Sterling Financial Group and guests enjoyed a Christmas Dinner together in early December at Bacchus’ Kitchen in Pasadena. Our fun evening was followed by a jazz duet performance of old standards and new music that helped us kick-start the holiday season. We hope you enjoyed time with family and friends.
During the Covid lockdown, media often cited the growing number of remote workers dialing in from a picturesque lake or mountain house. The rosy picture these articles painted forced many Americans to ponder if purchasing a second home made sense for them. While far from a comprehensive list, we feel that pondering these considerations could help some families avoid making an expensive mistake.
Can most of the family break away for long stretches to enjoy the vacation house? If the second home is more than a few hours away, it may only be used on long weekends or during school breaks. Limited vacation time or renewed “required office face time” in a post-Covid world may make it difficult to work remotely for long stretches in another state.
Aging is a natural progression and is something we all must face if given enough time on this earth. As the saying goes, “failing to plan is planning to fail”. In the golden years of any household’s lifecycle, the reliance on and support from professionals and/or family should be expected. Organization and communication are both paramount when entering this phase. Getting ahead of the following topics before urgent needs arise, will help preserve your estate and personal directives, along with family cohesion.
Our best to you for 2022; we hope the year has started off well for all of you and your families. We are now almost two years into the Covid-19 pandemic, and we know many have been impacted by this latest Omicron variant. Fortunately, 64% of the U.S. population is now fully vaccinated (according to the Mayo Clinic) and over 76% have received at least one dose, and many have also built up a natural resistance from contracting the illness. As a result, we may be reaching the “endemic” stage, and we are hopeful that 2022 will see a return to a more normal level of activity in all facets of our daily lives. The balance of my comments will focus on the financial markets across a few of the major asset classes, to provide our best thinking.
Bitcoin and cryptocurrencies are in the news everywhere, and it's not surprising that there's often partial or misinformation (and apprehension) about such a powerful new technology. Bitcoin is now a $2 trillion “asset class”, larger than high-yield bonds, thus I thought a deeper dive into this topic was warranted. The Bitcoin for Dummies book (published in 2016), offers a detailed understanding of the basic framework, terminology and resources to track and monitor this emerging financial asset. At its basic level, Bitcoin uses a computer ledger for two private parties to “agree” on a set of computations and then once that digital “handshake“ is confirmed then an exchange of value can be accomplished, say one party giving dollars or other tangible goods, in exchange for Bitcoin. Transaction details are recorded on the “blockchain”. For many, the allure of Bitcoin is knowing that the government is not in charge, that there will only ever be 21 million Bitcoin in existence, and that because of those two facts, there is a level of confidence regarding privacy and a lack of government intrusion and/or inflating of the monetary system. (BTW, there are dozens of other cryptocurrencies as well, Bitcoin is just the most prevalent.)
At the surface, this seems like a reasonable question, given that ten-year US Treasury bonds are currently yielding a paltry 1.5%. At that level, bond yields are certainly not keeping up with inflation, especially this year. Per the Bureau of Labor Statistics, The Consumer Price Index for All Urban Consumers (CPI-U) increased 5.3% over the twelve months leading up to 08/31/21; even when removing food and energy, this index rose 4.0% over the same period.
In addition, upward pressures on inflation may not turn out to be “transitory”, as often described by the Federal Reserve. There are concerns about possible increased nationalism, protracted supply chain disruptions and continued fiscal policy excesses. If a longer-term upward trend in inflation results, it raises the possibility that forward-looking returns for U.S. Government and Investment Grade bonds may be zero, or even slightly negative.
You’ve made it! Congratulations on a long and successful career. Goodbye stressors, hello autopilot… right? Not so fast. Retirement can be an overwhelming and daunting aspect in one’s life and is not to be taken lightly. Questions surrounding healthcare, social security, life and long-term care policies, 401(k) rollovers, required minimum distributions and overall cash flow can create “analysis paralysis” in even the most financially solid households.
