02/2024 - Investment Updates
Full written article below. Forgive the typos or grammatical errors. I'm clearly not a YouTuber or Content Creator, just a Financial Planner trying to get ideas out to people to want to see and hear them.
In 2023, the S&P 500 ripped higher by about 26%
In 2022, the S&P 500 ripped lower by about 18%
In 2021, the S&P 500 again ripped higher by about 28%
Then in 2020, the S&P rose about 4% at the beginning of the year, then dropped about 33% from Covid, then made all those losses back and finished higher on year by about 18%
Let me just pause there for a moment, did you realize how large of swings we’ve seen in the S&P 500 in just the past few years?
It’s no wonder when I talk with clients about investments and investment allocations their eyes start to roll from all the ups and downs we’ve experienced in the last few years.
Because of this, I created an Investment Focused video to help unpack the markets and review some of the implemented changes to portfolios over the past year as well share some of the anticipated changes we expect to see in the market.
But before I get into the Investment specifics, I want to step everyone back and put some perspective in place. Because before any investment is recommended or implemented,
1. we first need to understand what you’re investing for and why, This is what Stephen Covey calls “putting first things first”
2. Then develop what specific investment allocation is going to align with these ever changing goals,
3. And finally, continue to work through a repeatable process of keeping your specific portfolio in-line with your long-term goals as well as keeping in-line with ever changing markets.
If this get’s a little too busy or complex, please forgive me, that’s not my intent. However, this does get tricky pretty quickly so I’ll do my best to unpack in meaningful ways.
So to reiterate, first is developing financial goals and the plan to work towards those goals, then, what Investment Allocations should be used to work towards achieving those goals, and finally, how do we keep the portfolio relevant and in-line with your goals and the changing markets.
Yes, I realize you’re probably watching this and thinking “wait, I thought this was supposed to be about the investment markets, not financial planning” and you’re right, this is about investments, but ask yourself this question, when you invest in the market, are you investing just to grow your money? OR are you investing so you can do something else with your money?
I don’t work with ANY clients who just want to grow their money. ALL of the clients I work with want to accomplish something more with their wealth. This is why we need to keep money/wealth in its place and treat it as a tool, something we can act upon and hopefully increase our impact and effectiveness. This is also why in client meetings I stress the question… “What your Statement of Financial Purpose” – on the screen is just an example of one of these Purpose Statements that is regularly reviewed and updated.
Retirement is the most common goal, great. But what’s next? After you can afford to retire on your terms, adjusted for inflation, healthcare, and taxes, what else do you want to accomplish with your wealth, who do you want to benefit?
A common thought exercise I guide any clients through is the eulogy simulation. The idea here is to envision your funeral, morbid I know, but just imagine for a moment that you’re at your funeral and it’s time for eulogies. Who do you want to speak on your behalf? What do you want them to say? What impact to you want to leave on the loved ones who survived you?
The answers to these questions are not as straight-forward as creating a retirement projection.
I think you’re starting to get my point.
The better, I, as the financial advisor can understand you, the client’s, specific financial goals, the better I’ll be able to guide us to what should be the right investment allocation.
Now, once we have your financial goals mapped out, or at least in the ballpark, we can then create a specific investment allocation that will be designed to work towards accomplishing your specific goals in a specific period of time based on your specific risk tolerance.
Yes, there’s a lot of specifics at work. There’s no one-size fits all and there’s no website you can follow that will give you investment guidance that will “work for you” in the absence of developing a financial plan. Sorry – life just isn’t that kind.
Final word on this - whatever your financial plan is and whatever your corresponding investment allocation is - it’s likely wrong. Sorry, it just is. We’re all humans, our goals change at a moment’s notice and likewise our investment strategies need to change at a moment’s notice as well. As such, as your financial plan changes your investment allocation should change as well. This is one of the reasons why I am such a strong advocate of fully liquid and fully flexible investment allocations.
Ok – Who’s now ready to get into the investment weeds?
Diversified - Strategic – Research Driven - Implementation
These are the four foundations of Investment selection and allocation.
