How To Invest In A Bear Market

Contributed by: Center Investment Department

In a Q+A, our Director of Investments Angela Palacios, CFP®, AIF® provides valuable advice on the dos and don’ts of investing in a bear market. A “bear market” is when assets fall at least 20% or more from their high. We are currently facing a bear market.

What is a bear market and what triggers them? 

A variety of situations can cause a bear market. They can be event-driven, which explains the current bear market. A black swan event like COVID-19 or a shock in commodity prices like the price war on oil can cause bear markets that lead to recessions. In the case of late 2018, that brief bear market was driven by the trade-war escalation. This example did not lead to a recession. Financial imbalances like high inflation, increasing interest rates from the Federal Reserve, or banks being too leveraged (like in 2008) are all issues that can trigger a bear market and lead to an eventual recession.   

What's good/bad about investing in a bear market? 

Data from historical bear markets indicate that they are excellent investment opportunities, however, it is the most difficult time to invest. Bear markets allow us to tax-loss harvest to offset future capital gains, ultimately reducing our tax bills. We can rebalance out of positions that may not be our highest conviction investing ideas that we have had to hold on to due to high capital gains embedded in those positions.

What investments are best for a bear market and why?

We believe “Core Fixed Income” is often the best strategy to offset the downside risk from equities. These include positions like U.S. Treasuries and High-Quality Corporate debt. Generally, when equities are going down, investors are buying these types of investments. Cash is also a good insulator during times like this. Even though interest rates are low, there is no substitute for its safety. It is very important to always have your next 6-18 months of cash needs set aside so you don’t have to liquidate during times of market turmoil.

What should a brand new investor know about building a portfolio in a bear market? Is it a good time for newbies to enter the market while prices are down? 

Start building a portfolio regardless of whether we are in a bull market or a bear market. The old saying goes, “Time in the market is more important than timing the market”. Most investors save systematically throughout their lives rather than investing in one lump sum. We save every month through our 401(k) deferrals or every year when we get that bonus from work. Dollars go farther in bear markets because the shares of the mutual fund you are buying are now on sale. Investing is the only time in life when buying something on sale doesn’t feel good, but it should if you have a long time horizon to save.

What advice do you have for managing a portfolio in a bear market and when it begins to turn bullish again? For example, how do you manage risk and asset allocation to stay on target with your goals? 

The investing strategy and financial planning goals should be developed during quieter times. Thinking ahead to how you should react during times like this is crucial because in the moment our emotions are very difficult to overcome. A rebalancing strategy also needs to be developed at the same time you are developing your investment strategy. It is a concept that sounds simple but can be very easy to neglect. When markets are doing great and there is very low volatility (like January of this year), you may be tempted to let your best-performing investments run just a little bit longer before rebalancing…meaning you hold your stock positions rather than rebalancing into bonds. In other years that may have been fine, but this year it was not. So, having thresholds around how much stock and bonds you have in your portfolio can take the guesswork out of when to rebalance. That is extremely important at the depths of a bear market because one of the best ways to help your returns coming out of a bear market is simply to rebalance back to your target allocation of stocks and bonds. When markets are down, this means selling bonds and buying stocks.

We hope you found this informative. If you have additional questions, please contact your advisor!

This material is being provided for information purposes only. Past performance doesn't guarantee future results. Investing involves risk regardless of the strategy selected, including diversification and asset allocation. Rebalancing a non-retirement account could be a taxable event that may increase your tax liability.

First Quarter Investment Commentary 2020

Contributed by: Angela Palacios, CFP®, AIF®

As the first quarter of 2020 comes to an end, COVID‐19 has brought the world together in an unusual way. We are now using strange new language like “social distancing” and “shelter in place”. Many of us are now meeting via Zoom (daily users of the videoconferencing platform skyrocketed from 10 million to 200 million). On the lighter side, #QuarantineMadeMeDoIt is trending on social media and we may be watching TV shows that weren’t worth our time before. Schools have been canceled in some states, forcing families to juggle their careers and childcare. Layoffs are a difficult reality for many at this time (luckily, not any Center employees due to smart planning!). We can only stay positive and hope that the drastic efforts to stop the spread of the coronavirus are effective. There is no doubt that COVID‐19 will make history books and there will be many lessons learned as we digest the far‐reaching consequences of this time.

How Did Markets Perform?

The spread of COVID‐19 began in China late last year and impacted their domestic markets, but not the global markets. As the virus spread globally, markets around the world reacted. With the virus came fear manifesting in many different ways, from hoarding toilet paper to hoarding cash. Investors were selling anything they could with a “sell first, ask questions later” mentality. The stock market saw wild swings that haven’t occurred since the 2008 recession. However, the current swings feel much worse because they happened over less time. The markets were generally either negative or positive in a large way each day with an average daily movement of 5% during March! The circuit breakers were triggered on 3 separate occasions, pausing trading for 15 minutes each time (this occurs when the S&P drops by 7% on any given trading day).