As we walk through the following topics, keep in mind these decisions are not to be made in isolation and should be coordinated with your financial planner to help smooth out the transition into your retirement.
Americans are typically an optimistic lot, yet ‘we’ suddenly turned gloomy in August as demonstrated by the University of Michigan Consumer Sentiment Survey, dropping more than 13% in August to the low for this decade. Moreover this is part of a trend, since going back to June the index is off more than 20%. Why so gloomy? The continuing problems related to COVID-19 and the up and down rules seem to play a part, but there has to be more. Our own sense is that it is a combination of rising prices which are frequently seen in big ticket items like cars or homes, as well as the uncertainty over major tax and financial policy changes currently being contemplated, not to mention ongoing tensions with China, Afghanistan and other international cohorts. The pace of hiring is also slowing, meaning the unemployment rate will only improve slowly from here. As I’ve said to many of you that have asked, the economy is extraordinarily resilient, but the marketplace is made up of millions of consumers making decisions and they just want and need to know what the rules will be. Certainty is a big comfort. When tax laws and other regulations are unresolved, consumers as well as business start to stand still wanting to “see how it all plays out”. While the stock and real estate markets have recovered and thrived in this expansion since the 2020 lows, there is a sense that maybe some segments may have gotten ahead of where fundamentals would dictate; markets may take a pause and/or back track a bit.
What Is Volatility?
Volatility is defined as the range of possible returns for a given security or market index over a given period; this range can include upward or downward movements. The uncertainty of future events (i.e. interest rate movements, economic growth) can change periodically, sometimes resulting in dramatic changes in volatility.
When Do We Notice Volatility?
We tend to notice volatility when the news brings it to our attention, often after a downdraft in the market caused by a reaction to a big news story. A popular measure of volatility is the stock symbol VIX, the stock market's expectation of volatility and the popular name for the Chicago Board Options Exchange's CBOE Volatility Index, which is based on S&P 500 index options. If short-term volatility continues in a downward direction for several weeks or months, we often have a correction or a bear market. During the 2008 financial crisis and the Great Recession, the S&P 500 fell 57.7% in the six-month period from October 2007 to March 2009. In 2020, the coronavirus pandemic sent the world into a recession and equity markets reeling as the S&P 500 plummeted 51%.
Financial Planning Timeline: 50’s to Early 60’s Pre-Retirement Checkup
In this installment of Milestones in Focus, we will explore financial planning topics that should be top of mind when a household is in their 50’s to early 60’s. This time period can be characterized by peak income, retirement catch-up provisions, long-term care (LTC) insurance considerations, strategic estate and tax planning, and the reduction of outstanding debts. This is by no means an exhaustive list, but if these topics are overlooked or delayed, it can cause difficulty down the line for those racing to catch up.
Many clients over the years have inquired about investment returns and wonder what should a reasonable expectation be for long-term returns? As with many things in finance, the answer isn’t simple or straight forward: it depends. Investment performance has to do first and foremost with the overall allocation of your portfolio, but other key drivers include how long you remain invested and whether or not you are reinvesting your earnings – versus taking income from the portfolio, which in reality is really a withdrawal of earnings (or principal). Obviously there are other factors such as the specific investments chosen, when you invest and a myriad of other variables can impact returns as well.
Perhaps no founder in recent times has been more brazen and industry changing than Elon Musk, founder and CEO of Tesla. His statements move industries; their cars have captured the imagination of millions; yet the company has yet to turn an operating profit after 15 years. Having worked for General Motors early in my career, I do have some idea of what a complex task it is to bring a vehicle to market. As if that were not enough, Tesla has more or less invented the category of “performance electric vehicles” as most prior versions of electric cars were utilitarian machines.
COMMERCIAL REAL ESTATE: NOT ALL BAD NEWS
While visuals of “dead malls” and “ghost town office towers” pervade the news media, there is a wide disparity between various sectors of commercial real estate since the Covid-19 pandemic began. Some sectors, such as industrial, apartments and healthcare-related office, are proving to be pandemic-resistant.
