In the piece, he contends that one shouldn’t get too worked up about having 33% in seven companies. He’s referring to the Standard & Poor’s 500 index (S&P 500), an index that I think is the world’s most-benchmarked-to benchmark, which has about a one-third allocation to the so-called Magnificent Seven (Mag 7), Alphabet, Amazon.com, Apple, Meta Platforms, Microsoft, Nvidia and Tesla.

He points out that on June 1, 1932, 12.7% of the value of the entire U.S. stock market consisted of just AT&T. Today, the largest of the Mag 7, Nvidia, accounts for just 7.8% of the market value of the S&P 500 and 6.9% of the total U.S. market.

His cursory recap of the arguments against indexing or passive investing goes like this.

• In the 1970s and 1980s, tracking the market with low-cost index funds instead of hiring an expensive stock picker was “settling for average.”
• In the 1990s, brokers called index funds “tax bombs” that would supposedly hit investors with huge, unexpected tax bills. Then came warnings that index funds couldn’t protect you against market crashes. More recently, stock pickers touted their unique abilities to pick socially responsible companies. (Never mind.)
• “Concentration risk” is the newest in this long line of marketing blitzes.

Work as an advisor long enough, and you’ll realize that “investors need to be wary of messages about markets that are really about marketing.” He then includes this quote:

“The investment community has always agreed on all these tribal ‘truths’ that have no basis in data,” says Tim Atwill, a former senior analyst at Russell Investments and ex-head of investment strategy at Parametric Portfolio Associates

So should you bail out of your S&P 500 or other index funds?

No way.

That’s the conclusion of recent research by Mark Kritzman, chief executive of Windham Capital Management, and David Turkington, head of State Street Associates, both based in Cambridge, Mass.

After all, by definition, concentration goes up whenever winning stocks keep winning.

“Taking risk off the table every time the market gets more concentrated would have been very harmful historically,” Kritzman tells me. “It may help you avoid some fraction of the selloffs, but you incur a huge opportunity cost in losing out on the run-ups.”

He goes on to point out that larger companies are generally more diversified economically, geographically, and in their businesses; “the larger stocks are just safer,” says Kritzman.

What’s more, while we use the S&P 500 in portfolios, it usually comprises about 48% of an equity portfolio or segment. So, in a 60% stock/40% bond portfolio, the Mag 7 represent less than 10% of the portfolio (48% x 60% x 33%). When I used to work in a Trust Company setting, we would ask clients to sign exculpatory letters when one holding exceeded 20% of a portfolio, more than twice what Nvidia comprises presently.

It seems like, for now, this is an issue to be aware of but not overreact to.

The post The Big Scary Myth Stalking the Stock Market appeared first on Strategence Capital.

Recently, the Standard & Poor’s 500 (S&P 500) had declined  13.9% from the January peak ¹. Stocks are not the only asset class getting beated down. Year to date, through April, core bond funds were down 9.5%, which, if the year ended in April, would be the worst year ever for core bonds (previous worst was –2.9% in 1994) ². Pair all of this with a swelling inflation rate of 8.5 (Consumer Price Index; March 2022), and an investor can’t be blamed for wondering what to do.

It may be a good time to make lemonade out of lemons by considering a Roth conversion.

Huh?

Roth conversions are when an individual takes a portion of a retirement account that has not yet been taxed (I.e., traditional IRAs) and moves it to a retirement account that is post tax (I.e., Roth IRA). Some qualified retirement plans, such as a 401(k), may allow this, too.

Here are reasons why I believe that Roth conversions can make sense right now:

1. The stock market is on sale. When I go to the store, and I see a special sale on that exact thing I’m looking for, why would I wait for that item to go back up in price before I buy it? When completing a conversion to Roth when the market is down, you get to swap out your investments at a lower tax basis. I’ll provide an example later in this article.
2. Taxes are on sale.³ We are experiencing an extremely favorable tax environment right now. With the Tax Cuts and Jobs Act that is set to expire in 2026, this is could be a good time to realize income.
3. There are no required minimum distributions in Roth IRAs. That is not the case for traditional IRAs. Every year, starting at age 72, investors are forced to take money out of their IRAs, no matter if they need the money or not.

