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2022 2nd Quarter Review

2022 2nd Quarter Review

ALL STARS UNVEILED

The S&P 500 fell over 16% in
Q2. For the first 6-months of
2022 the index is down 20%.

International equities, as
measured by the MSCI EAFE,
fell 15.4% in Q2 and 20.3% in
the first half of 2022.

Bonds dropped 4.7% in Q2
and over 10% for Q1 & Q2.

The consumer-price index
rose by 9.1% over the past
12-months.

 The U.S. economy added 390,000 new jobs in May, the 17th straight monthly gain. The unemployment rate was 3.6% at the end of the quarter.

THE PAST IS PROLOGUE

The bear has arrived with the S&P 500 declining 16.5% in Q2 and falling 20% through the first six months of 2022. The usual solace provided by the bond market was absent as the Bloomberg Aggregate Bond Index fell 4.7% in Q2 and just over 10% for the first two quarters of the year.

This was only the second time in the past 40 years that both stocks and bonds declined for consecutive quarters. The last time there was such an occurrence was during the Great Recession in 2008. Before that, it was 1981.

Concerns over inflation (up 9.1% the past 12 months) and interest rates (the Fed has raised rates three times this year), and their resulting effect on corporate earnings dominated the first half of 2022 and will continue to do so for the remainder of the year.

THE FED

An often-cited trigger for falling stock prices is Fed policy. Fed Chair Jerome Powell has publicly stated that his biggest concern is bringing down inflation, and the Fed’s policy tool is to aggressively raise the fed funds rate. A higher fed funds rate drives up short-term interest rates, which in turn reduces liquidity in the economy, depressing corporate investment and consumer borrowing. With inflation outpacing wage increases, consumer confidence fell for the 2nd consecutive month.

This is certain to dampen consumer spending, which accounts for nearly 70% of US GDP.

All of this is a reversal of a long-term trend where Fed policies provided a fairly strong wind at the back of the investment markets. Bond rates are going up and liquidity is going down, the reverse of the conditions that began with the economic bailout

of the Great Recession and accelerated with the stimulus packages following the Covid outbreak. In essence, the Fed is ‘taking away the punchbowl,’ which had been the impetus for low-interest rates and economic growth. The economy is now moving from a low-yield, low-inflation environment to one of higher inflation and higher interest rates.

BONDS: YIELD CURVES & RECESSIONS

In the bond market, we are experiencing a significant rise in yields at the short end of the curve, but yield rises on longer bonds have slowed down a bit. While still not getting a yield above the current inflation rate, short-term CDs and treasuries are affording returns not seen in years. Meanwhile, the 2/10 yield curve has inverted with two-year treasuries yielding more than 10-year treasuries. Yes, since the 1950s, all recessions have been preceded by an inverted yield curve.

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However, not all inverted yield curves have resulted in recessions. The odds are greatly enhanced though that a recession will occur. There have been thirteen Fed tightening cycles since WW II, and only three times have they resulted in soft landings. A couple of positive signs indicate a recession is not on the immediate horizon. First, we continue to have very low unemployment numbers, currently 3.6%. Second, the May jobs report showed payrolls increasing by 372,000, the seventeenth consecutive month of positive job growth.

WHAT IT MEANS FOR PORTFOLIOS

On the equity side, we continue to re-balance and tax-loss harvest. When doing so we are adding to large-cap value and small-cap value and decreasing large growth positions. For fixed income portfolio allocations, we continue to reduce the durations and average maturities and re-allocate to short-term CDs and Treasuries.

WE ARE HERE FOR YOU

The Platt Wealth Management team is here for you to discuss any changes to your financial situation or investment objectives. We are always available to assist you with any financial matters of concern to you and look forward to continuing to serve as your partner along your financial journey.

Warmest regards,
Platt Wealth Management

Platt  Article 1  August 2022

Platt Article 1 August 2022

How Market Cycles Can Impact Retirement

Markets go up. Markets go down. But no one can predict when, how, why, or for how long. Ups and downs are par for the investing course, but market cycles can have a greater impact on those nearing or in retirement than those in their accumulation years. That’s because in retirement you simply have less time and fewer opportunities to rebuild your savings should the market take a turn for the worst.

So, in order to understand how market cycles can impact your retirement (and what you can do about it) let’s look at some facts.

Understanding the Impact of Market Cycles

The most noticeable impact market cycles can have on your retirement is in regard to income distribution. When you rely on your investments to generate income, a less than favorable market cycle can dictate how long your money will last. That’s why it’s imperative to determine the optimal spend down of your assets, which can be complex and based on many factors (both known and unknown).