Here’s how various indexes closed the quarter:

Monetary Stimulus

The Federal Reserve (the Fed) responded first to COVID‐19 aiming to keep financial markets from spiraling out of control. While their actions could not prevent the economic downturn that is already upon us, the Fed could create more accommodative financial conditions that would help cushion the landing of a recession and support the economy’s eventual recovery. In the near term, the Fed’s actions have aimed to support smooth functioning in financial markets and ensure that the problems on Wall Street do not spill onto Main Street. Below is a timeline of their actions to help support the various functions of the financial markets.

Source: Performa, Federal Reserve

Take a look at the last point “What’s Next?” Well, the Magic 8‐Ball was correct. The Fed further expanded facilities to support municipal and high‐quality corporate bonds. They also purchased highly liquid fixed income exchange‐traded funds to further support the bond markets. These actions were straight from the toolkit developed through the financial crisis of 2008‐2009 (except for purchasing the exchange‐traded funds). Back then, it took the Fed nearly a year to deploy these actions. Thankfully, this year it was deployed in a matter of weeks.

Fiscal Stimulus

This accommodative policy from the Fed made it easier for large‐scale fiscal stimulus to be financed by cheap debt. The government responded with the CARES Act, a $2 Trillion stimulus package. It makes history as the largest stimulus package in the U.S. The goal is to inject a large amount of money into the economy to carry businesses and individuals through this hopefully short, but very challenging time. Learn more about the CARES Act here.

The rising national debt levels in the U.S. are a concern, however, there may be a reason to go into more debt. “If ever there is a time for the government to add to our debt, it is now,” says Kenneth Rogoff, a Harvard economist who often speaks on the risks of the spiraling national debt. He says, “We are in a war, the whole point of not relying on debt excessively in normal times is precisely to be able to use debt massively and without hesitation in situations like this”.

There is a risk of the national debt growing and burdening society in the years to come. This will be on our minds in the coming years. However, it is good to remember that our country’s debt burden, or interest, is a far smaller percentage of GDP than back in 1999. There are two reasons for this. Our GDP has grown since 1999 and interest rates the government pays on the debt are far lower. Think of how much more home you can afford when your mortgage interest rate is 2.7% instead of 6%.

Below is an excellent graphic displaying tools that have been used and what options remain.

An Oil War

Our eyes aren’t only on the coronavirus pandemic. An oil war was brewing between Russia and Saudi Arabia. We are in the midst of a price war because both countries did not agree on a response to a falling demand. They decided, instead, to flood the world with an abundance of cheap oil. This pushed oil prices to their lowest levels in 18 years (of course when gas is cheap, we can’t go anywhere!). More seriously though, couple this with people consuming less oil because of the pandemic keeping us home and this has spelled disaster for energy company stock prices. As I write this, the price war appears to be de‐escalating and there are talks of cutting production to support oil prices.

The Economic Fallout

Despite the unprecedented response from both the U.S. government and the Fed, the pandemic will surely leave its mark on the economy. Early data is being released and it is ugly. Manufacturing/service activity has drastically slowed and unemployment is on the rise.

However, ugly was expected by markets and much of the ugliness has been potentially priced in. We may see the equity market lows retested (or even go a bit lower) in the coming weeks before everyone gets back to work and the economy restarts. This will be highly dependent on flattening the coronavirus curve. If we see positive results from the stay‐at‐home orders and the virus infection rates slow, the markets could recover in the coming weeks and months even as the economy falls into a recession.

What Is The Center Doing In The Meantime?

Accounts have had higher than normal activity this year due to the volatile markets. After a strong 2019, our process called for rebalancing from stock to bonds to keep recommended asset allocations on target. We monitor to make sure any upcoming cash needs are set aside ahead of time. After the sharp drawdown in markets, for many, we have needed to rebalance from bonds back into stocks. We have been able to proactively tax-loss harvest for those who needed it and identify investment opportunities to take advantage of.  For example, the Investment Committee is keeping an eye on U.S. Equities after reviewing the policy responses available to be deployed around the world. We feel the U.S. should be better positioned for recovery after the effects of the pandemic start to wear off.

In the Center’s 35 year history we have been through bear markets and surely will again after this. Bull markets follow bear markets and much of the recovery usually comes in the front end of the bull market and often well before the economy starts to recover. While we can’t predict when the next bull market will begin, your portfolio must be positioned properly for when that happens. It is important to stick to a thoughtful plan that was established during quieter/more rational times. Try to tune out the media and focus on your long‐term goals.

Thank you for the trust you place in us to manage your wealth and to advocate for your financial wellness. There could be no greater responsibility, especially during uncertain times. We strive to stay in touch and hope our communications via email, phone, and Zoom has been helpful. If you have questions or concerns please reach out to your planner! This is why we are here for you!

Angela Palacios, CFP®, AIF®, is a partner and Director of Investments at Center for Financial Planning, Inc.® She chairs The Center Investment Committee and pens a quarterly Investment Commentary.