Let’s look at an example to give you a better understanding of a Roth conversion. If an Indiana resident (home state bias on display, here) in the 22% federal tax bracket, and with a state tax rate of 3% (rounded down), converts $50,000 of a traditional IRA to a Roth IRA, their taxable income for the year will increase by $50,000. Assuming they stay in the same 22% bracket* with the $50,000 of additional income from the conversion, the tax liability is approximately $12,500 in federal and state taxes at the time of conversion. Hopefully you are tracking with me so far. The next part of the Roth conversion scenario is where investors can really benefit from this strategy.

It’s important to consider one’s tax bracket. A jump from the 22% tax bracket to the 24% tax bracket, the next one, isn’t a big one, but jumps from the 12% and 24% brackets are big moves.

If a market correction reduces the investment account by 15% and the Roth conversion is completed at $42,500 in value, the federal income tax liability from the conversion would fall to $10,625 yielding a $1,875 tax savings upfront. The caveat is once the funds are held inside a Roth IRA, any future market rebound and appreciation will be free of tax ⁴. The S&P 500 has never not rebounded over some time frame.

Other Considerations

The decision to convert all or a portion of your pre-tax IRA accounts depends upon an individual’s own facts and circumstances. Taxpayers are advised to speak with their tax and financial advisers prior to undertaking a Roth conversion. Some of the additional considerations include:

Sources:

1. LPL Research 

2. LPL Research

3. “Low Tax Rates and What to Do” , Strategence Capital Blog

4. “Everyone is Talking about Roth IRA Conversions and Here’s Why” , Kiplinger

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

Traditional IRA account owners have considerations to make before performing a Roth IRA conversion. These primarily include income tax consequences on the converted amount in the year of conversion, withdrawal limitations from a Roth IRA, and income limitations for future contributions to a Roth IRA. In addition, if you are required to take a required minimum distribution (RMD) in the year you convert, you must do so before converting to a Roth IRA.

The post An Opportunity in the Making appeared first on Strategence Capital.

One example of a time horizon would be saving for a child’s college education. If the child is four years old and might attend college at age 18, the time horizon is 14 years. Time horizon is so important that we’re required to review it annually with all our clients; it’s one of the most important factors behind an investment decision. It’s the reason that age-based investment products have different asset allocations, depending on the age-group targeted for the product.

Briefly, the shorter one’s investment time horizon, the less volatile those investment should be. Vice versa, the longer one’s horizon, the more volatile the investments can be.

The chart below, using data back to 1928, was produced by Bespoke. It shows the percentage of time that total returns for the Standard & Poor’s 500, a widely-followed measure of stock market returns, have been positive over various time frames. Total return includes not only price appreciation/depreciation but also dividends.

Now we can use that data to think about whether one should invest in stocks, as represented by the S&P 500.

• If you have money to invest for one month, there’s a 37.2% you’ll suffer a loss;
• If you have one decade to invest, there’s only a 5.8% chance you’ll suffer a loss;
• And there’s never been a 20-year period where the total return has been negative.

You can look at these percentages from the other side, too. Over a six-month period, your chance of having a positive return is 70%. That’s not bad. That means that out of ten six-month periods, seven will be positive, but what will your six-month period look like? That’s the big question. I like the odds at five years a lot better. That seems to me to be a good horizon to be thinking about owning stock, but your situation may be different.

Do you wonder if your asset allocation is in keeping with your time horizon? Give us a call or shoot us an email. We’d be happy to discuss this with you.

All investing involves risk including loss of principal. No strategy assures success or protects against loss.

The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. The S&P 500 is an unmanaged index which cannot be invested into directly.  Past performance is no guarantee of future results.

The post The Importance of Time appeared first on Strategence Capital.

The first is the survey of purchasing managers, the folks in charge of ordering the stuff for factories. This one shows purchasing managers at their most enthusiastic since 2014!

Then, there’s this, a measure of demand for outbound container rates from Shanghai. Boom!

The post Why Stocks Go Up appeared first on Strategence Capital.

