Part 1: Are International Equities Dead?

Contributed by: Jaclyn Jackson, CAP®

This is part one of a two-part blog series. We'll talk about diversification generally in this blog, then zoom in on international equity diversification during the second part of the series.

Amid geopolitical tension and pandemic backlash, equities have taken a beating; bond prices have fallen as the Fed raises rates, and even cash under the mattress is no match for inflation. Looking at our current market environment, I am reminded of the Motown classic sung by Martha and The Vandellas, "Nowhere to Run." For decades, investment professionals have preached the merits of asset allocation and portfolio diversification, but what do you do when it all stinks?

The answer is simple (but the action is hard): Stay the Course! That advice doesn't feel helpful during market turbulence, but honestly, it's the best advice for long-term investors. Let me explain…

Why Diversification Works

Craig L. Israelsen, Ph.D. and Executive-in-Residence in the Personal Financial Planning Program at Utah Valley, did compelling research around portfolio diversification worth reviewing. He compared five portfolios representing different risk levels and asset allocations over 50-years, from 1970 to 2019. While there is much to glean from his research, let's focus on his comparison of two moderately aggressive portfolios (as they most closely resemble the average investor experience):  

• Traditional “Balanced” Fund: 60% US stock, 40% bond asset allocation

• Seven Asset Diversified Portfolio: 14.3% allocation to seven different asset classes (asset classes included large U.S. stock, small-cap U.S. stock, non-U.S. developed stock, real estate, commodities, U.S. bonds, and cash)

In 2019, a year dominated by the S&P 500, the Traditional "Balanced" Fund (having a larger composition of the S&P 500) predictably outperformed Seven Asset Diversified Portfolio. On the other hand, over the 50-year period, the latter had a similar annualized gross return with a lower standard deviation. An investor with a diversified portfolio experienced comparable returns without taking as much risk.

Grounding his research in numbers, Israelsen evaluated a $250,000 initial investment for each portfolio over 26 rolling 25-year periods from 1970 to 2019 and assumed a 5% initial end-of-year withdrawal with a 3% annual cost of living adjustment taken at the end of each year. The Traditional "Balanced" Fund had a median ending balance of $1,234,749 after 25 years compared to the Seven Asset Diversified Portfolio median ending balance of $1,806,565.  

The research illustrates why planners have a high conviction in diversification. The Seven Asset Diversified Portfolio provided risk mitigation (as measured by standard deviation) and supported robust returns even with annual withdrawals.

Stay Tuned

We've discussed the merits of diversification in a general sense. In part two of the series, we'll speak more directly about international equities and explain why we believe it is still a diversifier worth holding.

Jaclyn Jackson, CAP® is a Senior Portfolio Manager 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 Jaclyn Jackson, CAP®, 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.

Harvesting Losses in Volatile Markets

Contributed by: Kali Hassinger, CFP®, CSRIC™

During periods of market volatility and uncertainty, it's important to remain committed to our long-term financial goals and focus on what we can control. A sound long-term investment plan should expect and include a period of negative market returns. These periods are inevitable and often can provide the opportunity to tax-loss harvest, which is when you sell an investment asset at a loss to reduce your future tax liability.

While this sounds counter-intuitive, taking some measures to harvest losses strategically allows those losses to offset other realized capital gains. Any remaining excess losses are used to offset up to $3,000 of non-investment income. If losses exceed both capital gains and the $3,000 allowed to offset income, the remaining losses can be carried forward into future calendar years. This can go a long way in helping to reduce tax liability and improving your net (after-tax) returns over time. This process, however, is very delicate, and specific rules must be closely followed to ensure that the loss will be recognized for tax purposes.

Harvesting losses doesn't necessarily mean you're entirely giving up on the position. When you sell to harvest a loss, you can't purchase that security within the 30 days before and after the sale. If you do, you violate the wash sale rule, and the IRS disallows the loss. 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're out of the investment and give up potential returns (or losses) during the 30-day window.

• Sell and immediately buy a similar position 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. Specifically identifying 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 reinvest it yourself when appropriate, or you'll 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 wipe 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 and is identified by social security numbers on your tax filing.

Personal circumstances vary widely, as with any specific investment and tax planning strategies. It's 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!

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

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 Kali Hassinger, CFP®, CSRIC™ and not necessarily those of Raymond James. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.

The Basics of Series I Savings Bonds

Contributed by: Kelsey Arvai, MBA

Inflation has been steadily increasing, making Series I savings bonds (I bond), which are investments linked to inflation rates, a very attractive investment. I want to share some key points that will help you determine if it makes sense to consider adding them to your portfolio. 