---

There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. This material is being provided for information purposes only. Past performance doesn't guarantee future results. Investing involves risk regardless of the strategy selected, including diversification and asset allocation. Holding investments for the long term does not insure a profitable outcome. You cannot invest directly in any index. The S&P 500 is an unmanaged index of 500 widely held stocks that are generally considered representative of the U.S. stock market. The Bloomberg Barclays US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. The Russell 2000 Index measures the performance of the 2,000 smallest companies in the Russell 3000 Index, which represent approximately 8% of the total market capitalization of the Russell 3000 Index. The MSCI EAFE (Europe, Australasia, and Far East) is a free float-adjusted market capitalization index that is designed to measure developed market equity performance, excluding the United States & Canada. The EAFE consists of the country indices of 22 developed nations. The MSCI Emerging Markets is designed to measure equity market performance in 25 emerging market indices. The index's three largest industries are materials, energy, and banks.

Retirement Planning Challenges for Women: How to Face Them and Take Action

Contributed by: Sandra Adams, CFP®

If we are being completely honest, planning and saving for retirement seems to be more and more challenging these days – for everyone.  No longer are the days of guaranteed pensions, so it’s on us to save for our own retirement.  Even though we try our best to save…life happens and we accumulate more expenses along the way.  Our kids grow up (and maybe not out!).  Our older adult parents may need our help (both time and money).  Depending on our age, grandchildren might creep into the picture.  Add it all up and the question is: how are we are supposed to retire?  We need enough to potentially last 25 to 30 years (depending on our life expectancy). Ughhh!

While these issues certainly impact both men and women, the impact on women can be tenfold.  Let’s take a look at some of the major issues women face when it comes to retirement planning.

1. Women have fewer years of earned income than men

Women tend to be the caregivers for children and other family members.  This ultimately means that women have longer employment gaps as they take time off work to care for their family.  The result: less earned income, retirement savings, and Social Security earnings. It can also halt career trajectory. 

Action Steps

• Attempt to save at a higher rate during the years you ARE working. It allows you to keep pace with your male counterparts. Take a look at the chart below for an estimated percentage of what working women should save during each period of their life.

• If you are married you may want to save in a ROTH IRA or IRA (with spousal contributions) each year, even if you are not in the workforce.

• If you are serving as the caregiver for a family member, consider having a Paid Caregiver Contract drawn up to receive legitimate and reportable payment for your services. This could potentially help you and help your family member work towards receiving government benefits in the future, if and when needed.

2. Women earn less than men

For every $1 a man makes, a woman in a similar position earns 82¢ according to the Bureau of Labor Statistics.  As a result, women see less in retirement savings and Social Security benefits based on earning less.

Action Steps

• Again, save more during the years you are working.  Attempt to maximize contributions to employer plans. Also, make annual contributions to ROTH IRA/IRAs and after-tax investment accounts.

• Invest in an appropriate allocation for your long term investment portfolio, keeping in mind your potential life expectancy.

• Be an advocate for yourself and your women cohorts when it comes to requesting equal pay for equal work.

3. Women are less aggressive investors than men

In general, women tend to be more conservative investors than men.  Analyses of 401(k) and IRA accounts of men and women of every age range show distinctly more conservative allocations for women.  Especially for women, who may have longer life expectancies, it’s imperative to incorporate appropriate asset allocations with the ability for assets to outpace inflation and grow over the long term.

Action Steps

• Work with an advisor to determine the most appropriate long term asset allocation for your overall portfolio, keeping in mind your potential longevity, potential retirement income needs, and risk tolerance.

• Become knowledgeable and educated on investment and financial planning topics so that you can be in control of your future financial decisions, with the help of a good financial advisor.

4. Women tend to live longer than men

Women have fewer years to save and more years to save for.  The average life expectancy is 81 for women and 76 for men according to the Centers for Disease Control and Prevention.  Since women live longer, they must factor in the health care costs that come along with those years. 

Action Steps

• Plan to save as much as possible.

• Invest appropriately for a long life expectancy.

• Work with an advisor to make smart financial decisions related to potential income sources (coordinate spousal benefits, Social Security, pensions, etc.)

• Make sure you have a strong and updated estate plan.

• Take care of your health to lessen the cost of future healthcare.

• Plan early for Long Term Care (look into Long Term Care insurance, if it makes sense for you and if health allows).

5. Women who are divorced often face specific challenges and are less likely to marry after “gray divorce” (divorce after 50)

From a financial perspective, divorce tends to negatively impact women far more than it does men.  The average woman’s standard of living drops 27% after divorce while the man’s increases 10% according to the American Sociological Review. That’s due to various reasons such as earnings inequalities, care of children, uneven division of assets, etc.

The rate of divorce for the 50+ population has nearly doubled since the 1990s according to the Pew Research Center. The study also indicates that a large percentage of women who experienced a gray divorce do not remarry; these women remain in a lower income lifestyle and less likely to have support from a partner as they age.

Action Steps

• Work with a sound advisor during the divorce process, one who specializes in the financial side of divorce such as a Certified Divorce Financial Analyst (CDFA) (Note:  attorneys often do not understand the financial implications of the divorce settlement).

6. Women are more likely to be subject to elder abuse

Women live longer and are often unmarried or alone.  They may not be as sophisticated with financial issues.  They may be lonely and vulnerable. 

Action Items

• If you are an older adult, put safeguards in place to protect yourself from Financial Fraud and abuse. For example: check your credit report annually and utilize credit monitoring services like EverSafe.

• Have your estate planning documents updated, particularly your Durable Powers of Attorney documents, so that those that you trust are in charge of your affairs if you become unable to handle them yourself.

