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Banking and Financial Services

Investing for the Long Run

By Barbara Trombley, CPA, MBA

 

As I write this article, the S&P 500 index, which tracks the performance of 500 large companies in the U.S., is down almost 22% for the year. Even more remarkable is that the Barclays Aggregate Bond Index is down more than 14% year to date. If the average investor had a 60% equities / 40% bond portfolio that followed these two indexes, they would be down 18.8% for the year! This is without any portfolio or advisor fees.

After many years of positive stock market returns, this is extremely unsettling for the average investor. Usually, investing in bonds or ‘fixed income’ serves as a buffer to the stock market by providing what is usually a more conservative return. This year, because of rampant inflation, the Federal Reserve has rapidly increased interest rates. Bond prices and interest rates move in opposite directions, leading to large drops in bond prices and, therefore, a depressed bond market.

Barbara Trombley

Barbara Trombley

“Sometimes during volatile market periods, an advisor may strive to counsel a client to change their withdrawal strategy from their portfolio or offer advice on large purchases that can be financed another way.”

As a financial advisor, I wear many hats. The obvious one is that I provide investment guidance and strive to help my clients make financial choices. A less obvious role that I play is that of cheerleader. At times, some investors are very tempted to sell out of the market when times are bad. They feel nervous and uncomfortable. But history has shown us that investing is a lifelong event. A financial plan needs to be followed in good markets and bad.

There is a J.P. Morgan asset-management study that shows that seven of the best ten days in the stock market occurred within two weeks of the ten worst days. Since Jan. 1, 2002 through the end of 2021, for example, an investor who was fully invested in the S&P 500 would have returned 9.52% year over year (without fees). If the same investor missed the 10 best days in the market during that same time period, their return may have been 5.33% year over year (without fees) — almost half! An advisor will strive to provide guidance and education to prevent their client from making rash decisions.

Another area where an advisor can assist clients during volatile stock-market periods (and other times as well) is, if appropriate, potential tax-loss harvesting. If an investor has money that is not in a retirement plan, they can sell positions held at a loss in order to offset any gains held in other stocks. The investor can also offset $3,000 in ordinary income each tax year (if he or she has already offset gains) and carry forward unused losses to be used against gains in future years.

The investor would want to be aware of wash sales rules, which prohibit selling an investment for a loss and replacing it with the same or a ‘substantially identical’ investment 30 days before or after the sale. This would void the loss that the investor was deliberately trying to achieve. The investor is allowed to sell a stock at a loss and buy a similar one in the same industry so that he or she can continue to have their money working for them. Tax planning in volatile times could be part of your financial plan as well.

Sometimes during volatile market periods, an advisor may strive to counsel a client to change their withdrawal strategy from their portfolio or offer advice on large purchases that can be financed another way. I have often counselled clients on the options available to them, from where to draw money for their monthly expenses. In a volatile market, for many clients, using cash savings to pay monthly expenses can take the stress off a portfolio that has declined.

The greatest benefit to you from using a financial advisor is having someone to listen to you, someone for you to seek out and reassure you that, based on history, industry knowledge, and their experience in the financial world day after day, you can pursue financial independence.

 

Barbara Trombley, MBA, CPA is an owner and financial consultant with Trombley Associates. Securities offered through LPL Financial. Member FINRA/SIPC. Advisory services offered through Trombley Associates, a registered investment advisor and separate entity from LPL Financial. This material was created for educational and informational purposes only and is not intended as ERISA tax, legal, or investment advice. 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.

Wealth Management

It’s Not Just About the Money

By Pat Grenier

We have a well laid out plan for how our wealth-building investment portfolios will provide us with the lifestyle we want, confidence in our financial strategy that we believe we deserve, and the legacy we want to leave our loved ones.

Inflation, rising interest rates, high gas prices, the war in Ukraine are non-trivial distractions that test our ability to stay calm and focused. As Mike Tyson once said, “everyone has a plan ‘till they get punched in the mouth.”

Pat Grenier

Pat Grenier

For many depending on their 401k plans, their IRAs and/or their investments, this is a gut-wrenching feeling. It certainly is painful to watch the value of our monies depreciate — especially in an inflationary environment. Emotions can take over and cause anxiety, nervousness, and fear. You are not alone. These feelings are real and may drive the person into a decision that may be irrational, absolutely the wrong one at the wrong time.

Until we address these feelings with facts and common sense, we will not be able to make rational decisions about our investments and the impact it will have on our lives.

As a start, let’s put the current market environment in perspective. As with any market decline, we don’t know when it will hit bottom or how long it will take for markets to come back. What we do know, and history has proven, is that market corrections occur periodically and have been short-lived:

 

As much as anyone would like to avoid these declines, they are an inevitable part of investing.

Looking back at the 15 largest single-day percentage losses in the S&P 500 since 1960, we see that investors are rewarded for staying the course:

Warren Buffett said it best “American magic has always prevailed, and it will do so again.” Can you think of a year where there was not an event that had a negative impact on the economy and investments? It is reassuring to know that despite these annual headwinds, the U.S. economy is resilient and has always recovered.

