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How Market Cycles Can Impact Retirement

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 an 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 a “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 a 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 chance 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. 

 

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. 

 

 

 

Portfolio 1

 

 

Portfolio 2

 

 

Age

Return

Withdrawal

Value

Return

Withdrawal

Value

65

 

 

$500,000

 

$500,000

 

66

(-23.1%)

$25,000

$365,250

22.7%

$25,000

$582,825

67

(-6.1%)

$25,750

$318,704

19.6%

$25,750

$666,456

68

(-0.3%)

$26,523

$291,397

18.0%

$26,523

$755,377

69

24.5%

$27,318

$328,694

24.5%

$27,318

$906,202

70

18.0%

$28,138

$354,777

(-0.3%)

$28,138

$875,706

71

19.6%

$28,982

$389,764

(-6.1%)

$28,982

$794,858

72

22.7%

$29,851

$441,613

(-23.1%)

$29,851

$588,250

80

(-23.1%)

$37,815

$181,631

22.7%

$37,815

$790,464

81

(-6.1%)

$38,949

$133,941

19.6%

$38,949

$899,073

82

(-0.3%)

$40,118

$93,572

18.0%

$40,118

$1,013,911

83

24.5%

$41,321

$65,035

24.5%

$41,321

$1,210,566

84

18.0%

$42,561

$26,529

(-0.3%)

$42,561

$1,164,868

85

19.6%

$26,529

$0

(-6.1%)

$43,838

$1,052,361

86

22.7%

$0

$0

(-23.1%)

$45,153

$774,491

94

(-23.1%)

$0

$0

22.7%

$57,198

$976,010

95

(-6.1%)

$0

$0

19.6%

$58,914

$1,097,167

96

(-0.3%)

$0

$0

18.0%

$60,682

$1,223,467

97

24.5%

$0

$0

24.5%

$62,502

$1,445,033

98

18.0%

$0

$0

24.5%

$64,377

$1,376,948

99

19.6%

$0

$0

(-0.3%)

$66,308

$1,230,356

100

22.7%

$0

$0

(-6.1%)

$68,298

$893,562

Avg

6.5%

$654,451

$0

(-23.1%)

$1,511,552

$893,562

 

 

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.

 

Creating Your Financial Strategy

At Platt Wealth Management, we know that life is about so much more than accumulated wealth and that real, impactful financial planning starts with what you want most out of life. That’s why our mission is to provide the financial expertise our clients need to think through and achieve the dreams they never thought possible. If this sounds like the financial advisory relationship you’re looking for, we encourage you to reach out and schedule your complimentary appointment with our team today. Or you can call the office directly @ 619-255-9554. We look forward to meeting you.

 

 

 

 

 

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.

Is the 60/40 Portfolio Allocation too Risky Now?

Is the 60/40 Portfolio Allocation too Risky Now?

For over seven decades, the 60/40 portfolio allocation has been the stalwart strategy of retirement planners with a high degree of success until recently. More recently, the tried and true portfolio mix has come under pressure, mounting uncharacteristic losses that may indicate it has lost its luster. What has changed for the 60/40 allocation, and has it become too risky?

 

Background on the 60/40 Allocation

 

The 60/40 portfolio has been around for more than 70 years, but it was popularized by Vanguard founder and investing great John Bogle. The research and data available at the time showed it to be an optimal allocation using stocks to drive returns and bonds to provide ballast during volatile markets. It was considered a balanced portfolio that could achieve growth while minimizing volatility and downside risk. A 60/40 portfolio regularly outperformed all stock or all bond portfolios.

 

It worked because, during most of that period, stocks and bonds had a low correlation with one another. When stocks were performing well, bonds were underperforming, and vice versa. But in 2021, that equilibrium suddenly changed. In the final quarter of 2021 through the current month, stocks and bonds became highly correlated, with both performing poorly. Instead of a portfolio where bonds are tempering the slumping returns of stocks, they have now become an additional drag on it. That’s not what investors sign up for with a 60/40 portfolio allocation.

 

It’s important to understand that the 60/40 rule was established long ago under different economic and market conditions. It performed exceptionally well over the last several decades because it was a time of historic gains in the bond market. That’s because interest rates had been in a sustained decline since the 1980s. Not anymore.

