JB's newsletter to help you set and reach your financial goals

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October 15, 2021

An Economy Coming Out of COVID

Happy Fall Friday Y'all!

     I hope this newsletter finds you all doing well and excited for the Fall Season spent with family and friends.  My goal with this newsletter is to summarize what's happening with the stock market and the economy and help you stick with your investment plan so let's jump right in.
     You had to go all the way back to last October to find a pull back of more than 5% in the S&P 500 stock market index.  That is until the last month when the S&P 500 dipped 5% and the Technology-heavy Nasdaq Index dropped 7.5%.  Remember stocks take the stairs up and the elevator down!
     Markets have rallied back this week. We got the lowest unemployment claims number since the pandemic and are seeing stronger than expected corporate earnings to start the third quarter reporting.  

      Before I go any further, I want to first share our quarterly letter to clients, written by Ron Copley, PhD, CFA titled:

"The CIM Model for Managing Client Funds"
      I hope this is a good reminder of the importance of focusing on risk instead of chasing returns.  Getting financially independently slowly, over the long-term, using a non-emotional, disciplined process will win out 99.9% of the time.  Short-term speculation (guesswork) has been very tempting to many due to the hype surrounding cryptocurrencies, Meme stocks, leveraged option strategies, and trading in and out of stocks that have done the best recently.  This is not investing, and will likely have you managing more of your emotions and less of your money.
       In 2019, the S&P 500 index finished up 29%, followed by a COVID 2020 return of positive 16%.  So far year-to-date the S&P 500 is up another 20%.  Most of the volatility in the stock market has been to the upside due to strong corporate earnings and aided by unprecedented Government Stimulus and low interest rates.         
       These measures have worked to reboot our economy after being shut down, but we're starting to see some of the negative consequences.  Demand for goods is higher than supply, leading to higher prices.  People have been slower to return to lower paying jobs, leading many companies to raise wages while battling higher costs. 
       Our economy is in the process of shedding it's COVID weight and it can take a while to get back in shape.  The government is gradually scaling back it's support which will help our incentivized capitalistic system to work off the excess. 
       We believe the majority of these problems are temporary, which will set the stage for a robust economic recovery and continued gains in the stock market.  When the dust settles from these issues, there will be new sets of problems.  Such is the nature of a capitalistic system.  I suggest you not get overly concerned about these developments and take them in stride. 
      Take a look at the chart below that shows each year's gain or loss (gray bar), and the decline within the year (red dot) for the S&P 500.  "Despite average intra-year declines of 14.3%, annual returns were positing in 31 of the last 41 years".  The average annual return for the S&P 500 during this period was 9%.  190% return over 21 years without any guesswork!  These numbers would be higher if you included dividends and reoccurring contributions.

Time To Talk Inflation and Interest Rates

      When I'm working with pre-retired clients, I always remind them that their investments will need to work for them long after they quit working.  Low interest rates makes this conversation even more important.  The reason is because its unlikely that any kind of bond or fixed income investment will keep pace with the rate that goods and services are increasing in price (inflation).  I'm referring to long term average inflation, not the recent spikes of 5%+ in some areas of the economy.
      Let's look an example.  The current yield (interest rate) on the 10-year U.S. Treasury Bond is 1.5%.  The "10-year" is the baseline that all other types of bonds are based off of.  The long term average rate of inflation is 3%.  Let's assume you have a friend that had a $30,000 kitchen renovation done.  You know you want the same thing done to your kitchen in 10 years so you invest $30k today in "safe" 10-year treasury bonds.  After 10 years, you'd have roughly $35k.  But at 3% inflation, the renovation will then cost $40,000, leaving you $5k (or 12.5%) short. 
     It's human nature not to want to lose money, especially money that you know you'll need down the road.  So why not invest it in something safe?  As this example shows, inflation can easily diminish your purchasing power.
      So how much should you have invested in bonds?  There's an old rule that says to subtract your age from 100 - and that's the percentage you should have invested in stocks.  We believe this historically conservative strategy has become too risky due to low interest rates as the example above shows.  The real answer is that it depends on each person's specific situation, but a better approach might be to invest a year or two worth of your annual living expenses in bonds to draw from during a recession induced stock market selloff. 

What is a Target Date Fund?

       Target-date funds are mutual funds or exchange-traded funds (ETFs) structured to grow assets in a way that is optimized for a specific time frame.  They are investment funds that gradually sell portions of stock and invest them into bonds as you get older.  They are becoming very popular with large retirement plan companies like Fidelity, Vanguard, and T.Rowe Price.  When participants go online or calls in to find out how to invest their money, they can't legally give investment advice, so they direct them to one of their target date funds depending on when they say they are going to retire.
      For example, the Fidelity Freedom 2030 Fund currently has a 35% allocation to bonds.  That's likely too much for someone with 8 years until retirement and 20-30 years in retirement. 
      The 2060 fund from Fidelity has a 10% weighting to bonds.  That's a long time from now and I'm confident we can grow your money faster given low interest rates.  TDF's provide diversification and there are likely better options available. 
      I'd love to review your current retirement plan and its available options free of charge so don't hesitate to contact me. 
A Personal Update
       Virginia Parks turned 2 years old in September and little sister Lawson is now 6 months old.  The first picture below is of me and Ron singing Happy Birthday to Virginia Parks.            
      Happy Birthday to my Mom, who we all call Mi-Mi!   The second picture is of her and my Dad with VP and Lawson.
        Last but not least, me and Mehegan are about to celebrate 10 years together and our 7 year wedding anniversary!  I couldn't have picked one any better. 

Justin Burges
Investment Advisor Representative
Text or Call: 910-612-4060

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