As much as the fearmongers want us to believe the world is falling apart, we should know better than to listen to the 24/7 negative news cycles. For our own sanity, we need to focus on the positive. Our economy continues to open after the closures due to the Covid pandemic, there are plenty of jobs for anyone that needs one and consumers are still spending. To our surprise many corporations for the first quarter of this year reported higher-than- expected earnings. In addition, in spite of higher mortgage interest rates, pending home sales rose in May. This should provide us with optimism for the economy, even if the ride is bumpy.

Famed British Banker, Sir Baron Nathan Rothchild, is credited with the phrase “buy on the sound of canons, sell on the sound of trumpets.” The old adage ‘buy low and sell high’ makes sense but is one of the most difficult principles to follow and act upon.

Markets decline on negative news. The negativity creates fear, but the decline presents an opportunity to reassess our investments, our allocation, our risk tolerance and to take advantage of quality investments that may have been beyond our reach. If time is on your side, buying on sale makes sense.

It is not just about the money. Investing is about having the right frame of mind to make our money work efficiently and effectively.

 

Pat Grenier, CFP® is president and founder of Springfield-based Grenier Financial Services; (413) 736-6712; [email protected]

Securities and advisory services offered through Cadaret Grant & Co., an SEC Registered Investment Advisor and member FINRA/SIPC. Grenier Financial Advisors and Cadaret Grant are separate entities.

Wealth Management

And When It Comes to Investing, That’s Not a Good Thing

By Jeff Liguori

 

Malcolm Gladwell, prolific non-fiction writer, journalist, and podcaster, has written extensively about mastering a subject. In his book Outliers, Gladwell builds upon the idea that it takes a person 10,000 hours to become a master, or expert, at something.

The premise was originally put forth nearly 50 years ago by two academics, Herbert Simon and William Chase, and published in the American Scientist specifically to address how one becomes an expert chess player. Gladwell elaborated on the idea by saying that an innate ability, or even exceptional intelligence, on a particular subject was not enough to excel or master that subject. In an article he wrote for the New Yorker in 2013, he stated “nobody walks into an operating room, straight out of a surgical rotation, and does world-class neurosurgery. And second — and more crucially for the theme of Outliers — the amount of practice necessary for exceptional performance is so extensive that people who end up on top need help.”

Today it seems that expertise is under attack. Whether it is climate science, economics, or healthcare. There are no hurdles to gathering information, factual or not, which has emboldened many to opine on, and in some instances act on, areas for which they are not equipped. Being informed and questioning authority is not a bad thing. But acting as an expert has the potential for serious long-term damage.

Let’s break down the 10,000 hours concept. A young woman decides on majoring in accounting her junior year in college. She has four semesters until graduation, where most of her classes are related to her major. Let’s assume that is a total of 100 hours of study. She graduates, gets a job in a major accounting firm where she likely works 50 hours per week. At night she studies for her CPA exam. After three years, between college study, work, and prepping for the CPA, she has logged approximately 3,200 hours of work in a single subject: accounting.

And it is likely in a specific area, either audit or tax work. At 25 years of age, she is about one third of the way toward the 10,000-hour rule. This is precisely why a business or individual, with complex accounting issues, would not hire a young person with that level of experience. The analogy could be made for doctors, lawyers, or diesel mechanics as well.

In the investment field, the information needed to manage one’s money is widely available. I’m not aware of a network that dedicates 24 hours to the practice of medicine. But turn on CNBC and it is a non-stop barrage of stock quotes and ideas, complete with bright colors, loud voices, and blinking lights. It thrives on our culture of excitement and reality TV.

Almost anyone with a decent Internet connection can invest his or her hard-earned funds. And early success reaffirms the dangerous bias that ‘I’m a talented investor.’ Until one morning, inevitably, that “hot stock” that had appreciated 78% is down 50% before the market even opens because the drug the company produced killed people in the FDA trial, or the company missed earnings by a wide margin, or the CEO was a fraud. Much of which could’ve been fleshed out by skilled analysis and a disciplined approach to investing to avoid such scenarios.

There is nothing inherently wrong with the do-it-yourself trend. However, the intersection of social media, and the assault of information from a variety of sources (some questionable), has empowered many to shun traditional expertise that has been built upon years of study. Logging on to WebMD to diagnose your poison ivy or watching a YouTube video on installing a garbage disposal, or even learning about a public company’s business on Yahoo! Finance is smart. Reputable sources with solid information. But these are part-time tasks, which don’t carry significant consequences if done incorrectly. They are suited for the curious individual with a penchant to learn.

But for more complex matters, requiring a longer success horizon — say preserving your retirement funds to support your lifestyle once your earning years are over — it is best to leave that to a full time, educated, disciplined professional. They’re called experts.

 

Jeff Liguori is the co-founder and chief Investment officer of Napatree Capital, an investment boutique with offices in Longmeadow as well as Providence and Westerly, R.I.; (401) 437-4730.

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