• If you are in a position of assisting an older adult friend or relative, check in on them often. Watch for changes in their situations or behavior and do background checks on anyone providing services.

While it is unlikely that the retirement challenges facing women will disappear anytime soon, taking action can certainly help to minimize the impact they can have on women’s overall retirement planning goals. I have no doubt that with a little extra planning, and a little help from a quality financial advisor/professional partner, women will be able to successfully meet their retirement goals. 

If you or someone you know are in need of professional guidance, please give us a call.  We are always happy to help.

Sandra Adams, CFP®, is a Partner and CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® and holds a CeFT™ designation. She specializes in Elder Care Financial Planning and serves as a trusted source for national publications, including The Wall Street Journal, Research Magazine, and Journal of Financial Planning.

---

Investing involves risk and you may incur a profit or loss regardless of strategy selected, including diversification and asset allocation. Raymond James is not affiliated with EverSafe.

The cost and availability of Long Term Care insurance depend on factors such as age, health, and the type and amount of insurance purchased. These policies have exclusions and/or limitations. As with most financial decisions, there are expenses associated with the purchase of Long Term Care insurance. Guarantees are based on the claims paying ability of the insurance company.

Harvesting Losses in Volatile Markets

Contributed by: Robert Ingram, CFP®

In times of market volatility and uncertainty there are still financial strategies available as part of a sound long-term investment plan. One example to keep in the toolbelt can be the use of tax-loss harvesting. It’s when you sell a capital asset at a loss in order to reduce your tax liability.

While this sounds counter-intuitive, taking some measures to harvest losses strategically allows those losses to offset other realized capital gains. In addition, remaining excess losses can offset up to $3,000 of non-investment income, with remaining losses carrying over to the next tax year. This can go a long way in helping to reduce tax liability and improving your net (after tax) returns over time. So, how can this work?

Harvesting losses doesn’t necessarily mean you’re giving up on the position entirely. When you sell to harvest a loss you cannot make a purchase into that security within the 30 days prior to and after the sale.  If you do, you are violating the wash sale rule and the loss is disallowed by the IRS.  Despite these restrictions, there are several ways you can carry out a successful loss harvesting strategy.

Tax-Loss Harvesting Strategies

• Sell the position and hold cash for 30 days before re-purchasing the position. The downside here is that you are out of the investment and give up potential returns (or losses) during the 30 day window.

• Sell and immediately buy a position that is similar to maintain market exposure rather than sitting in cash for those 30 days. After the 30 day window is up you can sell the temporary holding and re-purchase your original investment.

• Purchase the position more than 30 days before you try to harvest a loss. Then after the 30 day time window is up you can sell the originally owned block of shares at the loss. Being able to specifically identify a tax lot of the security to sell will open this option up to you.

Common Mistakes To Avoid When Harvesting

• Don’t forget about reinvested dividends. They count. If you think you may employ this strategy and the position pays and reinvests a monthly dividend, you may want to consider having that dividend pay to cash and just reinvest it yourself when appropriate or you will violate the wash sale rule.

• Purchasing a similar position and that position pays out a capital gain during the short time you own it.

• Creating a gain when selling the fund you moved to temporarily that wipes out any loss you harvest. You want to make the loss you harvest meaningful or be comfortable holding the temporary position longer.

• Buying the position in your IRA. This violates the wash sale rule. This is identified by social security numbers on your tax filing.

As with many specific investment and tax planning strategies, personal circumstances vary widely.  It is critical to work with your tax professional and advisor to discuss more complicated strategies like this. If you have questions or if we can be a resource, please reach out!

Robert Ingram, CFP®, is a CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® With more than 15 years of industry experience, he is a trusted source for local media outlets and frequent contributor to The Center’s “Money Centered” blog.

---

The information contained in this blog does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Bob Ingram and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional.

Think Portfolio Diversification is Overrated – Read This

Contributed by: Jaclyn Jackson

Let’s face it, the S&P 500 has consistently beat diversified portfolios since 2009.  Demonstrated below, a diversified portfolio of bonds, domestic stocks, and international stocks (crimson bar) was edged out by the S&P 500 nine of the last ten years. With the S&P’s winning streak, why would investors consider putting money to work anywhere else but US equities?

What The Fund?

For decades, investment professionals have preached the merits of portfolio diversification and asset allocation, but lately, performance hasn’t supported their conviction.  So why are investment professionals adamant about diversification? It began in 1952 when Harry Markowitz (a graduate student who became a

Nobel Prize winning economist) published an article in the Journal of Finance where he outlined the premise of his popularized Modern Portfolio Theory.  Essentially, the theory highlights the relationship between risk and reward for different types of investments. It then mathematically assesses investors’ ability to take on risks with performance expectations to create an optimal portfolio.  In other words, Markowitz laid the groundwork to help investors discover the right combination of investment products to achieve a certain level of performance without taking unnecessary risks.  