I bonds are backed by the US Government and offered via Treasury Direct. I bonds earn interest based on both a fixed rate (0.0%) and a rate set twice a year based on inflation. The bonds earn interest until it reaches maturity at 30 years, or you cash it in, whichever comes first. 

Through October 2022, I bonds are earning an interest rate of 9.62%. Meaning that during the first six months that you own the bond, let's say from May 2022 through October 2022, your bond would earn interest at an annual rate of 9.62%. A new rate will be announced every six months based on your bond's fixed interest rate (0.00%) and inflation. The inflation rate is based on changes in the non-seasonally adjusted Consumer Price Index for all Urban Consumers (CPI-U) for all items, including food and energy.

I bonds are attractive but have many limitations and require a fair amount of legwork to acquire. The most significant restriction is that you can only buy $10,000 per year per person. You could also purchase $5,000 in a paper bond with your tax return if you're entitled to a return from the Federal government (although it's too late now unless you've filed an extension). 

To get started on purchasing an electronic I bond, you'd have to open an account with Treasury Direct online. Here is the website for more information.

There are some restrictions on who can own an I bond. You must have a Social Security Number and be a US citizen (whether you live in the US or abroad). You could also be a US resident or a civilian employee of the US, no matter where you live. Children under 18 are eligible for paper bonds as long as an adult buys the bonds in the child's name. Electronic bonds are available as long as a parent or other adult custodian opens a Treasury Direct Account that's linked to the adult's Treasury Direct account. If you'd like to see more about how to purchase a bond as a gift, you can watch a video here.

A few final notes to add, interest is compounded semi-annually. The bond's interest earned in the six previous months is added to the bond's principal value, creating a new principal value. Interest is then earned on the new principal. Rates can go up and down, but you must hold the bond for a minimum of one year, and if you cash out between the end of year one and year five, you could lose your prior three months of interest as a penalty. If inflation subsides, you could be staring at minimal interest rates. Zero is the lowest that the rate would go, so if we entered a period of deflation, there wouldn't be a negative interest rate. As always, consult your financial advisor before making any changes to your current portfolio.

Kelsey Arvai, MBA is an Associate Financial Planner at Center for Financial Planning, Inc.® She facilitates back office functions for clients.

The information contained in this letter 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 Kelsey Arvai, MBA, and not necessarily those of Raymond James. Expression 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. 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.

Focusing on What You Can Control

Contributed by: Josh Bitel, CFP®

May is Mental Health Awareness Month, and as we all know, managing stress can go a long way in improving mental health. Personally, I have always been a bit of a “worry wart” and often have to remind myself not to sweat the small stuff and focus on what I can control. And of course, as a financial planner, I find this very easy to relate to investing and saving for retirement! Below is a graphic from J.P. Morgan that I have shared many times with clients. Just as we try to do in our personal lives, managing what we can control and not worrying about other factors can go a long way in relieving some of the stress that comes with saving for retirement.  

The major area that we as investors often become fixated on (and rightfully so!) is market returns. Ironically, as the chart shows, this is an area we have no control over. The same goes for policies surrounding taxation, savings, and benefits. As you can see, employment and longevity are things we do have some control over by investing in our own human capital and our health. In my opinion, the areas that we have total control over—saving vs. spending and asset allocation and location—are what we need to focus on. We try to have clients focus on consistent and prudent saving, living within (or ideally, below) their means, and maintaining a proper mix of stocks and bonds within their portfolio. Over the course of 35+ years of helping clients achieve their financial goals, The Center has realized that those two areas are the largest contributors to a successful financial plan. 

With so many uncertainties in the world we live in that can impact the market, it is always a timely reminder to focus on the areas we have control over and make sure we get those right. If we do, the other things that we might be stressing over will potentially fall into place. If you need help focusing on the areas of your financial well-being that you CAN control, give us a call! We are always happy to help.

Josh Bitel, CFP® is a CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® He conducts financial planning analysis for clients and has a special interest in retirement income analysis.

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 Josh Bitel, CFP® and not necessarily those of Raymond James.

How Do I Prepare my Portfolio for Inflation?

Contributed by: Angela Palacios, CFP®, AIF®

Inflation is common in developed economies and is generally healthier than deflation. When consumers expect prices to rise, they purchase goods and services now rather than waiting until later. Inflation has continued to trend higher here in the U.S. over the past year, and many are now asking, "Can this harm my portfolio's ability to help me achieve my goals?" Consider the following factors contributing to or detracting from the inflation outlook.