 

That was Then. This is Now

 

With the recent surge in inflation, the likes we haven’t seen in more than 40 years, the conditions for bonds have changed to the detriment of 60/40. To cool inflation, interest rates must rise. When interest rates rise, bond prices fall, which they have been doing for most of this year. Interest rates will continue to climb depending on how long and high inflation will run, making it difficult for bonds to fulfill their role as a defensive hedge.

 

If you believe the experts, investors in a 60/40 portfolio should downsize their return expectations over the next decade. Vanguard forecasts a relatively low median annual return of less than 4% through 2031. That’s well below the 7% annual return target of a 60/40 portfolio, primarily due to declining bond prices. 

 

Is it Time to Consider Total Return Alternatives?

 

If high inflation persists, investors now have to worry about the possibility of negative returns on their investments. For some investors, especially those with longer time horizons, it may be time to change the allocation rule with less emphasis on bonds and more emphasis on total returns. Several bond alternatives provide diversification while enhancing total return opportunities.

 

Utility stocks: Utility stocks act similarly to bonds because they offer high yields and relative safety. Some of the better utility stocks have a record of steady earnings and dividend growth. While utility stock prices can be sensitive to rising interest rates like bonds, they offer higher total return potential. 

 

High-quality dividend-paying stocks: High-quality companies with a long history of paying annual dividends and increasing them over time are a reliable source of income. They also tend to be less volatile than the rest of the stock market, making them a great diversifier. The dividend acts as a cushion against declining share prices. 

 

Real estate investment trusts (REITs): REITs are professionally managed real estate portfolios that hold up well in an inflationary environment. Many are required to pay out up to 90 percent of their earnings as dividends, making them a reliable income source. 

 

Though it may not be entirely over for the venerable 60/40 portfolio allocation, it may be a while before it recaptures its magic, which calls for some rule adjustments in the meantime. The adjustments don’t have to be radical—perhaps moving from a 60/40 stock and bond allocation to a 60/20/20 stock, bond, utility stock, high-quality dividend stock allocation, or some combination of all the above. 

 

However, any changes to a long-term investment strategy should always be made in consultation with an investment advisor with the expertise and tools to help you assess your circumstances and create an allocation consistent with your investment objectives, time horizon, and risk profile.

 

 

 

 

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.

How Rising Interest Rates Could Impact Your Finances

How Rising Interest Rates Could Impact Your Finances

As expected, the Federal Reserve is holding firm to its policy of hiking short-term rates in an effort to cool inflationary pressures. Generally, these small, incremental rate increases don’t immediately impact consumers. The fed rate is the rate the Treasury charges banks for the use of money overnight. When the Fed raises its short-term rate, the banks will increase the rate they charge borrowers, so consumers may experience a slight uptick in borrowing costs.

 

The more significant impact on consumers comes from an increase in long-term rates (Treasury bonds), which have also seen an uptick this year, impacting mortgage rates, variable loan rates, credit card interest, savings account rates, and certificates of deposits.

 

Here are the ways higher interest rates can impact your finances and some steps to take to mitigate their effect.

 

 

Higher Mortgage Rates

 

After hovering near historic lows for several years, mortgage rates jumped past 5% for the first time in more than a decade. With Treasury bond yields expected to inch higher, mortgage rates won’t be far behind.

 

Rising interest rates won’t impact you if you currently hold a fixed-rate mortgage. However, if you have plans to refinance your loan, now would be the time to do it because there’s no predicting how high rates could climb.

 

If you hold an adjustable-rate mortgage, your interest costs will increase, so now may be your best opportunity to lock in a reasonable, fixed rate.

 

Higher Consumer Debt Costs

 

Credit cards and other types of consumer loans also carry variable rates, which can be expected to increase with rising interest rates. Keep in mind, variable rates on consumer loans tend to adjust once per year, while credit card rates can change at any time.

 

Your best bet is often to pay down high interest, variable debt as quickly as possible to avoid swift changes to your payment. Some lenders offer personal loans with fixed rates for loan consolidation as an option to explore. You could also look for 0% balance transfer opportunities, though that would only be a temporary solution.

