November Newsletter
In this edition, we’ll cover:
Stagflation
The recent Build Back Better legislation package
How to Invest during the next 20-50% decline
Index Update (As of 10/31/2021 from Yahoo Finance)
S&P 500 (Large Cap): +24.04% YTD | +41.20% YOY
Russell 2000 (Mid, Small Cap): +17.19% YTD | +48.58% YOY
Global Market – ex US: +8.94% YTD | +29.50% YOY
What we do at Cedar Wealth: We work towards creating lifetime and multi-generational wealth through the use of diversified portfolios. We make no attempt to time the market, out-smart the market, and we continuously refine our portfolios to match our client’s financial priorities.
This newsletter always consists of our thoughts and insight about the top few questions and topics that have come up with clients and prospects over the last month. We want to keep our clients up to date with our latest thinking about financial trends and market news. Some of these opinions may play into our strategy, but not all apply.
Stagflation:
This is the mix of Stagnation and Inflation. Basically, it means that economic output, as measured by GDP is less than inflation. During periods inflation, like today, we at Cedar Wealth keep a keen eye on economic output when compared to inflation.
Bad news, we don’t have a crystal ball, but we are monitoring what we’re seeing and are making proactive portfolio changes (like the week of Nov 1st 2021) to help position us in changing economic times.
Each Quarter, the BEA puts out GDP updates and does so in Real vs Nominal terms. Real GDP is GDP adjusted for inflation, which is the GDP that we at Cedar Wealth care about. The most recent quarterly report was published on Oct 28th 2021 and the US posted a +2.0% Real GDP growth. This was lower than the prior estimate, but still positive growth. Source: BEA.gov
POTUS Build Back Better:
POTUS Biden has been working on an original 5.5T spending package
(over a decade) called “Build Back Better.” The spending package has been cut in half, down to approx. 3T (over ten years). There are a number of provisions within this legislation, I’m going to highlight just three that have caught my eye. To read about this in detail, please review the sources provided. Financial Advisor Mag. Washington Post WhiteHouse.Gov
Roth Conversions and Back-Door Roths of these planning options were in the original legislation to be removed from the American public. I’m thrilled to share that both of these provision have been cut out of the legislation and are available for us to use.
Stepped-Up Basis was also in the proposed legislation to be disallowed, however this as well has been kept. If you aren’t familiar with this concept, just know it’s a wonderful way to transfer wealth from one generation to the next. If you’re a client and we haven’t spoken about it already, chances are we will.
Income Tax changes: in the legislation, there is a new top tax rate of 45% on income and 31.8% on capital gains. This income tax change is currently only going to impact those making 10mil-25mil or more in a given year, which will not impact the majority of Americans. However, part of this income tax change that will impact many Americans is how these new higher rates will impact Trusts and Estates that generate income, as the new income tax rates start to kick in at the 200-500k range.
As Tax provisions change, know we’re regularly monitoring the situation and aim to proactively contact our clients when they will be impacted. However, if you feel you’re going to be impacted and we haven’t discussed your options, please call or email us immediately.
How to invest during the next 20-50% market decline:
No matter how experienced you are with investing, market downturns are scary.
They test your resolve, can put you into a depressed state, and create anxiety.
I’m going to answer this question in two different ways:
The first will be for all our clients who are in the building and accumulating stage of their wealth. This could be that you’re still working, or it could be that you’re retired, but still focused on growing your investment net-worth to pass on to the next generation.
The second response will be for the retired client who is decumulating wealth. This client is more focused on current income generation than legacy value.
Building Wealth: When you’re in the wealth building stage, market downturns are far less scary than when you are in the decumulation stage. However, it’s never easy watching your accumulated wealth dissipate before your eyes. During the wealth accumulate stage, I am assuming that you are regularly contributing to your investment accounts. Most likely, in the form of a 401k, or other retirement focused investment vehicle. Regular, recurring contributions into volatile investment accounts is the ipso facto definition of Dollar Cost Averaging.