Our investment committee has discussed inflation at length for several years now. Here are some highlights from our discussion.

Factors influencing inflation in the short term and long term:

1. Large amount of monetary and fiscal stimulus

There has been a record amount of stimulus being pushed into the pockets of Americans by the government. The consumer is healthier than it has ever been and demanding to purchase.

2. Supply chain disruptions  

Due to shipping constraints or lack of manpower, companies can't make enough of many different products to meet current demand. Does this sound familiar? It should; because two years ago, all we could talk about was not having enough toilet paper and disinfectant wipes. People were paying high prices for even small bottles of hand sanitizer. Fast forward two years and the shelves are now overflowing with these items as prices have normalized. Once people have spent the money they accumulated over the past two years and can purchase the goods and services they want when they want to, demand will likely return to normal.

3. Starting from a very low base 

The point to which we are comparing current inflation is one of the biggest influences on the calculation. For year over year inflation, we were comparing to an economy that had very little to no economic activity occurring and was still digging out of the hole the pandemic created. When you compare something to nothing, it looks much larger than it is. Now we are starting to compare to a more normalized time, so we should see this number trend downward simply because of this anomaly.

4. Wage inflation 

One of the biggest factors in the lack of inflation over the past decade was a lack of wage inflation. We are now seeing wage inflation because companies can't hire enough people to meet the current demand for their goods or services. Wages are going up trying to entice people back to work. For many years, no wage inflation at lower-paying jobs has culminated in a resetting of wages recently (it is likely wages settle at a higher base than they were before, but it doesn't mean they will continue to rise at the pace they have been).  

5. A complete lack of velocity of money

While banks are flush with cash, they still aren't lending. Why? Because the banks, due to banking regulation changes over ten years ago, only want to loan large amounts of money to someone who is creditworthy. Creditworthy consumers are so healthy that they don't need to borrow money.

6. Technology increasing productivity

A large portion of the country increased productivity by reducing commute time via remote working capabilities over the past two years. Companies that would never have considered allowing remote work now find themselves reducing office space and making permanent shifts in working style. This is just one example of how growth in technology can increase productivity which, over time, puts downward pressure on prices. The Center is an excellent example of this. While our team is back in the office, we work a hybrid schedule of several days in the office and several days remotely.

It is important to understand what investments could do well if we are surprised and inflation is around the corner.

First of all, your starting point is very important. Are you starting from low inflation, or are your inflation levels already elevated? The answer is we are starting from a long stretch of time with very low inflation rates. So in the chart below, you would reference the lower two boxes. Then it would be best if you asked, "Is inflation rising or falling?” Low and rising inflation is in the bottom left box. You may be surprised to see the strong, average performance from varying asset classes in this scenario. Inflation that is reasonable and expected can be a very positive scenario for many asset classes.

The past year had inflation prints that many investors saw as unreasonable and unexpected. Stocks and bonds struggled because of inflationary pressures. If inflation starts to moderate, as I think it will, fear should start to diminish. In the meantime, commodity-linked sectors and countries benefitted through positions held in portfolios like real asset holdings. Diversification remains important!

Inflation assumptions are fundamental in the financial planning process. This is why it's important that we utilize Monte Carlo simulations, meaning we plan for some pretty bad scenarios in the planning process. If you would like to gather more insight or an update on your plan, don't hesitate to give us a call!

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.

The information contained in this letter 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 CFP® AIF®, and not necessarily those of Raymond James. Expression of opinion are as of this date and are subject to change without notice. There is no guarantee that these statement, 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. 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. Rebalancing a non-retirement account could be a taxable event that may increase your tax liability.

US GDP Unexpectedly Gives a Negative Reading

Contributed by: Angela Palacios, CFP®, AIF®

As the U.S. Market entered correction territory (down 10%), another warning sign entered the state of the economy. Gross Domestic Product (GDP) for the first quarter fell at a 1.4% annualized pace. The definition of a recession is two consecutive quarters of negative GDP growth. Below is a great visual of the makeup of GDP growth this past quarter, so we can dive deeper into what is making up the negative number.