 

Good News for Savings Deposits

 

Savings accounts are already seeing yield increases. However, unlike rates on consumer debt, which lenders are quick to raise when interest rates rise, rate hikes on savings accounts tend to be smaller and less significant. Still, accounts that were recently yielding as low as 0.025% have jumped to as high as 1.0%. While it’s still relatively low, it’s an improvement. If interest rates continue to increase, you can expect yields on your savings to follow suit.

 

The Impact of Rising Rates on Investments

 

Bonds

 

Rising interest rates affect different types of investments in different ways. For example, bonds are almost always negatively impacted by rising interest rates. That’s because rising rates force bond yields up, which decrease bond prices. However, if you hold a bond to maturity, you will receive the entire value when you redeem it. If you sell bonds in this environment, you will likely receive less than their par value. General rule of thumb: When interest rates decrease, bond prices should increase again.

 

Stocks

 

The impact of rising interest rates on stocks can vary depending on the industry or market sector. Stocks of companies with a lot of debt don’t perform as well because they will have higher borrowing costs. Because interest rates are increasing as a result of higher inflation, the bottom line of some companies suffers because of the higher cost of producing or selling goods and services. However, well-established, well-managed companies with big brands, dominant market positions, and low or no debt can perform well in a high-interest and inflationary environment.

 

Diversification is Key

 

As always, the key to successful investing in any interest rate environment is to ensure you are well-diversified with a mix of different asset classes. Because it’s difficult to know which asset class will outperform another at any given time, owning assets with low correlation to one another helps to minimize volatility. For example, historically, stocks and bonds have a low correlation, so it is good to have a mixture of both in your portfolio.

 

Time to Reassess Your Personal Finances

 

Although many people have never experienced it, rising interest rates are a normal part of the economic cycle. For more than three decades, borrowers have benefited from declining rates (not so much for savers). Now the cycle is turning to where savers will benefit over borrowers.

 

Keep in mind that economic cycles can last for years or even decades, so it is essential to maintain some flexibility so that you can make adjustments to your finances that can mitigate adverse effects while capitalizing on positive ones.

 

At Platt Wealth Management, we understand that the rising rate environment is new for many younger investors and may bring up some (not so fond) memories for our older ones. But, rising rates aren’t all bad and simply need to be accounted for in your financial planning.

 

As always, we are here to answer any questions or address any concerns you might have about this rising rate environment. Our goal is to support you through these ebbs and flows in the economic cycle so you stay honed in on what is most important to you on your financial journey. 

 

 

 

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.

Protect Your Inheritance. Enhance Your Life.

Protect Your Inheritance. Enhance Your Life.

Whether it is expected or unforeseen, receiving an inheritance can be life-changing. Regrettably, it’s not always in a good way. That’s because the reality is that many folks struggle to preserve what they’ve inherited in such a way that enhances their life over both the near and long term.

 

In fact, the track record for Americans is pretty abysmal. Only two-thirds manage to increase their wealth after receiving an inheritance, and nearly 90% of families manage to waste it entirely when it passes to the next generation. 

 

Much of this can be attributed to two factors: (1) the heirs’ unwillingness or inability to act responsibly and/or (2) a lack of true understanding about what it means to be a steward of the family’s legacy. The latter tends to happen when family members lack a shared vision and purpose for their legacies. But almost always, it really comes down to poor decision-making and money mismanagement. 

 

Inheriting money should be a blessing, not a curse. But it takes the right perspective and the willingness to manage it with a clear purpose to get right. An inheritance that is honored and preserved provides the potential to change you and your family’s financial trajectory (and that of your heirs, as well). 

 

With this in mind, we’ve compiled a list of five things you can do to protect your inheritance and enhance your life so your family’s legacy is put to purposeful use.

 

 

1) Take a Step Back. Pause. Reflect.

 

There’s no rush in deciding what to do with your inheritance. It will be perfectly safe sitting in a zero-risk money market account while you take the time to evaluate your next steps thoroughly. While you might be tempted to make some moves right away, we encourage you to wait until you’ve consulted with your advisory team before you start dispersing the funds.

 

Primarily, this is because major money moves should never be made in isolation, but in the context of your overall financial picture. You need to see how the implications of your decisions could or will affect the other financial areas of your life. There may be better options for the allocation of your funds you aren’t aware of, or tax implications for your decisions that could come back and cost you. Making strategic decisions will be imperative in preserving and maximizing what you’ve inherited.

 

 

2) Build Your Dream Advisory Team.