Our Financial Planning Timeline covers how to set up the right foundations for your financial future, this quarter we review some of life’s milestones that occur as investors transition from their 30’s to their 40’s.
Avoiding Lifestyle Inflation
As incomes increase and household net worth grows, many couples begin to acquire nicer vehicles, possessions, eat out more often with friends, etc. is is a critical time to prioritize what you want most in life over what you want now; self-discipline is key so that discretionary expenses do not spiral ever upward. Manage credit card debt and limit high interest loans; try as best you can to “pay as you go” and avoid unnecessary debt for consumer purchases.
Dear Clients & Friends,
We hope you are well and are starting to make plans to move forward with your lives in a safe yet productive and enjoyable manner. We have much to be thankful for, as our office staff and their families here at Sterling Financial Group have remained healthy and all are looking to more normal activities.
As a firm, we would like to introduce a new section to our newsletter that will cover financial planning milestones throughout each phase of an individual’s life. Topics include savings vehicles, contribution and distribution schedules, tax deductions and credits, benefit optimization, and retirement.
Financial planning is an exercise in both commitment and awareness. As the adage says, “proper planning and practice prevents poor performance”. Whether these plan- ning topics are an ongoing refresher course, a resource to share with your kids/grandkids, or a first-time passthrough, we plan to explore these topics in the next few newsletters.
Like the shifting phases of life which provided the solution to the Riddle of the Sphinx,
we find that most households tend to shift across four financial planning phases of life. The first of these phases could be generally described as “Building Your Wealth”. It is easy to ignore these issues and post- pone decisions. By working closely with an experienced financial advisor, it is often much easier to start off on the right foot.
In a year when statistics are flying around like an infielder’s drill in baseball, we thought it prudent to touch on the confusion often present in common statistics.
While often mistakenly attributed to Mark Twain, one can find the explanation in Wikipedia that “"Lies, damned lies, and statistics" is a phrase describing the persuasive power of numbers, particularly the use of statistics to bolster weak arguments. It is also sometimes colloquially used to doubt statistics used to prove an opponent's point”. In this article, we will focus on the hospital Intensive Care Unit (ICU) capacity riddle, stock market gyrations, the Covid-19 infection rate, and short-term investment performance. Another article in this news- letter will focus on the oft confusing Unemployment Rate.
The Federal Reserve is tasked with a dual mandate to provide stability of prices (i.e. control inflation), and to promote full employment. Thus, the government tracks many statistics related to inflation and employment figures to give policymakers and the public a sense of trends in the economy that can impact many areas from investment and purchasing decisions, hiring, or the movement of goods, services and people.
The phrase "irrational exuberance" was used by Alan Greenspan in late 1996 during the dot-com boom of the 1990s; it was interpreted as a warning that the stock market might be overvalued given an apparent disconnect between stock performance and underlying fundamentals, such as profitability. We may be experiencing Irrational Exuberance 2.0 right now, as our stock market has rallied back to near January 2020 levels, despite the highest unemployment figures since the Great Depression. While we are not in the business of making short term market projections, the sudden, sharp market increase has certainly grabbed our attention.
Summer greetings and our best wishes that you and your family are safe and healthy, and getting outdoors to enjoy the warmer weather. With all of the news and facts reported, we know that at times the information flow is overwhelming. This quarter we return to some basic, fundamental details about our investment process and underlying factors from which we begin our analysis, highlighting two areas: Timing and Demographics.