Over the years, many financial advisors have been applying the “4 percent rule,” developed several decades ago by financial planner William Bengen. Bengen modeled various asset allocations and spend down rates over a 30-year period to see how each would have fared. He found that, between 1926 and 1976, an asset allocation mix of 50 percent stocks and 50 percent bonds enabled retirees to safely draw down four percent of their assets annually without running out of money.

Following that rule in the 1980s and 1990s made sense because bonds and stocks experienced primarily positive returns. It didn’t work quite as well in the 2000s with a largely stagnated stock market, forcing retirees to deplete their assets more quickly.

What complicates this rule of thumb is market volatility, which introduces a greater risk to the portfolio. When retirees are drawing down assets during a declining market period, there is a higher probability their assets will not last as long as they’d hoped. The only remedy then seems to be to reduce the spend down rate, live a diminished lifestyle, or risk depleting their assets too soon. And of course, no one wants to run out of money.

There is even greater risk when the market declines at the beginning of retirement. A steep market decline in the first few years before or after retirement, even if followed by a sustained market increase, can severely impact future income. This risk is referred to as “sequence of returns” or sequence risk and is one that very few DIY investors are privy to. And if they are aware of the risk, they tend not to know how to account for it in their financial plans.

The Greatest Risk Retirees Face: Sequence of Returns Risk

When it comes to retirement drawdown and market cycles, timing is everything. That’s because sequence of returns risk stems from the timing of market returns and their impact on your portfolio when you begin to draw down your assets.

While it is fair to assume that the market will generate an average rate of return over time, that doesn’t account for the timing of those returns. Your portfolio can average eight percent a year over twenty years, but if the first three to five years consist of negative returns, it could be too much to overcome even if the next fifteen years produced positive returns.

Why? Because loss and gain are not inversely proportional. If stocks in your portfolio decline in value, you need to sell more shares to meet your income needs. That reduces the number of shares left to grow inside your portfolio. During a prolonged market decline, that accelerated depletion of shares could make it difficult for your portfolio value to recover as the market recovers.

Imagine your portfolio like an apple tree. Each year you need to take 40 apples from the tree to survive. Based on the tree’s history, this is a safe rate at which the tree will at least replenish if not surpass restoring those 40 apples. But, if when you begin taking those 40 apples out each year, the tree starts to produce fewer apples—you run the risk of using up all your apples before the tree has a change to grow more.

The Risk (or Reward) is Greatest at the Beginning of Retirement

Conversely, drawing down your assets during an advancing market could provide the boost needed to carry your portfolio through future market declines or allow you to live an enhanced lifestyle. That also means if your portfolio experiences negative returns in later years, it will probably have a minimal negative impact.

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Consider the following chart showing two portfolios starting with $500,000. Both are drawing down assets at a rate of $25,000 per year adjusted for 3% inflation. Portfolio 1 experiences negative returns in the first three years, followed by multiple cycles of positive and negative years. Portfolio 2 starts out with four years of double-digit returns followed by a typical market pattern of positive and negative returns with three years of negative returns at the end.
For this analysis, the same rates of returns are used in both portfolios, except their sequence is reversed. So, both portfolios generated the same 6.5% average rate of return, yet the outcomes were vastly different due to the sequence of returns.

Key Takeaway

While you can’t predict the stock market’s direction, much less the sequence of returns as you enter retirement, you can prepare a diversified portfolio that is designed to handle such possibilities. We help our clients mitigate this risk and provide them with peace of mind that the retirement income plan we have built for them will be able to mitigate the sequence of return risk and boost their overall lifetime income sufficiency.

2022 1st Quarter Review

2022 1st Quarter Review

HOPE SPRINGS ETERNAL

The S&P 500 finished Q1 down -4.60%, while foreign stocks fell -6.61%.

The U.S economy added 678,000 jobs in February and 431,000 in March. The unemployment rate was 3.6% at the end of the quarter.

The 10-year Treasury yield finished the quarter at 2.83%, up significantly from 1.63% at the beginning of the year.

The consumer price index was up 8.50% the past 12-months. The highest year-over-year change since 1982.

SHIFTING MONETARY POLICY

In March 2020 the Federal Reserve cut interest rates to 0.00% – 0.25% amidst the uncertainties of the COVID-19 Pandemic. Now, two-years later, the Fed has taken action to normalize monetary policy. The Federal Open Market Committee (FOMC) concluded its March meetings by issuing the first rate hike since 2018. The federal funds rate now sits between 0.25% and 0.50%, and the Fed has indicated that up to six rate increases may occur in 2022.

As we move forward, the big challenge for Fed officials is how to address inflation. During periods of high inflation, the Fed typically resorts to raising rates to normalize prices. However, there is a fine line between combatting inflation and inhibiting economic growth. If interest rates are raised too high this could place a chokehold on the economy resulting in a recession.