 

Managing personal finances can be complex, and receiving a large sum all at once can magnify the complexities and implications of your decisions, especially regarding taxes and the estate.

 

Not only will you need an investment strategy based on your family’s goals, priorities, and risk profile., you’ll also need to consider the increased risk exposure you could have and how to protect against it. All of these considerations, and more, need to be integrated into a comprehensive financial plan that will optimize the value of your legacy. 

 

To build your dream financial advisory team, you’ll need to enlist the help of the following professionals: a financial advisor, a tax professional (preferably a CPA), and an estate attorney. Your financial advisor, or team of advisors, can then guide the other members of the team to make the planning and tax decisions that are best for you and your circumstances.

 

 

3) Clearly Define Your Life Ambitions.

 

Getting clear on what you’d like your life to look life is critical before you start spending. Plus, this is the fun part. You get to dream big and decide how you’ll align your resources with what matters to you most. Maybe it’s retiring early, fully funding your children’s’ college funds, or even investing in real estate. Have you always wanted to start a business? Travel more often. Buy a vacation home. Perhaps be able to work remotely doing something you’re passionate about. The way to get there is with the right planning performed up front.

 

Plus, we have found that the people with no clear vision or purpose for how they want to use their money tend to waste it on the “pursuit of more,” which ultimately brings no lasting fulfillment and leads to a lot of personal and financial disappointment. But people who set clearly defined goals that align with the purpose they see in their life are able to make smarter decisions about their money. They have clarity and conviction about how they want things to turn out, and put the plans in place to get them there.

 

At the end of the day, clarity on your big picture helps to streamline your financial plans and investment decisions. Any decision, strategy, or investment option that doesn’t get you closer to your goal should be eliminated.  

 

 

4) Addressing Immediate Priorities.

 

We know you are likely anxious to cross some financial to-dos off your list. Depending on your circumstances, there may be some things you can do right now to enhance your financial position while checking off some financial planning boxes. Remember, any financial decision you make should be made in consultation with your advisory team based on your long-term goals. So, if you are unsure, always err on the side of caution and wait until you have sought the appropriate counsel.

 

  • Pay off Smaller, High-Interest Debts

 

If you have the capacity to pay off smaller, high-interest consumer debts that will improve your cash flow, it may make sense to handle these sooner rather than later. Student loans would be the next in line of priorities, but depending on the amount, you may want to consult with your financial advisor before selling equity positions to reconcile these debts. You need to weigh the relative merits of your desired outcome with the realities of the decision to see what makes the most sense for your long-term financial security.

 

  • Bolster Your Emergency Fund

 

Increase your emergency fund to make sure it can be used for unexpected expenses, such as major medical bills, home or car repairs, or to cover living expenses for up to six months if you lose your income to a job loss or disability. 

 

5) Bigger Picture Goals to Consider

 

  • Funding Your Children’s College Education

 

If the funds are available, this would be an essential box to check off your financial plan. It can be far less expensive to pre-fund your children’s education while they’re young, and if you can do it with a lump sum investment, you can set it and forget it. Your financial planner can help you determine how much to invest now to cover educational expenses and the best vehicle to use. 

 

  • Funding Your Retirement

 

Depending on how large your inheritance is, if you have enough to pre-fund your retirement, it would be another critical box to check. Allocating a portion of your assets to secure your retirement will give you the confidence to freely allocate your other assets to pursue other goals. Again, your financial planner can help you calculate your income needs in retirement and guide you in developing an appropriate investment strategy. 

 

 

6) Honor the Legacy 

 

To honor the legacy bequeathed to you, you must become its steward, ensuring that it will benefit both you and future generations. Your success in accomplishing that will rely primarily on the decisions you make and how well you prepare the next generation for their eventual job as stewards after your passing.

 

Work with your estate attorney to develop a plan designed to preserve your estate and maximize it for your heirs. Include your children in any discussions having to do with your family’s vision and purpose for the legacy, as well as the values and attitudes about money you want to instill in your children. 

Most people who bequeath a large sum of money want to know that it will benefit future generations. After all, that’s what leaving a legacy is all about.