A Case for Portfolio Diversification

If you were looking to maximize portfolio growth over the last decade, you could have easily been tempted to scrap diversification in favor of the S&P 500.  Yet, there is evidence that Markowitz’s theory is still relevant for today’s investors. Craig L. Israelsen, PhD and Executive-in-Residence in the Personal Financial Planning Program at Utah Valley University, did compelling research around portfolio diversification worth reviewing. He compared five portfolios that represent different risks levels and asset allocations over 50-years, from 1970-2019.  While there is much to glean from his research, I’d like to zoom in on his comparison of two moderately aggressive portfolios because it shows the value of portfolio diversification. 

The first Moderately Aggressive Portfolio has a traditional 60% US Stock, 40% Bond asset allocation. The second Moderately Aggressive Portfolio has a 14.3% allocation to seven different asset classes.  In 2019, a year dominated by the S&P 500, the first portfolio (having a larger composition of the S&P 500) predictably outperformed the second portfolio.  On the other hand, over the 50-year period the second portfolio had similar annualized gross return with a lower standard deviation.  An investor in the second, 7-Asset Diversified Portfolio, had similar returns without taking as much risk as an investor in the first portfolio.  

There is another point worth spotlighting here.  Imagine if you only invested in the S&P 500, as represented by the Very Aggressive 100% US Stock portfolio, over that 50-year period. Compared with the 7-Asset Diversified Portfolio, the 100% US Stock portfolio had a 7% greater standard deviation for just under a percent greater return.  The diversified portfolio would have given you most of the return for half the headache.

Complex Portfolios for Complex Living

Investors don’t invest in a bubble or just for kicks.  In reality, investors use portfolios to serve needs and meet financial goals. Digging deeper into Israelsen’s research, he explores a real-life need and a common portfolio use: supplementing retirement.  His research evaluates a $250,000 initial investment for each portfolio over 26 rolling 25-year periods from 1970-2019 and assumes a 5% initial end-of-year withdrawal with 3% annual cost of living adjustment taken at the end of each year.

Again, looking at the two Moderately Aggressive Portfolios, the 60% US Stock, 40% Bond Portfolio had a median ending balance of $1,234,749 after 25 years compared to the 7-Asset Diversified Portfolio median ending balance of $1,806,565.  Likewise, if someone had aggressively invested in US Stock over that time, (s)he would still end up with less money than the diversified portfolio at $1,500.554.  This best illustrates why Modern Portfolio Theory (limiting risk through diversification) still matters.  Retirees want to avoid choppy investment experiences as they pull money from their accounts and create even returns through diversification that extend the longevity of their portfolios.

Pulling it all together, life is complex and investors use their investment portfolios to manage those complexities.  Investor needs and financial goals punctuate the necessity of investing in ways that diminish excessive risk-taking and extend the life of portfolios. Everything considered, risks mitigation through portfolio diversification stands true today, even for investors who’ve witnessed an S&P 500 tear over the last decade. 

Jaclyn Jackson is a Portfolio Administrator at Center for Financial Planning, Inc.® She manages client portfolios and performs investment research.

---

The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of the author, and not necessarily those of Raymond James. Investing involves risk and you may incur a profit or loss regardless of strategy selected, including diversification and asset allocation. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary.

The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. Standard deviation measures the fluctuation of returns around the arithmetic average return of investment. The higher the standard deviation, the greater the variability (and thus risk) of the investment returns.

Performance of hypothetical investments do not reflect transaction costs, taxes, or returns that any investor actually attained and may not reflect the true costs, including management fees, of an actual portfolio. Changes in any assumption may have a material impact on the hypothetical returns presented. Illustrations does not include fees and expenses which would reduce returns.

The Importance of Staying Invested

Contributed by: Angela Palacios, CFP®, AIF®

While trying to time the market may seem tempting during times of volatility, investors who attempt to, run the risk of missing periods of quality returns, likely leading to significant adverse effects on the ending value of a portfolio.

The image below illustrates the value of a $100,000 investment in the stock market during the 2007–18 period, which included the global financial crisis and the recovery that followed. The value of the investment dropped to $54,381 by February 2009 (the trough date), following a severe market decline. If an investor remained invested in the stock market over the next nine years, however, the ending value of the investment would have been $227,993. If the same investor exited the market at the bottom, invested in cash for a year, and then reinvested in the market, the ending value of the investment would have been $148,554. An all-cash investment at the bottom of the market would have yielded only $56,122. The continuous stock market investment recovered its initial value over the next three years and provided a higher ending value than the other two strategies. While all recoveries may not yield the same results, investors are well advised to stick with a long-term approach to investing.

Sometimes it can feel very difficult to stay invested!

Crises and Long-Term Performance

Economies and markets tend to move in cycles, and any stock market can have a downturn once in a while. Most investors lose money when the stock market goes down, but some people may think they can time the market and gain. For example, an investor may aim to buy in when the market is at the very bottom and cash out when the recovery is complete, thus enjoying the entire upside.

The problem with this type of reasoning is that it’s impossible to know when the market hits bottom. Most investors panic when the market starts to decline, then they decide to wait and end up selling after they have already lost considerable value. Or, on the recovery side, they buy in after the initial surge in value has passed and miss most of the upward momentum.

The graph illustrates the growth of $1 invested in U.S. large stocks at the beginning of 1970 and the four major market declines that subsequently occurred, including the recent banking and credit crisis. Panic is understandable in times of market turmoil, but investors who flee in such moments may come to regret it.

