainder of annual savings.

Retirement Bucket:

The retirement bucket includes employer-sponsored accounts like a 403(b) or 401(k) as well as individual retirement accounts like a Traditional or Roth IRA. We may advise clients to grow their Roth bucket as much as they can as we anticipate future tax increases.

As for global markets in 2021, what a year! The S&P 500 grew about 29%, the Dow Jones Industrial Average was up about 21% and the NASDAQ rose about 22%. International Equities struggled to keep up with their US counterparts in 2021 but still rose by about 7%. Unfortunately, Investment-Grade Bonds (represented by the Bloomberg Aggregate Index) detracted from portfolio performance losing about 2% on the year. As a former colleague once coined, 2021 showed “diworsification” as the S&P 500 was the best game in town.

As we look out into 2022, there are two major themes for investors – inflation and the transformation from a pandemic to an endemic disease.

Inflation may remain a concern for some time which could cause the Federal Reserve to raise interest rates faster than the market expects. Therefore, we have been aligning our portfolios to overweight companies that have quality earnings and pricing power to pass along price increases to the consumer. In terms of COVID-19, it appears to be more and more evident that COVID-19 may look more and more like influenza as an endemic disease and will remain a health concern into the future. As COVID-19 (depending on the variety of strains) becomes more common place, it may alleviate disruptions in everyday life. Therefore, families and investors may be able to finally take that long awaited vacation or be able to visit with family more often than in the previous two years. We believe this transformation will cause volatility in global equities, but an overall strong backdrop for increased corporate earnings in the years ahead. We want to wish everyone a healthy and a prosperous 2022 that fills all of your life buckets! As always, “you do the dreaming, and we’ll do the math!”

January 5, 2022|Commentary|
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