The beauty behind Dollar Cost Averaging (DCA) is it’s simplicity, you are averaging out market prices to get efficient investments.
Here’s a quick example, let’s say you are going to start in January and contributing $1,000 a month into an investment account and the investment you’re buying is $10 a share. So in January you put in your $1,000 at $10 a share to buy 100 shares. But then in February, as you put in $1,000, the investment is $8 a share, so now you bought 125 shares. Then in March, you invest another $1,000 when the cost is $11 a share so you bought another 91 shares. Then finally in April, the share cost is back to $10 a share. Even though from the share price in January is the same share price from April, $10 a share, in this example, you still made money! Below is the visual.
So just image what can happen over a lifetime of investing??
Again, it’s never fun to lose money, ever. While you’re accumulating, this is a way to generate disproportionate investment returns.
But if you haven’t noticed, I still haven’t answered the question… so how SHOULD you be invested during market downturns? The answer will of course be dependent on your specific goals and timelines and I do suggest meeting with your advisor to confirm your course of action, but for most, your asset allocation should be Strategic in that you’re looking 3-5 years down the road looking at longer-term trends and Diversified in US and international positions.
Decumulating: This is commonly the “retirement” phase of someone’s life. Majority of Americans should plan on a 30-40 year retirement. Transitioning from working to not-working, is a high anxiety period of time! For those who aren’t retired, image yourself in this situation, for the past 30-40 years, you’ve gone to work, done something of value, created a paycheck and based your lifestyle around this income you created from your employment. But now you’re in a period of your life, that you’ve never done before, where you are voluntarily unemployed and are creating your lifestyle based on what you saved during the prior 30-40 years. So naturally, most retirees are going to be more conservative because they aren’t creating an income from their employer anymore and don’t want to loose what they created.
This is the difference between protecting principal and purchasing power. Protecting principal is the effort to keep what you have. Protecting purchasing power seeks to protect what you can buy in the future. The retirement phase requires managing both principal protection for today’s value and purchasing power for future values.
On one hand, significant market declines are incredibly painful and you don’t want to take on too much risk. On the other hand you can’t afford to miss out on significant market up-moves. So how do you balance these two competing priorities? It’s a balancing act and the specifics will certainly depend on the specific client. However, there are a few guidelines.
If you’re recently retired and anticipate a 30-40 year retirement, then I’ll encourage you to think with a 30-40 year time horizon. I’ll also encourage you to calculate how much you would spend, in a recessionary period. Then calculate how much income you’ll get from Social Security and Pensions, then keep the balance of that figure in cash equivalents. This will help create the principal protection you’re looking for. Then with the remaining funds, I’ll then want to remind you of what you already know.
Markets go in two directions – the average intra-year S&P 500 decline is 14.3% since 1980. And the average S&P 500 gain since 1980 is 12.08%. Source: JP Morgan Guide to the Markets. And to pile it on, during a 40 year period of time, if you invested 100k and averaged 10%, your ending value would be over $4.5 million!
Historically, whenever markets go down, they come back up. The gains have far outweighed the downs. In fact, the average Bull Market goes up 154% while the average Bear Market goes down by -32%. Source: First Trust
In closing: We of course cannot control what the market does from here and we cannot predict when the next market downturn will occur. But we can control our behavior to these outside events and continue to stick with our long-term investment strategy.
As always, thank you for your trust, if you have any questions/concerns please contact me.
-Dave
Cedar Wealth’s Facebook | Cedar’s YouTube Channel
David Hobbs, CFP®, CLTC | Wealth Advisor | Founding Partner
Offices in Indianapolis & Terre Haute
Office: 317-559-2940
Schedule a MEETING
Email: D.Hobbs@CedarWealthPartners.com
www.CedarWealthPartners.com
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An index is an unmanaged portfolio of specific securities, the performance of which is often used as a benchmark in judging the relative performance of certain asset classes. Investors cannot invest directly in an index. An index does not charge management fees or brokerage expenses, and no such fees or expenses were deducted from the performance shown.
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