Each crisis, when it happens, feels like the worst one ever (the most recent one in 2008, as evidenced by the image, actually was). When viewed in isolation on the lower-tier graphs, each decline appears disastrous. However, historical data suggests that holding on through difficult times can pay off in the long run. For example, $1 invested in January 1970 grew to $117.05 by December 2018, generating a 10.2% compound annual return. And in the past, when looking at the big picture, every crisis has been eclipsed by long-term growth.

Please don’t hesitate to reach out to us when you are feeling uneasy during market volatility.  We are here, working for you!

Angela Palacios, CFP®, AIF®, is a partner and Director of Investments at Center for Financial Planning, Inc.® She chairs The Center Investment Committee and pens a quarterly Investment Commentary.

---

Returns and principal invested in stocks are not guaranteed. Stocks have been more volatile than bonds or cash. Holding a portfolio of securities for the long term does not ensure a profitable outcome and investing in securities always involves risk of loss. About the data: Stocks are represented by the Ibbotson® Large Company Stock Index. An investment cannot be made directly in an index. Four market crises defined as a drop of 25% or more in the index. Return is represented by the compound annual return. Recession data is from the National Bureau of Economic Research. The market is represented by the Ibbotson® Large Company Stock Index. Cash is represented by the 30-day U.S. Treasury bill. An investment cannot be made directly in an index. The data assumes reinvestment of income and does not account for taxes or transaction costs. Performance of a hypothetical investment does not reflect transaction costs, taxes, or returns that any investor actually attained and may not reflect the true costs, including management fees, of an actual portfolio. Changes in any assumption may have a material impact on the hypothetical returns presented. Illustration does not include fees and expenses which would reduce returns. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Angela Palacios, and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary. Past performance does not guarantee future results. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation.

The Single Most Important Investing Decision

Contributed by: Nicholas Boguth

Unsurprisingly, I think investing is fun. This is one of the reasons I’ve chosen a career in investment management. With that being said, my career is only 6 years in. Is it possible that I only think investing is fun because the stock market has hit a new all‐time high every single year of my career? Do stocks ever fall? Why even own bonds that pay 2% coupons?

With the decade being over, and the S&P 500 rising almost 190% over the prior ten years, it seems like a good time to remind ourselves of a few key investing principles.

• Stocks are risky. Their prices can fall.

• Bonds are boring, but they have potential to help preserve your portfolio.

• Asset allocation is the single most important investing decision you will make.

Asset allocation in its simplest form is the ratio of stocks to bonds in your portfolio. More stocks in your portfolio means more risk. More bonds in your portfolio means more potential to balance out the risk of stocks. As financial planners, one of the first decisions we’ll help you make is the decision of what asset allocation is most likely going to lead to your financial success.

Take a look at the drawdowns of a portfolio of mostly stocks (green line) compared to a portfolio of mostly bonds (blue line). Stocks may have roared through the 2010’s, but no one has a crystal ball to tell us what they will do in the 2020’s. This chart is a good reminder of what stocks CAN do. Be sure that your portfolio is set up to maximize your chance of success no matter what stocks do. If you are unsure about your current portfolio, we’re here to help.

Source: Morningstar Direct. Stock index: S&P 500 TR (monthly). Bond Index: IA SBBI US IT Govt Bond TR (monthly).

Nicholas Boguth is a Portfolio Administrator at Center for Financial Planning, Inc.® He performs investment research and assists with the management of client portfolios.

---

Investing involves risk and you may incur a profit or loss regardless of strategy selected, including diversification and asset allocation.

The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. The IA SBBI US IT Government Bond Index is an index created by Ibbotson Associates designed to track the total return of intermediate maturity US Treasury debt securities. One cannot invest directly in an index. Past Performance does not guarantee future results.

Investment Commentary: Fourth Quarter 2019

Contributed by: Angela Palacios, CFP®, AIF®

It’s a new decade, and there is much to discuss! We’d love to see you at our annual Economic and Investment Outlook event, happening Wednesday, February 5, from 11:30 a.m. to 1 p.m. We’ll review the past year and take a look at what to expect in 2020. Lunch will be provided. You can register here. If you are unable to attend, don’t worry! We’ll send a link to view the presentation afterward.

2019 in Review

Where’s the beef? 2019 will be remembered as the year of the meat alternative. Burger King introduced the “Impossible Whopper”. Fans raved that this meatless alternative tastes great (I’ll take their word for it). However, investors were not left wondering about the beef in the markets, as 2019 saw excellent returns for both bonds and stocks. 2019 was strong until early May, rallying from a 2018 Christmas Eve low over 25%. The old adage “sell in May and go away” would have worked for investors this year. Point-to-point, from early May to early October, the S&P 500 was down just under 2%. From October on, however, the markets rallied strongly through year-end. Here’s how they finished up for the year:

What spurred this strong rally?