 

Creating Your Financial Strategy

At Platt Wealth Management, we know that life is about so much more than accumulated wealth and that real, impactful financial planning starts with what you want most out of life. That’s why our mission is to provide the financial expertise our clients need to think through and achieve the dreams they never thought possible. If this sounds like the financial advisory relationship you’re looking for, we encourage you to reach out and schedule your complimentary appointment with our team today. Or you can call the office directly @ 619-255-9554. We look forward to meeting you.

 

 

 

 

 

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.

Inflation: Trouble for the Economy?

Inflation: Trouble for the Economy?

Of all the fears investors have faced over the past 30 years, high inflation wasn’t among them. In 2021, that’s changed.

Today, the biggest questions for investors revolve around inflation: How high will it go and how long will it last? Is it “transitory” as the Federal Reserve claims? Or is elevated inflation the new normal amid labor shortages, supply chain bottlenecks and a severe energy crunch?

The uncertain path of the pandemic makes near-term conditions difficult to predict but, over the long term, the picture comes into better focus.

Economic growth should slow due to high debt levels and fading stimulus, resulting in a return to GDP gains of 1.5% to 2.5% a year. Consequently, interest rates should stay relatively low as well.

 

Two types of inflation

chart showing sticky inflation

Sources: Federal Reserve Bank of Atlanta; Refinitive Datastream. Sticky and flexible prices reflect the Atlanta Federal Reserve sticky and flexible consumer price indexes (CPI). If price changes for a particular CPI component occur less than every 4.3 months, that component is a “sticky-price” good. Goods that change prices more frequently are “flexible-price” goods. As of August 2021.

 

Sticky or Flexible Inflation?

 

A source of uncertainty today is that there are two different types of inflation: sticky and flexible. Sticky inflation, currently around 2.6% annualized, tends to exhibit longer staying power. Sticky categories include rent, owners’ equivalent rent, insurance costs and medical expenses.

Flexible inflation has climbed this year to nearly 14% — the highest since the 1970s. However, this level of inflation likely won’t last. The flexible category contains products such as food, energy and cars, where prices can move a lot higher or lower over time. For instance, that’s already happened with lumber, copper and soybeans. Prices for those products skyrocketed this spring and have since come down.

 

Price flare-ups in key commodities are starting to level out

chart showing inflation cpi versus commodity

Sources: Capital Group, Bureau of Labor Statistics, Refinitiv Datastream. Inflation is measured by the Consumer Price Index for All Urban Consumers (CPI-U) as of 8/31/21. Commodity prices are as of 9/30/21.

 

Watch out for sticky inflation

 

As anyone who has tried to buy a used car knows, flexible inflation categories have spiked due to pandemic-related shortages, a lack of available labor and supply chain disruptions. A quick resolution to these challenges is unlikely, but more normal conditions should return by mid to late 2022.

What that means is, the upside risk is in the sticky components. Many of the flexible price categories moved higher for transitory reasons, but inflation in those areas may come back down to zero or even go negative. The sticky components will drive inflation in 2022 so that’s what investors need to keep an eye on.

The Fed will not be in a hurry to raise rates and potentially derail the COVID recovery if inflation remains in check. In short, flexible inflation is transitory, but sticky inflation could be troublesome.

Overall inflation as measured by the U.S. Consumer Price Index should gradually decline in the months ahead, eventually falling into a range of 2.50% to 2.75% by the end of 2022.

If that prediction holds, there’s a good chance the Federal Reserve will not raise interest rates in 2022. The Fed might officially announce in November that it will begin reducing its bond-buying stimulus program. That process will take several quarters. And the Fed’s first rate hike will come in 2023, which is later than market expectations.

What if this benign inflation outlook is wrong and consumer prices move sharply higher?

That is by no means our base case, but it is a big enough risk that it should factor into portfolio construction.

 

What inflation means for investments

 

For stocks, there are a few rules of thumb to consider. Historically, higher prices have boosted commodities, as well as sectors that benefit from higher interest rates (such as banks) and companies with pricing power in must-have categories like semiconductors and popular consumer brands.

Before making portfolio adjustments, it’s important to remember that sustained periods of elevated inflation are rare in U.S. history. People of a certain age will remember the ultra-high inflation of the 1970s and early 1980s. But in hindsight, it’s clear that was a unique period. In fact, deflationary pressures have often been more difficult to tame, as students of the Great Depression will attest.

