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. 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!”
Alone With My Thoughts – 12/29/2021
Happy New Calendar Year It is time to flip the calendar on another year and also to reflect on what has been a very impressive market in 2021. Speaking of markets and calendars, the total return on the S&P 500 (the 500 largest US companies) has been quite impressive for the past 95 years, or dating back to 1926. Think about this, over this period we have seen countless historical events…wars, depressions, recessions, embargoes, financial crisis’s, and throw in a pandemic, yet the market has still had a 10.3% average annual return. Remarkable. Even more remarkable, over these 95 years we have only seen seven calendar years where the market is down by 14% or more, just seven. On the flip side we have seen 48 years (more than half) up 14% or more. We cannot predict the future but we can use the odds to our advantage. Here’s to a healthy and happy 2022! (research source Ibbotson Associates)
Alone With My Thoughts – 12/14/2021
According to a recent Wall Street Journal article, the value of tax-loss harvesting is quite impressive. Tax loss harvesting is basically managing long and short term gains to the investors advantage. Using someone in the 25% income tax bracket, their studies show that in a strong market, managing taxable gains and losses can add 1.1 to 1.42% to annual returns. Even more impressive, during significant downturns when the S&P is negative, this harvesting can add about 3.21% to yearly performance. So whether the market has been naughty or nice, tax management can be a gift to returns.
Alone With My Thoughts – 10/15/2021
Thanks to Kevin Caron at www.washingtoncrossingadvisors.com we get to consider this…Back to the old Buttonwood tree in NYC in 1790, when the value of stocks were first calculated, it took over 200 years for the US stock market to top $16 trillion in value. Based on today’s current value, we have risen by $16 trillion in market value since the pandemic BEGAN. A recession and health crisis that produced a $16 trillion gain in value, go figure. One, it shows the law of large numbers and too, it may be pointing to some inflation momentum in financial assets. Speaking of inflation, again this past week, Janet Yellen stuck with her premise that we are in a “transitory” period of higher prices, yet today social security payments were adjusted higher by almost 6%. Social security payments do not go lower so the only thing transitory is the money leaving your pockets.
Deconstructing 30 Year Stock Market Returns
One of the most impressive long-term stock market statistics has to be the historical 30 year returns on the S&P 500: This graph shows the rolling annual 30 year returns from the corresponding start dates. The worst 30 year return — using rolling monthly performance — occurred at the height of the market just before the Great Depression and stocks still returned almost 8% per year over the ensuing three decades. You can see that there is some variation in these returns throughout this period, but the volatility of the results is quite impressive — less than a 5% standard deviation in the return figures. Everyone seems to assume that the returns from the early 1980s mark a golden age of stock market performances. And it’s true that the returns in the 80s and 90s were off the charts, close to 18% annually over two decades. But if you look at the 30 year annual return that started in 1982 — which is when many say that bull market started — the 10.98%/year performance from 1982-2012 ranks right in the middle of the historical numbers. In fact, it’s the median value. The 30 year returns were much higher for the start dates that coincided with the bear markets of the late-1960s and mid-1970s. Some will argue that these numbers are somewhat misleading because many of these periods are overlapping with one another. If you break things down into non-overlapping periods there have really only been three separate 30 year periods in this data set. So I calculated the annual returns from each of those three 30 year periods to see how they stacked up: 1926-1956: +10.77% 1956-1986: +9.63% 1986-2016: +9.99% The consistency of returns is fairly remarkable when you consider some of the events that have transpired in each of those 30 year periods: 1926-1956: The Great Depression, a stock market crash of more than 80%, World War II, The Korean War and four recessions. 1956-1986: The Civil Rights Movement, the Vietnam War, a president was assassinated and another forced to resign, an oil price shock from the OPEC embargo, double digit inflation and interest rates and six recessions. 1986-2016: Black Monday in 1987, the Savings & Loan crisis, Desert Storm, 9/11, wars in Iraq and Afghanistan and three recessions. The usual caveats apply here: Past is not prologue. We’re a more mature economy now. There were no index funds until the mid-1970s. Costs were much higher in the early days. These numbers don’t take into account inflation, taxes, fees, etc. The winners write the history books. 90 years is a small sample size in the grand scheme of things. 30 years is a long time to hold an investment. We are promised nothing as investors in terms of future returns. Things could certainly be worse from this point forward. You just never know. Still, it’s hard to look at these numbers and not be optimistic about the future. Bad things happen and human progress continues to march on. Visit Source
Alone With My Thoughts – 10/1/2021
Katy Milkman, a behavioral scientist at the Wharton School has written about “the fresh start effect”, or the effect that birthdays, the start of a new season or other landmark dates have on our ability to make changes to our lives. For example, with back to school and the fall season upon us, we may be more inclined to begin a new healthy and or profitable habit. So pump the brakes on the pumpkin lager and pumpkin spice drinks and pour your savings into a compounding investment and kick off a new fall beginning.