The Coronavirus Aid, Relief, and Economic Security (CARES) Act, passed on March 27th of this year, initiated a $2 trillion economic relief package for the American worker and business alike. According to the U.S. Department of the Treasury, "The CARES Act provides fast and direct economic assistance for American workers, families, and small businesses, and preserves jobs for our American industries." The package can broadly be broken into four main sections:
Dear Clients and Friends:
We know that you are dealing with many challenges at this time but please know that we are here to support you in any way that we can. With the recent volatility in the markets, we did hear from several clients who wanted to know “what they should do? ” given the market conditions. With that in mind and our research over the years on behavioral finance we wanted to reiterate our investment approach in the context of some of the more emotional aspects to investing that nearly all of us experience. Above all, take care of your health and be safe!
THE SECURE ACT was signed into law in late 2019 and makes numerous changes to tax favored retirement accounts. SECURE stands for Setting Every Community Up for Retirement Enhancement Act, and like many Congressional actions, the benefits of this new law are varied and some believe the rules have been changed midstream on retirees. Most notable are a delay in IRA required minimum distributions to age 72 for those eligible, and non-spouse beneficiaries must distribute inherited IRAs over a 10-year period, as opposed to the previous lifetime “stretch IRA” that was possible. We will be sending out a full synopsis of this new and complex rule via email later in January, after we fully digest the changes.
There is (almost) always a confusing set of economic data coming out, some indicating economic expansion, while others pointing to a contracting economy. When picked up by news or other market commentators such data is often spun into convenient 40 second sound-bites that fit into a narrative or time slot that the media business is looking to fill. I say “media business” intentionally as we do need to remember that whether one consumes news and information from Facebook or social media, or more traditional television or print media, nearly every outlet is a for-profit model looking to grow their audience, place ads and keep their audience tuned-in. None are fiduciaries tasked with the legal responsibility to act in your best interest, mitigate/eliminate any potential conflicts of interest, or disclose their compensation arrangements. (Recall that all those fiduciary duties DO APPLY to us.)
Late in the economic cycle, income-generating investments are viewed as an attractive buffer against stock market volatility. Real estate can be an income- generating option that has the potential to be a strong investment when held long-term. While not immune to the risks associated with economic downturns, adding real estate investments to a portfolio of diversified stock and bond assets can help manage a portfolio’s overall risk. Real estate values do not tend to move in a highly correlated manner with U.S. stocks, thus potentially reducing risk and smoothing overall portfolio returns during periods of stock market volatility.
In 2017, data security took center stage when Equifax fell victim to one of the largest data breaches of all time. Nearly one hundred and fifty million people had their personally identifiable information stolen, or fifty five percent of all Americans! Since then, additional data breaches have occurred and will likely continue to do so moving forward.
What are you to do? The burden is on consumers to protect their own personal data security. It is difficult to pinpoint what, if any, personal identifiable information has been compromised in the past. Unfortunately, the damage that has been done cannot be reversed; however, taking precautionary steps now, may prevent the need for future recourse.
With the first half of 2019 complete, financial markets have rebounded significantly from the poor showing in 2018, and the especially difficult 4th quarter. While Sterling Financial Group has focused on long-term results when making asset allocation and investment strategy decisions, and our investment choices reflect that outlook as a priority, we are not immune from the news distraction and market declines that occasionally occur. When experiencing volatility, most investors are very pleased to participate in the upside swings, but at times may be extremely anxious over downside volatility, which in reality is a fairly normal pattern and should not be feared. What volatility should we expect in stocks, and what is normal? Below we try and examine some of the facts and point to an example that hopefully illustrates the long-term nature of how companies have grown.
Time for a different allocation?
Volatility has returned to the equity markets, as evidenced by an increase in the VIX (a popular measure of the U.S. stock market’s expected volatility), from 12 in mid-April 2019 to over 20 in late May 2019. The traditional antidote to stock market volatility is long term Treasuries.
Unfortunately, yields on Treasuries (2.0% for UST 10 year) are disappointingly low and expected to stay “lower for longer”; the Federal Reserve has already signaled that they are willing to cut the Fed Funds target rate as needed to support the economy. With more volatility in stocks and relatively low bond yields, clients are seeking higher portfolio yields without taking undue risk.