Dear Clients and Friends:
Welcome to 2021, we hope you have a safe and fulfilling new year. Our holidays were spent with close family or a few friends, enjoying our covered patio here in Pasadena.
Many publications make prognostications at this time of year, however you probably know by now we are not in the business of selling airtime on TV (commercials), or generating more newspaper column inches (AKA, old-fashioned ads), nor clicks on a website to generate revenue. What we are in the business to do is provide you with timely and relevant information, professional investment management and customized financial structure and strategies specific to you. We offer procedure over predictions, data over descriptions and unique solutions over universal suggestions. What specifically do we mean by these?
Procedures over Predictions
Our investment and financial planning process starts with a macro-economic review, and a detailed look at the investment landscape, economic trends, interest rates, currency levels, relative asset valuations, tax, cash flow and risk attributes all as applied to your particular situation. Valuations matter. Periodic rebalancing before there is a problem is crucial - this past year we rebalanced in February before we felt the pandemic’s problems. Consistently applying a disciplined procedure to our practice gives our clients a much higher probability of success, that is not dependent on outsized or unattainable return and isn’t based on some prediction of unknowable future events. For example, one of the macro-economic topics we review is the amount of cash available in the economy, generally measured by the FED as M2. The enclosed chart shows the M2 money supply, which took 4.5 years to go from $12-15 trillion from 2015 to 2020 and then at the start of the pandemic, grew by $3.8 trillion in just 9 months. That is one reason why we can be optimistic about the economy next year – vaccines are on their way and Americans are sitting on a record level of cash in the bank – dry powder for our continued economic return.
Data over Descriptions
The press now encompasses hundreds if not thousands of channels, outlets, periodicals, websites, blogs, etc., and the “news” coverage is too often dominated by the descriptors placed on events or themes, with little substance. For instance, many investors don’t realize how extended the values are of the so-called “FAANGM” stocks (those of Facebook, Amazon, Apple, Netflix, Google, Microsoft). Three indicators to keep in mind:
a. Since 2012 when all six of these stocks were publicly traded, this group of stocks is up more than 4.5 times the S&P 500, and
b. FAANGM stocks now represent over 25% of the market cap of the S&P 500, and
c. Such a concentration last existed in the marketplace in 1998-2000 right before the dot-com implosion.
We are not bringing any of this up to alarm you, just to remind you that we are closely looking at the data, and taking with a grain of salt the latest market descriptions and headlines. With people stuck at home, start-ups like Robinhood, built to trade stocks for free, (typically on a smart phone) have increased their retail brokerage accounts by +3 million accounts in one year, a 30% increase! As the terrific documentary film "The Social Dilemma" advised..."if the service is free the product is you." Margin interest, that is the cost of borrowing money to buy more stocks, is at a 20+ year record high. Many of these new investors are inexperienced, buying the same 10-15 stocks that are currently in the news, like the placement of capital is a game; as untested investors our confidence in them is low. We don’t know when a CEO will abruptly retire, a quality problem will force outages, or an accounting issue will cause earnings restatements. These are all individualized risks which we seek to avoid by owning a larger set of investments rather than just a handful of companies. Though we don’t have an over-concentration in these six FAANGM stocks, the market attention and resulting legal scrutiny, government or consumer focus will cause us to likely diversify even further away from the most popular stocks.
Unique over Universal
You are not the same as your siblings, parents, cousins or neighbors; nor is your unique set of goals and aspirations, income level, taxation, risk or investment experience the same. That is why we tailor our financial planning and investment approach to your unique situation, whether it be an IRA, trust account, retirement plan, donor advised fund or other structure. We don’t have thousands of client families to know, just the unique situation of 200 or so families that we have come to know, value and respect and we hope to continue providing custom solutions for you for years to come.
We do know there are families and businesses who are suffering and not able to cope financially – please know that if any of your friends or family need financial counseling we are here to assist those that you care about. As always, we appreciate hearing from you if you have questions or topics you would like to review. We look forward to seeing you in the new year 2021, hopefully in person!
Michael Hatch, CFP®, MBA, JD