It was a roller-coaster year, to be sure, but staying the course again proved to be a good strategy. Many investors responded to the COVID outbreak by moving to more conservative allocations.  Others cited the 2020 Presidential election and the narratives they created around it as reasons to change allocations. We continued to preach a sermon about sticking to long-term investment plans with rebalancing when investments strayed from their target allocations.

The quilt chart above shows the performance of six asset classes and a hypothetical 60/40 (stocks/bonds) portfolio. It showed the S&P 500 staying in the top three for the eighth year in a row, but the top-performing asset class was Emerging Markets stocks (EM on the chart). The 60/40 portfolio remained a good way to invest, muting, as it does the moves of the best and worst asset classes.

Going into 2021, our advice remains the same

Invest in a portfolio at the intersection of your risk tolerance, required risk, and capacity for risk, a subject explored in greater depth in this blog post.

This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes.

Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.

There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.

All performance referenced is historical and is no guarantee of future results.

All indexes are unmanaged and an individual cannot invest directly in an index. Unmanaged index returns do not reflect fees, expenses, or sales charges.

S&P 500 – The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

Emerging Markets Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of the emerging market countries of the Americas, Europe, the Middle East, Africa and Asia.  The MSCI EM Index consists of the following emerging market country indices: Brazil, Chile, Colombia, Mexico, Peru, Czech Republic, Egypt, Greece, Hungary, Poland, Qatar, Russia, South Africa, Turkey, United Arab Emirates, China, India, Indonesia, Korea, Malaysia, Philippines, Taiwan, and Thailand.

The post Diversification Remains a Core Investment Tenet appeared first on Strategence Capital.

I might be wrong, but I think it was Strategas Research Partners which coined the term, TINA, shorthand for There Is No Alternative…to stocks. Traditionally, the two main, competing asset classes are stocks and bonds, and in this two-asset class dichotomy, you could change Tina to TRINA, there really is no alternative.

Take a look at the inflation-adjusted yield on the 10-year Treasury note in the chart below. Investors in it, are likely to end up with less purchasing power than when they started. (Click the chart to be taken to the Axios story on this.)

With bonds traditionally the less volatile of the two asset classes—and U.S. Treasuries the world’s safest securities with respect to default risk—there are, admittedly, riskier and thus, higher-yielding bond types, but Treasuries anchor yields, and other bond types will only be slightly more attractive than Treasuries.

Regardless, this scenario forces investors to say there really is no alternative and, thus, I must invest elsewhere. Where can I invest, instead? The front cover of this week’s Barron’s magazine suggests some alternatives… “energy pipelines, dividend stocks, and real estate,” none of which have a risk profile anything like bonds.

Unfortunately, there is also no alternative to holding investments that match one’s risk profile, which is a subject we discuss in the blog post here.

This material is for general information only and is not intended to provide specific advice or recommendations for any individual.

All investing involves risk including loss of principal. No strategy assures success or protects against loss.

Past performance is no guarantee of future results.

Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.

Government bonds and Treasury bills are guaranteed by the US government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value.

The post Meet TRINA, TINA’s Sister appeared first on Strategence Capital.

We pool our funds together—each of us puts in $20—and we start the lemonade stand. To represent our ownership, we take a piece of paper and split it in half…50/50. Imagine that our lemonade stand is wildly successful (the recipe is a proprietary secret with a couple of special ingredients) such that it’s value goes up from our initial $40 to the point where a couple of kids from the neighborhood offer us $80 for the lemonade stand.

The next day, we take those pieces of paper and cut each half into four pieces, so our ownership goes from being represented by two pieces of paper to eight. Now, the neighborhood kids offer us $150.

Makes no sense, right? We didn’t increase the value of the company by changing the number of pieces of paper. The neighborhood kids would be silly to increase what they’d pay for the company.

And yet, that’s exactly what is happening with Tesla and Apple stock.

Take a look at the chart to the right. On the day that the stock splits are announced, the stocks each punched the launch mode button.

This makes no economic sense whatsoever. Neither company has made any announcements that would have significantly increased the value of the company. Maybe there’s speculation that Apple’s likely September announcement of new products could do that.

This is not investing; this is speculating, and you should only do it with money that your significant other won’t miss.