Over the past 100 years, U.S. inflation has stayed below 5% the vast majority of the time. More recently, in the aftermath of the 2007–2009 global financial crisis, inflation has struggled to hit 2% on a sustained basis. And that’s despite unprecedented stimulus measures engineered by the Fed in an attempt to reach the central bank’s 2% goal.

Another important point: It’s mostly at the extremes — when inflation is 6% or above — that financial assets tend to struggle. Stocks have also come under pressure when inflation goes negative, as one would expect.

For investors, some inflation can be a good thing. Even during times of higher inflation, stocks and bonds have generally provided solid returns as shown in the chart below.

 

Stocks and bonds have done well in various inflation environments

charts showing different inflation rates of returns

Sources: Capital Group, Bloomberg Index Services Ltd., Morningstar, Standard & Poor’s. All returns are inflation-adjusted real returns. U.S. equity returns represented by the Standard & Poor’s 500 Composite Index. U.S. fixed income represented by Ibbotson Associates SBBI U.S. Intermediate-Term Government Bond Index from 1/1/1970–12/12/1975 and Bloomberg U.S. Aggregate Bond Index from 1/1/1976–12/31/2020. Inflation rates are defined by the rolling 12-month returns of the Ibbotson Associates SBBI U.S. Inflation Index.

 

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.

The World and Investing in 2030

The World and Investing in 2030

The world in 2030 may seem a long way off, but as investors it’s important to spend some time thinking about the distant future.

Imagining life in 2030 is not a hypothetical. In the portfolios we manage, the average holding period is about eight years, so we’re living that approach to investing. So, projecting out how life might change in the next decade is smart.

Here are seven portfolio managers’ perspectives on the world in 2030, and how these shifting trends influence their investment decisions.

  • COVID could be this generation’s Pearl Harbor
  • Cash is an endangered species
  • A cure for cancer may be around the corner
  • Health care innovation reaches warp speed
  • Renewable energy powers the world
  • Electric and autonomous vehicles hit the fast lane
  • What’s not changing? Successful investing

 

1. COVID could be this generation’s Pearl Harbor

 

Ten years from now we will look back on COVID as our generation’s “Pearl Harbor moment” — a period when extreme adversity spurs innovation and behavioral changes to help address some of the era’s biggest problems. When Pearl Harbor happened, the U.S. artillery was 75% horse drawn. Let’s put that another way: In 1941, three quarters of our artillery depended on horses. Yet by the end of the war we had entered the atomic age. That incredible transformation sparked a period of innovation and growth in the U.S. economy that lasted for decades.

COVID could be the trigger that spurs us to tackle critical issues over the next decade, such as the cost of health care, education and housing. We’ve already seen an almost magically rapid development of COVID vaccines at a speed few thought possible. And we’re doing things in our daily lives we never imagined would happen this quickly.

In 2030 we may be living, working, studying and playing in a radically new world. Our lives could be better, richer, healthier, cheaper and profoundly more digital, virtual and data centric. Many of the technologies already exist, but there’s still so much untapped potential for innovative companies to think bigger and use them in ways that solve societal problems.

 

2. Cash is an endangered species

 

A decade from now digital payments will be the norm, and people will give you odd looks if you try to pay with cash.

This is one area where emerging markets are ahead of the U.S. We’ve seen this trend for several years in developing countries — where many consumers had no bank accounts but did have mobile phones and adopted mobile payment technology quickly. The pandemic accelerated use of digital payments around the world, including places where it hadn’t previously been ingrained in daily life. Once this crisis is over, more people will be comfortable making digital payments, and they probably won’t feel the need to use cash as much as they did before.

investing in 2030 could mean digital payments

 

While cruising has resumed in Europe, the U.S. Centers for Disease As consumers become increasingly comfortable with the technology, companies with large global footprints could be poised to benefit. We’ve also seen strong growth in smaller companies outside the U.S. that offer mobile payment platforms for merchants.

 

3. A cure for cancer may be around the corner

 

A cure for cancer may be closer than you think. In fact, some cancers may be functionally cured with cell therapy between now and 2030. New, reliable tests should enable very early detection of cancer formation and location. Beyond that, cancer could largely be eradicated as a major cause of death through early diagnosis.