1. Diversification – this is boring, so much talk is given to diversification, but why? I’m going to try and back up why this is so important. Begs the question, why not just invest in the S&P 500?
2. Strategic – to me, this is the most obvious. Unless you have a crystal ball, you don’t know the future and as smart as you may be, none of us know what the future holds. AND if there was a person or firm who did know the future, then 100% of all my investment dollars and 100% of all your investment dollars would be invested with that person or firm. This just isn’t the case. Because of this, I’ve learned to embrace my limitations and ignorance with investing. So to help create strategic portfolios, I utilize research from some of the world’s largest money managers. The end effect is that our portfolios have a very similar structure as the most wealthy investors in history.
a. I’d argue that in today’s environment, there’s no larger driver of the market than the interest rate policies of the Federal Reserve of the United States. As interest rates moves, so do market returns, at least historically.
b. In this chart we see where the Fed has been and where the Fed rates are anticipated to be. These anticipated moves by the Fed are what’s driving some of the investment allocation changes
3. Research Driven - In late January 2024, there was a normal investment reallocation, this allocation was designed to execute on three items
- Slight overweight to US stocks and trying to reduce overall active risk, the idea here is the market has surged higher over the past few months and it wouldn’t be surprising if the market pulled back. Should this happen, this slight overweight to US stocks may help prevent some of the downside. Keep in mind, when I say slight, I mean slight, this is not an allocation change that’s going to fundamentally change the portfolio.
- Added new position in an ETF that’s designed to follow the US equity market, and is flexible enough to move between the Growth and Value sectors, the ticker symbol is DYNF. 2023 was a year of high concentration and narrow stock return breadth, example, think about how tech stocks carried the rest of the market. This ETF is designed to help navigate these waters.
- Taking some gains from Growth style investments and moving those gains into Value style investments
4. For Implementation there are two areas to address: investment allocation and rebalancing
Firstly, reallocation of funds based on research, this happens about four times a year. This is when specific funds are subbed out for others in an effort to keep the portfolio in-line with the current economy.
Secondly, regular re-investment and small rebalancing along the way. It does you no favors to simply implement an investment allocation and then never to adjust it over the years and it does you no favors to implement that allocation, but not have the discipline to keep it balanced throughout the year. Because of this, I’ve developed a weekly process that reviews all my client’s portfolios that I manage and alerts me of any potential investments that can be made. This results in a constant fine-tuning of clients’ portfolios as shown by several small trades throughout each month. If you want to see this in action, just look at your account statements under the transaction history.
Side note, in years past, these small trades were not practical to do because we used to have trade fees every time the portfolio was touched. Thankfully, that’s no longer the case and the funds used don’t have a trade fee attached to them. What does this mean for you? It means your portfolio can be traded without you incurring any trade fees.
But now - turning back the portfolio structure, again, this is research driven, strategic, and diversified. On your screen, you can see how just over the past year there have been four different rebalances, all focused on Diversification, Strategic, Research Driven, and now implemented
Lastly – let me compare this portfolio to similar portfolios from BR, State street, and Wilshire. This is by no means to say the portfolio managed will constantly out-perform, but I do certainly have confidence in the process followed
So in closing, please hear me when I say that that most important part of your investment allocation is getting your financial plan on the right track, then having your investment allocation align with your long-term financial plan.
If you’re watching this and your not confident that your investment allocation is right for you, please do yourself a favor and tell me so we can have a conversation around your financial plan and if you’re allocations need to change.
David Hobbs, CFP®
Wealth Advisor | Owner
Hobbs Wealth Management
Standard & Poor’s 500 (S&P 500) - a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy.
Russell 2000 – The index measures the performance of the small-cap segment of the US equity universe. It is a subset of the Russell 3000 and includes approximately 2000 of the smallest securities based on a combination of their market cap and current index membership.
MSCI ACWI ex USA – The index measures the performance of the large and mid-cap segments of the particular regions, excluding USA equity securities, including developed and emerging market. It is free float-adjusted market-capitalization weighted.
Federal Funds Rate - refers to the target interest rate set by the Federal Open Market Committee (FOMC). This target is the rate at which commercial banks borrow and lend their excess reserves to each other overnight.
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