Source: Washington Post

The consumer continued to hold up its end of the bargain fairly well, contributing to nearly 2% of GDP growth as shown by personal consumption. But much of the drag this quarter came from an excessive amount of net exports (pink area), which are a negative drag to GDP. These imports were the largest ever on record this quarter as businesses worried about Russia’s invasion of Ukraine and front-loaded their imports. Also, consider that we are comparing against quarter 1 of 2021, which had a direct cash infusion by the Federal Reserve into consumers’ bank accounts. This quarter’s reading encompassed bad news like the Russia-Ukraine conflict and the biggest spike in covid cases ever here in the U.S.

All of this negative news has weighed on investor sentiment. This reading is typically a contrarian indicator, the AAII Investor Sentiment Survey, but has recently registered the worst reading since 1992. Readings were not this bad during the 2008/2009 financial crisis! Usually, a reading like this is contrarian because a market bounce generally follows it to the upside. 

So, which indicator do you follow to make investment decisions? Often we get mixed signals from markets. It is best to determine what is important to pay attention to and what might be noise so that you can have an action plan built ahead of time during periods of stress. This is no easy task and is one of the main mistakes made by do-it-yourself investors. Planning is in our name, and the importance never diminishes. If you have questions and need to speak with someone, don’t hesitate to reach out to us!

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.

The forgoing is not a recommendation to buy or sell any individual security or any combination of securities. Be sure to contact a qualified professional regarding your particular situation before making any investment or withdrawal decision. 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 Angela Palacios, CFP® AIF ®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. Individual investor's results will vary. Past performance does not guarantee future results. Investments mentioned may not be suitable for all investors.

Why Everybody Is Talking About ESG Investing

Contributed by: Jaclyn Jackson, CAP®

*This blog was originally published on April 8, 2021. For more information on matching your values to your investments, check out The Center Social Strategy.

According to CNBC, almost 1 in 4 dollars is going into Environmental, Social, and Governance (ESG) funds this year.  Even before 2021, the combination of ethical provisions and competitive performance turned many heads towards ESG investments.  I aim to explain what the big fuss is about and why ESG investments are gaining traction.

Investors Are Talking About It

To be clear, the March 2020 downturn was no picnic (for anyone).  However, investors who had stake in environmental, social, and governance (ESG) investments managed the economic downturn with greater resilience.  Leading research firm, Morningstar, reported that during March 2020, “sustainable funds dominated the top quartiles and top halves of their peer groups.  Sixty-six percent of sustainable equity funds ranked in the top halves of their respective categories and more than a third (39%) ranked in their category's best quartile.”  Compared to peers, ESG funds pulled top rankings.

Not only did peer to peer comparisons look good, but index comparisons proved more robust too.  In the same study, Morningstar compared 12 passive ESG funds in the large-blend category to a traditionally passive fund. They reported, “For the year through March 12, all 12 ESG index funds outperformed”. What’s more is that fees were included in this study.  While the ESG passive funds compared were more expensive than the traditional passive fund, they still managed to outperform.  Impressively, the trend held with international and emerging market index comparisons…and everybody is talking about it! 

Including the world’s largest investor/asset manager, BlackRock, who’s CEO challenged corporations to consider the impact of climate change on business models.  In 2020, CEO Larry Fink announced BlackRock would incorporate ESG metrics into 100% of their portfolios.  The asset manager also pledged to produce data and analytics to punctuate why considering climate change should be an investment value. 

Yellen And Powell Are Talking About It

Investors are not the only people concerned.  In wake of recent natural disasters, Treasury Secretary Janet Yellen and Federal Reserve Chairman Jerome Powell are working to assess the risks climate change poses to the health and resilience of the financial system.  Their consensus implied a concentrated effort to monitor financial institutions and their exposure to extreme weather events.  Leading the charge, Fed Governor Lael Brainard, recently announced the Financial Supervision Climate Committee (FSCC).  Brainard is a proponent of using scenario testing to understand banks’ ability to survive hypothetical climate catastrophes.  The FSCC will focus on developing evaluation processes for climate risks to the financial system.

Why Everybody Is Talking About It

While many people acknowledge the ethical appeal of ESG methodologies, they may not fully appreciate the businesses appeal that underpins stock performance.  Business litigation risk provides a clear example.  The Financial Analyst Journal featured a study that explored the relationship between ESG performance and company litigation risks.  Analyzing US class action lawsuits, researchers found, “a 1 standard deviation improvement in the ESG controversies of an average company in the sample reduced litigation risk from 3.1% to 2.4%”.  The study also asserted that companies with low ESG performance experienced market value losses ($1.14 billion) twice the size of companies with high ESG performance.  Further, the study integrated their findings with a trading strategy and concluded investors benefitted from lower litigation risk.