INFLATION, OIL AND GEOPOLITICAL CONFLICT

Economic Inflation has persisted longer than most economists predicted. With supply chain issues and the ongoing conflict in Ukraine, the existing price increases may be around longer, too. Looking at the components of inflation, it is clear that energy costs are the primary source of this inflation. With ongoing sanctions on Russia, a major energy producer, 

there has been a decrease in the overall supply of resources such as crude oil. With decreased supply and plenty of demand, energy prices have increased dramatically. Along with the increase in energy prices, the rise in transportation costs ultimately gets passed on to the consumer.

However, the current administration announced that the U.S. would release one million barrels of oil per day from its reserves. The plan intends to increase supply and decrease energy prices. On March 8th, WTI crude oil was trading at $123/barrel; as of April 18th, WTI was trading at $107/barrel.

UNCERTAINTY AND RISK: THE LONG-TERM APPROACH

There are many uncertainties on the horizon for investors. These uncertainties raise the possibility that the markets may not touch new highs near term. However, there is one area that you can be confident in during these uncertain times – your asset allocation. We design your asset allocation to support your financial situation and risk tolerance.

The below graph depicts three portfolios with allocations described as Aggressive, Moderate, and Conservative. This data is from 1970 to 2020 and illustrates the probability of gains and losses for a 1-year, 5-year, and 10-year rolling periods.

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For a Moderate portfolio (60% stock/40% bond allocation) and an Aggressive portfolio (80% stock/20% bond allocation), the probability of a loss over 5-year rolling periods was 0% (same for the Conservative portfolio with a 30% stock/70% bond allocation). There was an 18% chance of a loss over one year for the Moderate and Aggressive portfolios, but usually that loss is less than 10%. The odds are pretty good that over the next 5-years, these portfolios will have positive results, and there is even more than an 80% chance that they will have positive results over the next 12-months. See illustration from Morningstar 2021 below.

WE ARE HERE FOR YOU

The Platt Wealth Management team is here for you to discuss any changes to your financial situation or investment objectives. We are always available to assist you with any financial matters of concern to you and look forward to continuing to serve as your partner along your financial journey.

Warmest regards,
Platt Wealth Management

5 Things to Consider about Cognitive Decline and Retirement

5 Things to Consider about Cognitive Decline and Retirement

No one wants to admit when getting older starts affecting them. It can a sore subject that hurts an individual’s sense of pride and confidence in their ability to care for themselves. Think about how many stories you’ve heard of adult children having to have a talk with their elderly parents about no longer driving because their eyesight has significantly deteriorated or how stubborn a grandparent can be about using their cane or walker even though they are clearly in pain and struggling.

 

But not all ailments are physical. What about mental atrophy? A recent study shows that 10% of Americans over 65 have dementia and 22% experience mild cognitive impairment. The risk gets worse as you age, research shows, with half of all people in their 80s showing at least some mild cognitive impairment, which likely still allows them to live alone, but can make it difficult to stay on top of all the information required to manage money.

 

Cognitive decline is a risk we don’t often associate with the money side of retirement but is something everyone ought to consider. Here’s why.

 

1. Retirement is Already Complex

 

Navigating the complexities of the stock market and living off your retirement savings, including taxes and sequence of return risk, is already a tenuous balancing act for the majority of DIY investors. Add cognitive decline to keeping up with required minimum distributions (RMDs), balancing a portfolio to avoid overexposure to risk, and remembering important deadlines and you’ve got enough to add stress to even the most experienced investor.

 

2. Missed Bills can be Disastrous

 

Today, keeping up with all of your financial obligations, such as monthly bills and donations, may be a nuisance, but add in cognitive issues and it can be a tall order. Miss the wrong bill, such as a Medicare payment, and you could be dealing with a more serious issue like a gap in health insurance coverage.

 

3. Get Family Involved Early

 

Everyone seems to have a horror story about extended family or a close friend’s family waiting too long to get important paperwork completed and then their loved one is too far gone to be legally able to sign. The headaches and legal work that situation creates can last months, if not years. So, talk to your loved ones now about the different “what if” scenarios that can arise, including cognitive decline, and get a financial power of attorney lined up who has the legal ability to act on your behalf should you need help even with just making sure your bills are paid and any other money management tasks are completed.

 

4. Scammers are Targeting You

 

Your favorite grandson is on the phone and he sounds desperate. He’s in huge trouble and needs you to send $50,000 to him right away. He does sound slightly different, but, hey, who wouldn’t in a time of extreme stress like this? And this is just one way hundreds of thousands of grandparents have been scammed out of money. Having an extra layer of protection, such as a trusted family member as a financial power of attorney, can help safeguard you and your assets from scams and even would-be hackers.

