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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.

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.

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.)

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. 

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%.

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.   

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. 

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.

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.

Investing Fundamentals

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 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.)

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.