It doesn’t stop with litigation risk.  There are also links between healthy corporate governance and market returns.  As You Sow, a nonprofit promoting corporate responsibility, has been tracking S&P 500 companies with excessively compensated CEOs since 2015.  They collaborated with R. Paul Herman, CEO of HIP Investor Inc., to do performance analysis based on their tracking. Herman determined, “…shareholders could have avoided lagging returns by excluding companies that keep making the list for excessive CEO pay”.  Companies without excessively paid CEOs significantly outperformed companies with excessively paid CEOs.  The former generated 5.6% in annualized returns compared to the latter at 1.5%.  What’s astonishing is that the report noted, “The performance gap due to excessive compensation equates to approximately $223 billion in shareholder value lost.”  How are companies without overpaid CEOs edging out competitors?  Instead of overpaying CEOs, more resources can be dedicated to research and development projects, dividends to shareholders, or equitable pay for employees; things that advantage company profits and support positive investor outcomes.

Are You Talking About It?

There is definitely a case for the merits of ESG investing.  It is no wonder folks are talking about it.  Are you interested in the conversation?  If you’ve followed trends in ESG investing and are considering adapting ESG strategies into your portfolio, The Center is here to help.  Ask your advisor about the Center Social Strategy; they would be happy to talk about it with you.

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

This material is provided for information purposes only and is not a complete description of the securities, markets, or developments referred to in this material. Any opinions are those of the author and not necessarily those of Raymond James. There is no guarantee that the 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. Utilizing an ESG investment strategy may result in investment returns that may be lower or higher than if decisions were based solely on investment considerations. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. 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.

Battle of the Brackets…Portfolio Management Edition: A Center Spin-Off Competition

Contributed by: Nicholas Boguth, CFA®

I believe certain things make our team outstanding here at The Center, and a few of them were in the spotlight this past month amid the March College Basketball Tournament:

• We constantly practice our company values.

• We have a heavy focus on charitable giving.

• And ultimately, we are just a cool place to work.

In the spirit of education, teamwork, and some friendly competition, we ran a bracket competition with an investment focus (we did a normal bracket game too, but mine was busted the first day, so there is no need to talk about that). Every team member chose an asset class to represent their “team” in the tourney. The winner of each round is the asset class that outperformed over the week, and we are repeating for five weeks until we have our champion.

Some team members chose more stable asset classes like short-term U.S Treasuries or investment-grade bonds, while some chose more volatile options like Emerging Market stocks or commodities. Overall, it is fun for the entire team to collaborate and for all of us (not just those in investment roles) to watch how different asset classes move with economic news*.

*We all know there is no shortage of economic news lately from the U.S. and overseas. Markets have been volatile, and times like these stress the importance of having a plan in place. As always, we are here to help answer any questions you may have about your plan. One small but powerful tool in investment management that we have taken advantage of is tax-loss harvesting during volatile markets. Read more about that here.

The cherry on top of this competition is that we are playing for some of our favorite local charities. The Center’s Charitable Committee donated $1,000 to the winning four team members’ charities of choice. Check out the results from last year, as we ran the same competition using individual stocks instead of asset classes. We will continue to find new ways to collaborate, learn, and partner with charities here at The Center. We hope you follow our blog as we update along the way!

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

Any opinions are those of Nicholas Boguth, CFA® and not necessarily those of Raymond James. Every Investor’s situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment, Prior to making an investment decision, please consult with your financial advisor about your individual situation.

Tips for Investors During Times of Market Volatility

Contributed by: Michael Brocavich, CFP®, MBA

When faced with volatility in the market, emotions can be triggered in investors that can impact their judgment and potentially affect returns. These pullbacks can make folks want to pull up stakes and run – a reaction that is often a mistake, especially for long‐term investors.

The likelihood that we will continue to see volatility this year is high. The Fed has slowed down its bond buying activities and is raising interest rates, the threat of a new COVID variant that could shut down the economy still exists, and there are supply chain and labor issues around the globe. To top it all off, we are gearing up for mid‐term elections in November.

Here are some tips to consider when we do face a volatile market. Having a plan during this time can help provide clarity, confidence, and even strategies to take advantage of the volatility.

• First, we need to remember that market volatility is normal. As investors, when we experience long periods of upward markets with little volatility, we forget how regular market volatility really is. We need to remember that historically, the market will dip by 5% at least three times a year. Also, on average, the market will have a 10% correction once a year. Understanding that volatility is a natural process of investing and challenging to avoid can help curb some emotions triggered by these markets.

