Have you heard about the movement called F.I.R.E. investing? F.I.R.E. stands for Financial Independence Retire Early. Sounds like a great idea as who would not want to be financially independent with the ability to retire on their timeline rather than on the timeline of retirement income like social security. The goal for F.I.R.E. investors is to save and invest 50% to 70% of their income so that they can retire in their 40s maybe even their 30s! You may need to read that sentence again, as the answer to the question you are inevitably asking is YES, F.I.R.E. investors work to save over 50% of their income.
How does this work? A F.I.R.E investor first calculates their financially independent (FI) number. This number provides the investor the ability to retire early, switch jobs, work part-time or whatever the investor desires. Everyone’s FI number is different, but one easy calculation someone could use is 30x their projected yearly expenses. Thus, if your expenses are $50,000 and using this F.I.R.E. investor calculation you may need about $1.5 million.
Saving 50% of one’s income is nearly impossible for most investors with the unpredictability of life from raising a family, the cost of education, investor debt, and the list goes on. However, what we can learn from the F.I.R.E. movement is the power of a financial plan and the liberating feeling of being financially independent. We constantly work with our clients to put a plan in place to help them achieve their financial goals whether that be retiring early or building a nest egg for generations to come.
As for financial markets today, we just finished our 6th consecutive positive quarter for the S&P 500, albeit with the recent volatility in September it does not feel that way. The S&P 500 is up about 16% YTD (year-to-date), the Dow Jones Industrial Average is up about 12% YTD and the NASDAQ is up about 13% YTD. Investment-Grade Bonds (represented by the Bloomberg Barclays Aggregate Index) dampened volatility for portfolios in September as they outperformed equities on a relative basis but are still negative on the year.
Recent headlines frame a daunting wall of worry for investors as Wall Street Bulls sound a bit more cautious on media outlets. Rising interest rates, raising the debt ceiling, the US government defaulting on its debt, and a government shutdown would make anyone fearful of what is to come in the markets. However, as some investors worry about a correction that will inevitably come, we prepare for the volatility and the opportunity it presents like buying great companies at lower prices or managing taxes for our clients as Uncle Sam is always lurking and happy to tax capital gains.
We are excited to close the chapter on September as it is historically one of the worst months of the year for the equity markets and are ready for a fall filled with crisp air, football, and a little more volatility in the equity markets. We thank you for your support and trust in our company and cannot wait for our next discussion to help you reach your financial goals. As always, “you do the dreaming, we’ll do the math.”
The second quarter has ended, which means it is halftime for the global markets. The first half could not have gone better for investors in riskier assets like equities as the S&P 500 is up 14.4% YTD (year-to-date) posting the second best first half since 1998 according to Barron’s. As investors, we hope that whatever Herb Brooks type speech that was delivered before the first half, will be delivered again for the third quarter. The Dow Jones Industrial Average is up 12.7% YTD, and the NASDAQ is up 12.5% YTD closing the gap in the second quarter as growth stocks rallied on a move lower in interest rates. The fixed income market provided positive results for investors in the quarter, but Investment Grade Bonds (represented by the Bloomberg Barclays Aggregate) are still negative 1.7% for the year.
As you may recall, the first quarter of 2021 was dominated by Energy and Financial companies as the rotation continued away from the Technology COVID-19 winners. However, investors experienced a reversal in the second quarter. Energy and Financial sectors had strong quarters up 9% and 7% respectively, but the Technology and Communication Services sectors outperformed up 12% and 11%. The combination of strong cash flow, quality earnings, and lower interest rates as the 10yr US Treasury yield decreased to 1.47% provided tailwinds for growth companies to outperform.
What about inflation… a major concern for the market and investors as the most recent headline inflation reading was 5.0% for the 12-month period ending in May. We believe some inflation data is transitory as our economy continues to recover from the COVID-19 recession. Inflation numbers will normalize but will remain higher than inflation data prior to the pandemic, in our view. One of the key data points in the recent inflation reading was used car prices, which increased because of the imbalance in the supply of new cars. As the supply of new cars increases during the recovery, we should see supply and demand find a healthier equilibrium. With that said, higher inflation moving forward, albeit lower than current readings, suggests that companies with the ability to pass along price increases to consumers have a competitive advantage. Furthermore, higher inflation and low interest rates support our belief that portfolios should be overweight equities and underweight bonds and cash alternatives as inflation erodes the dividend purchasing power.
As we look to the quarters ahead, we believe our economy will continue to recover and grow from catalysts such as vacation and business travel and what we believe will be a record breaking back to school shopping season. In our view, international equities may provide strong relative returns in the second half of the year, but we are cautiously watching the impact of the COVID-19 Delta variant. We favor US and international equities moving forward, but utilize fixed income, commodities, and cash alternatives to provide ballast and diversification in our portfolios.
We thank you for your continued support in our company and look forward to our next connection. As always, “you do the dreaming, we’ll do the math.”