 

Investing in 2030 3 Cure for cancer

 

Vastly reduced costs and scientific developments have contributed to phenomenal growth in medical research. We’re in a renaissance period for R&D, and companies are investing aggressively to find unique ways to battle cancer and other illnesses. Genomics research and therapies derived from genetic testing have the potential to extend lives and generate billions of dollars in revenue for companies that develop them.

 

We should see increasing amounts of pharmaceutical innovation come from outside the U.S. In fact, many blockbuster drugs from China by 2030. The country has the biggest population of cancer patients in the world, and it’s significantly easier to enroll those patients in clinical trials. They will probably begin to produce novel drugs within five to 10 years and sell them at one-tenth the cost in the U.S.

 

4. Health care innovation reaches warp speed

 

Star Trek, the classic sci-fi TV series, depicted a far-off future where space explorers traveled the galaxies equipped with cutting edge technology such as the tricorder, a hand-held medical device that scanned a person’s vital signs, issued a diagnosis and prescribed treatment in minutes. While there may not be a single tricorder that does everything, by 2030 many of us might have devices like it that will analyze blood, do cardiology monitoring and even remotely check our breathing while we sleep, some of which are available today.

 

investing in 2030 4 healthcare

We are already experiencing a massive wave of innovation and disruption across the health care sector that has the potential to drive new opportunity for companies, reduce overall costs and, most importantly, improve outcomes for patients. Breakthroughs in diagnostics will help lead to earlier detection of illnesses, which can help make drugs more effective — or in some cases treat disease before it progresses. One of the most exciting things today is something known as liquid biopsy, whereby a sample of your blood can be used to identify a tumor at its earliest stages.

A broad range of traditional technology and medical technology companies have been working to develop home diagnostics for some time, and patients are now benefiting from their innovation. These are cost-effective devices that can collect all kinds of health-related metrics that not only help coach us to improve our own health, but can be immediately sent to our doctor for further consultation. We’re still in the early stages of development, but by 2030 it should be a routine part of our daily lives.

 

5. Renewable energy powers the world

 

We’ll see a dramatic shift toward renewable energy over the next decade. We are in the early stages of the transition to an electrification of the grid and green energy, and there are strong tailwinds that could drive growth through 2030 and beyond. Automation and artificial intelligence are setting the stage for a golden age in renewables — pushing costs down while boosting productivity and efficiency. 

investing in 2030 5 renewable energy

 

Renewable energy has historically been perceived as expensive, impractical and unprofitable — but all that is quickly changing. Some traditional utilities are already generating more than 30% of their business from renewables and are reaching an inflection point where they are being recognized more as growth companies rather than just staid, old-economy power generators and grid operators. The move toward renewables is most pronounced in European utilities, where their governments have set high decarbonization targets. For example, the Renewable Energy Directive stipulates that a minimum of 32% of energy in the European Union should come from renewable resources by 2030.

 

6. Electric and autonomous vehicles hit the fast lane

 

In 2030 we will have widely deployed fleets of autonomous electric vehicles operating in most major and many secondary cities around the world. Ownership of a personal vehicle will go from being a necessity to a luxury. Many people will still have vehicles — just like people ride horses or bicycles for fun. But personal vehicles will no longer be necessary as the primary form of transportation for most people in major cities.

investing in 2030 6 electric cars

 

This is an area where the market hasn’t fully appreciated yet. Right now, the market leaders are embedded in other companies — such as Alphabet’s Waymo, Amazon’s Zoox or the Cruise division of GM — so investors can’t buy a pure-play autonomous driving company. But as these fleets roll out more publicly, the market should start to reevaluate these companies and realize this is a real business, not a science project.

2030 is when we’re likely to see hybrid electric engines and hydrogen engines introduced into commercial aircrafts, with widespread deployment over the following 5–10 years. The impact on global emissions could be significant if we transition to a world where we’ve got huge fleets of autonomous electric vehicles on the road and aircraft transportation shifting from oil-based fuel to a mixture of oil, electricity and hydrogen.

 

7. What’s not changing? Successful investing

 

We may be able to look at the future and imagine new products and trends, but we’d like to predict one thing that won’t be different in 2030. Despite all the change going on in the world, the nature of our work and focus as financial advisors will be exactly the same.

In 2030 — just as we did in 2020 and 2010, and every year before that — we will come upon the right solutions for our client’s unique needs. That is our true north.

 

 

 

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.

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