• Make sure your employer retirement accounts are rebalanced appropriately. Over the last few years, money invested in stocks have severely outperformed the bond market. Now is a good time to revisit the allocations in your Employer‐Sponsored Retirement plans to make sure your allocation is still within your risk tolerance. You will want to make sure that your allocation to stock funds and bonds funds is appropriate for the amount of risk you want to take. If you are unsure of how you should

• Increase Plan contributions when markets are down. For younger investors still in the accumulation stage, a volatile market is a great time to increase your contributions. Though it may seem scary to increase your contributions when markets are volatile, you are actually buying into the market when prices are on sale. Contributions added when the market is down 5‐10% from the previous high have much more earning power than contributions made when the market is up 5‐10% from its last high.

• Have additional cash on hand to invest in dips and corrections. For investors who have been able to max out their Employer‐Sponsored plans and still have additional cash to invest, a volatile market can make for an excellent opportunity to do so. Consider talking with your advisor about moving extra cash to your investment accounts to invest on dips and corrections. Together, you can develop a strategy to get your cash invested over time or all at once, depending on market conditions.

Stumbling through bad times without a strategy makes a troubling situation even worse. If you do not have a retirement or investment plan, you will not accurately assess the damage when markets do take a dive. This could increase stress and cause investors to make bad decisions.

These periods of volatility are an opportunity to connect with your advisor, enabling them to act as a sounding board for your concerns. By talking about current events in light of your overall financial plan, your advisor can provide a reassuring perspective to help you stay the course or even invest extra cash during an opportune time.

Michael Brocavich, MBA is a CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® He has an extensive background in both personal and corporate finance.

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. Past Performance does not guarantee future results.

Tax Diversification and Investment Diversification: The Limitations of Asset Location

Contributed by: Center Investment Department

Taxes throughout your lifetime are nearly impossible to predict, so tax diversification is almost as important as the decision to save itself. Taxes are the biggest enemy to retirement and one of your single most significant costs. Therefore, when you are establishing your career, your younger years are the most impactful time to start saving, as shown by the chart below. In this hypothetical example, an investor starting young (Consistent Chloe) has the potential to accumulate far more – teal colored line and ending portfolio value - than a person who waits until age 35 (Late Lyla) – purple colored line and ending portfolio value - to start saving.

Our younger years also offer us a unique opportunity to save in a Roth IRA (tax-free savings) account; however, this is when we are least likely to think of expanding our retirement income options. What if that growth you see in the example above happened all in a tax-free account? This can help you dodge the bullet of taxes later in life.

As we mature in our careers, our income (and tax brackets) naturally increase, and it often becomes more important to invest within tax-deferred accounts. In turn, this gets us tax deductions today that were not always important before.

In our later stages of saving, perhaps when considering early retirement or before social security and Medicare kick in, we would need to start saving into our taxable account buckets to have money readily available for current expenses. This would bridge the gap if accessing our tax-deferred buckets (usually the largest portion of our assets) come with too many strings attached, such as early withdrawal penalties.

So, we know it is important to save and diversify our tax buckets for savings, but are there differences in how we should diversify those asset buckets?

We have all heard that asset location can also be an important tool for diversification. This means placing portions of our investments in certain accounts because of the additional tax benefits that it provides. For example, placing taxable bonds in your tax-deferred accounts to shelter the ordinary income they spin-off or focusing on equities for high growth in our Roth accounts. This makes a lot of sense for someone in the accumulation stage; however, there needs to be even more careful thought applied for someone in or nearing retirement.

There is also such thing as too much of a good thing. Going to extremes and putting all of your bonds in tax-deferred accounts or all of your most aggressive positions in your Roth accounts can lead to some significant shortcomings. Diversifying your investments by tax buckets is important because it gives you the flexibility in any given year to draw from a certain tax profile based on your current situation and cash flow needs. What if you want capital gains only? Take from taxable investments. Need to remodel your house and take a large withdrawal but doing so could push you into a higher cap gains bracket? Take from your Roth. But what if you need to take from that Roth IRA and the markets have corrected 25% that year? In this case, you might be hesitant to take the money out because you want to give it time to experience the rally back that may be on the horizon. You get the picture of where issues could arise. Asset location is a great tool to mitigate taxes, but always be aware that some diversification may always be appropriate in each tax bucket.

It is important to properly diversify on many different levels, and a financial planner can help you do just that. If you have any questions on this topic or others, don’t hesitate to reach out!

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. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional. Examples used are for illustrative purposes only.