 

5. Lean on the Experts

 

Sometimes, you need an unbiased expert in your corner as another layer of protection and help, especially if your family can be a little overwhelming. Plus, there are plenty of great family relationships that money can complicate. A financial advisor can listen to your concerns and wishes and then help you build a plan to protect your assets in case of cognitive decline. They also will help guide you to the right steps and paperwork that needs to be completed for powers of attorney, insurance coverage, and more to make sure you are taken care of and your wishes are met.

 

Need Help?

 

Retirement should be enjoyable and carefree. Let us help you safeguard your assets and prepare for whatever the stock market or life throws your way.

 

 

 

 

 

 

 

Are you on track for retirement?

 

Making sure you will be ready for retirement can be overwhelming. Funding your retirement accounts over the years is a critical part of your journey to the retirement of your dreams. An experienced Financial Advisor can help you navigate the complexities of investment management. Talk to a Financial Advisor>

Dream. Plan. Do.

Platt Wealth Management offers financial plans to answer your important financial questions. Where are you? Where do you want to be? How can you get there? Our four-step financial planning process is designed to be a road map to get you where you want to go while providing flexibility to adapt to changes along the route. We offer stand alone plans or full wealth management plans that include our investment management services. Give us a call today to set up a complimentary review. 619-255-9554.

2021 4th Quarter Review

2021 4th Quarter Review

SDSU WINS BOWL

The S&P 500 finished 2021 up 28.71%, while international equities lagged, up 8.78%

Large growth outperformed large value with returns of 27.60% and 25.16%, respectively. Small-cap value exceeded small-cap growth with returns of 28.27% and 2.83%, respectively.

The consumer-price index rose 7% in December from the same month a year ago, the third straight month of inflation exceeding 6%.

Unemployment fell to 3.9%, as demand for labor increased, resulting in inflationary pressures.

2021 AT A GLANCE

Entering 2021, investors faced a backdrop of uncertainty, and there were many reasons to be pessimistic about the markets. In modern history, restoring a world economy from an abrupt halt was unprecedented, and COVID-19 continued to impact business activity. Despite that, markets demonstrated strong performance, the unemployment rate fell to 3.9% in December, and S&P earnings grew by 34.5%. More than any other, the past year demonstrated the importance of staying disciplined despite all the “noise.”

2022: STRONG BUT SLOWING GROWTH

Economic activity has surpassed its pre-pandemic levels and consumer financials, in aggregate, appear healthy. Vanguard’s Economic and Market Outlook for 2022 anticipates GDP growth of 4%. However, some factors pose risks to the strong recovery and normalization of the economy. Bottlenecks in the supply chain and labor and materials shortages have pushed prices higher, and there is uncertainty around when these issues will subside. Overall, supply and demand imbalances continue to persist.

The U.S. labor force is unlikely to return to pre-COVID levels as retirements and unanticipated retirements totaled two million as of June 2021.

Going forward, it is expected that the U.S economy will experience strong growth but at a decelerating pace. The consensus is also that inflation will persist in the 1st half of 2022. Concerns are whether the Fed can keep inflation in check without stalling the economy, if supply chain issues can be resolved and if higher interest rates will result in 1970’s stagflation (stagflation occurs when inflation is high and the economy slows, leading toward higher unemployment).

MONETARY POLICY AND THE FEDERAL RESERVE

The Fed has remained extremely accommodative in its stance towards the economy, despite the strength of the recovery, inflation pressures, and low unemployment rates. However, recent statements from Chairman Powel indicated that the era of “easy policy” may be coming to an end as unemployment levels tick lower, and the focus shifts to combatting inflation. The Fed’s extraordinary bond purchases are expected to end late Q1 or sometime in Q2. Additionally, it is anticipated that there will be as many as three rate hikes in 2022.

DISCIPLINED OUTLOOK THROUGH THE NOISE

We are cautiously optimistic for 2022. Valuations appear stretched in specific sectors of the market. We still anticipate positive returns for the stock market but less than the double digit returns of the past three calendar years. We will continue our disciplined approach, no matter the noise, to monitor portfolio allocations and to rebalance when necessary, conduct tax-loss harvesting where appropriate, and diversify portfolios to capture return but minimize risk.

 

Our Contact Information

3838 Camino del Rio North
Suite 365
San Diego, CA 92108
619.255.9554

info@plattwm.com

www.plattwm.com

The Platt Wealth Management team is here for you to discuss any changes to your financial situation or investment objectives. We are always available to assist you with any financial matters of concern to you. We look forward to continuing to serve as your partner along your financial journey.

Warmest regards,
Platt Wealth Management

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