I struggled to find one quote from someone famous that crystalize all of this and couldn’t. Instead, here’s a bunch of ‘em. Take your pick.

“Stock market bubbles don’t grow out of thin air. They have a solid basis in reality, but reality as distorted by a misconception.” – George Soros

“Behind every stock is a company. Find out what it’s doing.” – Peter Lynch

“Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.” – Paul Samuelson

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

The post A Rant About Stock Splits appeared first on Strategence Capital.

The image below shows the long-term path of the stock market. It covers a lot of political administrations, and yet the long-term direction is up and to the right.

Given the polarization in the U.S., I’m guessing you are pretty sure that if the other political party gets in office, that the U.S. economy and stock market are going to go off the rails. Here is a clinical look at returns by political party, and by lagging the returns by one year (right pair of bars), we can model the lagged effect of policies. If you squint, you can see that returns do modestly better during democratic administrations. To be fair to statisticians, it is a small sample size.

We strongly discourage what some call derisively “market timing,” and what others call “risk management.” Regardless, if you’re out of the market, and miss just one day, your long-term returns can be dramatically impacted.

Allow me to speak frankly for a moment—and maybe offend you

There are millions of what smart people call market participants. They include hedge funds, Robinhood investor/speculators, 401(k) participants, mutual funds, sovereign wealth funds, value investors, growth investors, and more. Most of them are interested in the same thing as you, seeing their investments go up in value. To varying degrees, each is employing all their mental faculties and literally employing others to research companies, consider policies, determine economic impacts, and forecast thousands of data points. They have done and continue to do that. They, too, know there’s an election in November.

And, yet the Standard & Poor’s 500 index is at an all-time high.

You must ask yourself: what do I know that they don’t?

Maybe more importantly, what do they know that you don’t?

Other things you could ask yourself:

1. What if I’m wrong?
2. When will I get back in, especially if I’m wrong?
3. Since when is the gut a thinking organ?
4. How did it work out the last time I had a hunch like this? How about the time before that?
5. From 0 – 100, how confident are you that your conclusion is right?
6. If I sell, what does the party who buys my stocks from me know that I don’t? For every seller there is a buyer.

None of this is to say that there will not be volatility related to election headlines or outcomes. What it does try to say is that you can’t predict accurately what will happen to investments. Still, let’s look at some actions that you can take and that we would generally be supportive of.

1. Check your risk tolerance versus your investments. You should always hold a mix of investments that is appropriate for your risk tolerance. If you’re nervous about the election, this would be a good time to review your risk tolerance. We can help. You can click here to do that now.
2. If you absolutely must do something, take half measures in the event you’re wrong. For example, if your original thinking was to get out of all stock investments and sit in cash, how about selling no more than half?
3. Want to hear from someone smarter than us? Check out the video here.

If history is a guide, what you do probably matters more than the election. Benjamin Graham is one of the great fathers of investing. He said, “the investor’s chief problem—and his worst enemy—is likely to be himself. In the end, how your investments behave is much less important than how you behave.”

In the meantime, operators are standing by.

The post Another Election of a Lifetime…Stay Invested appeared first on Strategence Capital.

While it may not be one of the most popular stock market sayings, I like the phrase, “stocks climb a wall of worry.”  In other words, there is always something to worry about.  Since March 6, 2009, at market bottom, there has been a constant stream of negative stories.  Stocks consistently seem to work through them. I think it’s because investors factor in these stories ahead of time.  Then when the worries resolve themselves, stocks continue on their merry way.

It was with that in mind that I read a story in the Wall Street Journal of April 18 about skittish investors.  The headline was something like “as stocks climb toward record levels, nervous investors are hedging their bets.”  For two consecutive months, investors have piled into “so-called smart funds that try to mitigate risk,” and “exchange-traded products (ETPs) that offer insurance against market volatility.” In addition, investors—seemingly eager to part with funds—are also snapping up ETPs that rise when volatility increases.

The article doesn’t suggest culprits, but one can select from the stories floating around and capture fears of market participants.  There are plenty: the recession that’s just around the corner, the coming earnings collapse, tariffs, and colorful New Deals.

Just remember that on some investment time frame, all these walls of worry shrink to speed bumps.

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