The Federal Reserve Board (the Fed)

Interest rates were cut three times throughout 2019, with guidance from the Fed that future rate hikes were very unlikely, while inflation remained low. This was a complete turnaround from the Fed, increasing rates four times in 2018 to the point that the yield curve briefly inverted in early 2019. (The yield curve shows what interest bonds of the same credit quality with different maturity dates pay.) This meant that the yield on a 2-year U.S. Treasury bond was paying more interest than a 10-year Treasury bond. Since then, the yield curve has rapidly steepened as short-term interest rates moved back down. Cutting rates not only spurred bonds to a record year, but also provided a tailwind that lifted stock markets to higher levels. Remember the old saying “Don’t fight the Fed”? This means that when the Fed is reducing interest rates, markets tend to go up, and this year was no exception.

Trade wars

Markets have responded very favorably to the trade war de-escalation. China and the U.S agreed to the phase-one trade deal in December, removing significant unpredictability, at least in the near term. This agreement rolls back a portion of the existing tariffs and cancels the tariffs that were to be implemented on December 15, 2019. China also has committed to purchasing more agricultural products, goods, and services from the U.S. in the coming years. However, significant work remains to resolve the larger sticking points in the trade war. This will likely be a factor influencing market performance and volatility in the coming year.

Corporate Buybacks

Over the course of the business cycle, the contribution to equity returns from corporate share buybacks ebbs and flows. Companies frequently buy back their own shares with the firm’s profits. This will increase Earnings Per Share (EPS), because the company’s earnings are divided among fewer shares, and it becomes a way to potentially increase stock prices.

Post-recession, companies tend to have less expendable cash and tend to buy back fewer shares. Later in the business cycle, they become cash rich and are able to more heavily deploy funds. This business cycle is no exception. Share buybacks throughout 2018 and 2019 have been a contributor to growth in EPS for companies. The one time allowance of corporate funds repatriation at a lower tax rate (allowed by Trump’s tax reform) has, no doubt, boosted this a bit.

The chart below shows the growing percentage of share buy backs. Twenty-eight percent of corporate cash on hand was utilized for this in 2018 and 2019, versus only 21% in 2010. Also notable, is the growing pool of cash (total height of the bar each year) for S&P 500 companies.

Source: Bloomberg, Compustat, FactSet, Standard & Poor’s, J.P. Morgan Asset Management

Impeachment threatened to derail the 2019 stock market rally

The House of Representatives formally voted to Impeach President Trump in December, which the markets largely anticipated. Now, the House is preparing to send the Articles of Impeachment to the Senate and begin trial there. The Republican-controlled Senate is expected to acquit President Trump. If the vote goes as expected, it should not have an impact on markets. I see this as the most likely scenario.

What do we expect for 2020?

Election year

As 2020 ramps up, so will the political campaigns. The chart below looks at the S&P 500 performance during election years. The story is largely one of positive returns. In previous years, 6- and 12-month returns ahead of a presidential election have been positive almost 90% of the time.

Our economic indicators support moderate growth, and markets are playing out in a positive manner, but we are watching a few points of worry.

U.S.-Iran tensions increase

The markets took a hit during the first week of January, after a move by President Trump. In response to Iran’s latest threat, Trump targeted Iran’s top general Qasem Soleimani, ultimately killing him in a U.S. air strike. This marks a departure from the nonmilitary approach the president has taken with the rest of the world, and caused the markets to quickly pull back. We’ll be watching the escalation of this geopolitical risk. 

After studying markets during other overseas military conflicts, we see the stock market flare up at the beginning of each conflict, when uncertainty is at its greatest. Once a course of action is decided, markets tend to settle into a general growth pattern, if the overall economy remains strong. This holds true even if that action is U.S. military invasion, which may seem counter intuitive. During this tension, many investors chose bonds as their safe haven. Oil is expected to spike and put some upward pressure on inflation. However, the amount of oil we can supply ourselves could mute this impact.

Economic Highlights:

• Unemployment remains at 50 year lows at 3.5%.

• Inflation, as measured by the PCE Price Index, rose 1.6% over the year ending November 2019.

• Gross Domestic Product (GDP) rose 2.1% in the third quarter, exceeding expectations.

• Retail sales increased 3.3% year over year, with online sales leading the growth – signs of a healthy consumer.

• U.S. dollar strength continues, bolstered by low inflation and low interest rates.

Economic Lowlights:

• ISM Manufacturing Index declines to 48.1. Any reading below 50 indicates contraction and is a potential recessionary signal.

• Consumer Confidence Index softens from reaching all-time highs, leaving us to wonder whether the consumer will continue to buy goods and services at the same pace (which boosts GDP).

• While leading indicators softened in the fall, the most recent reading leveled off. A negative trend here can signal a coming recession, but this softening hasn’t yet pushed us into the camp of calling for recession.

2019 was a strong year for U.S. markets. We predict positive returns will continue, just not at the same pace we experienced last year. At this point, we don’t expect a recession this year, but companies will likely face challenges as the Trade War continues. The 2020 election will continue to be on our minds as a party change in the White House could bring new economic policies.

As we welcome the New Year, we don’t want to miss the opportunity to express our gratitude for the trust you place in us each and every day. Thank you! Have a wonderful 2020!

On behalf of everyone here at The Center,

Angela Palacios, CFP®, AIF®
Partner & Director of Investments

Angela Palacios, CFP®, AIF®, is a partner and Director of Investments at Center for Financial Planning, Inc.® She chairs The Center Investment Committee and pens a quarterly Investment Commentary.

---

There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Past Performance does not guarantee future results.

One cannot invest directly in an index. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. The MSCI EAFE (Europe, Australasia, and Far East) is a free float-adjusted market capitalization index that is designed to measure developed market equity performance, excluding the United States & Canada. The EAFE consists of the country indices of 22 developed nations. The Russell 2000 Index measures the performance of the 2,000 smallest companies in the Russell 3000 Index, which represent approximately 8% of the total market capitalization of the Russell 3000 Index. The Bloomberg Barclays US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market.

The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete.

Great Expectations

Contributed by: Nicholas Boguth

We hear a lot about how stocks perform “on average”, and what to “expect” from stock returns:

• “On average, stocks return x%.”

• “You can expect stocks to return x% over the long run.”

• “We expect stocks to return x% per year.”

But what to expect and what is average are two very different things. In fact, average happens so rarely, that I would almost never expect the average. Let’s take a look at some numbers.

Below is a chart of one-year rolling returns for the S&P 500 since 1936. Every spot on that line represents the prior 12 months of returns. As you can see, it is quite sporadic. The “average” return for this set of data is +11.9%, but it ranges from -50% to more than +61%!

Return data from Morningstar Direct

When it comes to investing, realistic expectations are very important.

They keep us grounded and help us keep emotions out of the decision-making process. Don’t expect average returns every time you look at your stocks. Statistically speaking, since two standard deviations capture ~95% of data, it is safe to say you can expect somewhere between two standard deviations on any given period. If you are looking at one-year returns, that would be between -23% and +47%.

It is also important to remember your time horizon. Expectations over one year should be very different than expectations over 30 years. For reference, the entire range of 30-year returns for the S&P 500 since 1936 is between +9.1% and +14.7%.

S&P 500 TR index, monthly returns, 3/31/1936 to 10/31/2019

Lastly, we need to remember that this is only one asset class. If you have a diversified strategy, there is a good chance that large U.S. companies only make up a small percentage of your strategy. International companies, small and mid-sized companies, various bonds, and alternative strategies all merit different expectations. As financial advisors, it is our job to help you understand what to expect. Not sure what to expect? Give us a call.

Nicholas Boguth is an Investment Research Associate at Center for Financial Planning, Inc.® He performs investment research and assists with the management of client portfolios.

---

Return data from Morningstar Direct. S&P 500 TR index, monthly returns, 3/31/1936 to 10/31/2019. Any opinions are those of Nicholas Boguth, Investment Research Associate, and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected, including diversification and asset allocation. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary. Past performance does not guarantee future results. Future investment performance cannot be guaranteed, investment yields will fluctuate with market conditions. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. International investing involves special risks, including currency fluctuations, differing financial accounting standards, and possible political and economic volatility.

Capital Gains Distributions from Mutual Funds

Contributed by: Kali Hassinger, CFP®

Each November and December, investment companies must pay out their capital gains distributions for the year. If you hold these funds within a taxable brokerage account, distributions are taxable events, resulting from the sale of securities throughout the year.

Investors often meet these pay-outs with minimal enthusiasm, however, because there is no immediate economic gain from the distributions. That may seem counterintuitive, given that we refer to these distributions as capital gains! 

When capital gains distributions from mutual funds are paid to investors, that fund’s net asset value is reduced by the amount of the distribution.

This reduction occurs because the fund share price, or net asset value, is calculated by determining the total value of all stocks, bonds, and cash held in the fund’s portfolio, and then dividing the total by the number of outstanding shares. The total value of the portfolio is reduced after a distribution, so the price of the fund drops by the amount of the distribution.

In most situations we recommend that our clients reinvest mutual fund capital gain distributions,  given this is right for the investor's individual financial circumstances. 

This strategy allows you to purchase additional shares of the mutual fund while the price is reduced. Although your account value will not change, because the distribution reduces the fund’s net asset value, you have more shares in the future. By incurring the capital gain, you are also increasing your cost basis in the investment. 

As a counter point, If you rely on the dividend for income it might make more sense to take the mutual fund dividend as cash and not reinvest.

If you own mutual funds in a taxable account and expect the distributions to be large, you should work with your financial planner and tax advisor to weigh the advantages and disadvantages of owning the investment and ultimately incurring the capital gain.

Kali Hassinger, CFP®, CDFA®, is a CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® She has more than a decade of financial planning and insurance industry experience.

---

The information contained in this blog does not purport to be a complete description of the securities, markets, or developments referred to in this material. Investments mentioned may not be suitable for all investors. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Past performance may not be indicative of future results. Raymond James and its advisors do not provide tax advice. You should discuss any tax matters with the appropriate professional. Opinions expressed in the attached article are those of the author and are not necessarily those of Raymond James. All opinions are as of this date and are subject to change without notice. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Every type of investment, including mutual funds, involves risk. Risk refers to the possibility that you will lose money (both principal and any earnings) or fail to make money on an investment. Changing market conditions can create fluctuations in the value of a mutual fund investment. In addition, there are fees and expenses associated with investing in mutual funds that do not usually occur when purchasing individual securities directly.