JD Gardner, Author at Aptus Capital Advisors

Don’t Hold the Bag

JD Gardner — Tue, 03 Jun 2025 21:34:26 +0000

There’s noise… so much noise.

The headlines, data, and stuff that just don’t matter bombard investors. It’s our own dang fault. The noise only exists because there’s demand for it. Investors click on the bait and even make decisions off the emotions triggered by the bait.

Our aim at Aptus is to be informed with some noise, while targeting our focus towards the things that matter. Less noise, more substance. Substance being the stuff that moves investors closer to improving financial outcomes.

C.S. Lewis had a good quote in Mere Christianity about aiming for heaven. We want to aim for our north star, too…consistent in our focus and delivery of solutions that help solve things that matter. While we cover quite a few topics, the target today is a short reminder of the core investment belief that drives our business:

Asset allocation matters most, and within that, we want to own more stocks, less bonds, and blend hedges to protect against left tails.

Bondholders = Bagholders

In investing, a bagholder describes an investor who holds onto a declining asset. Many bagholders ignore the warning signs… of which there are plenty.

Our fiat system and the accompanying debt loads are not conducive to productivity gains translating to greater purchasing power of a dollar. We will spare you the soapbox, the point is simply that our system MUST dilute the dollar’s value over time.

Speaking of distractions, remember way back when (a couple of weeks ago), cost-cutting was the initiative? DOGE, fiscal restraint, trimming excess, etc. That was all the noise. We have quickly pivoted back towards a growth-centric philosophy, one that wants to run the economy hot to stimulate demand and growth beyond the pace of our debt expansion.

Good luck with that. As investors, what matters is the recognition of all this. Let’s just play the hand we are dealt through our asset allocation. It’s no surprise to any reader of ours that our opinion in both tails is risk assets up, and bond holders as bag holders. The likely outcome of good things (growth above expectations) is risk assets higher. The likely outcome of bad things (plunge protection team enters to supply more dollars) ultimately leads to risk assets higher.

Allocate accordingly.

Here Comes the Dollar Supply

This tweet from Charlie Bilello illustrates the increase in money supply over the last few years:

You could argue that this doesn’t matter. If that’s your stance, you probably think bonds are safe, too.

Here’s a reminder that when you hold something that can be created out of thin air, there’s a chance that thing might become worth less and less over time:

$1,000,000 today only has the purchasing power of $132,444 in 1972 dollars. Purchasing power of $1,000,000 has eroded by about 86.76% since 1972 due to inflation.

The cumulative price increase from 1972 to 2025 is 655.04%. This means that $1,000,000 in 1972 would buy the same amount of goods and services as $7,550,358.85 would buy today.

Let’s Run it Hot

We are hopeful that AI has productivity gains in store for us, to grow our way out of this debt issue. While hopeful, we will allocate dollars in a way to hedge that hope…via owning more risk assets.

We’d agree that a US default is unlikely, but the likelihood of bondholders being paid back with debased dollars is quite high. The current situation is roughly 97% public debt to GDP + 3.2% primary deficit + 3.4% effective interest rate. This means the US must grow nominal GDP at 6.6% to keep debt/GDP Stable.

The US has only grown nominal GDP at 6.6% or higher a handful of times:

- High Secular Inflation 1965-1985

- Dot-com Bubble (late 90s)

- Housing Bubble (mid-2000s)

- Everything Bubble (post-COVID)

Conclusion

Asset allocation is mission critical. If we get that right, we can get a lot of other stuff wrong and still be fine.

The backdrop is one where we are convinced that the need to own more stocks and less bonds will become increasingly apparent over time. We will continue to build solutions that help facilitate this shift and model portfolios that express this conviction.

We believe our allocations, which are a blend of risk assets with hedges, are positioned to be better in the tails. It’s the tails that carry the greatest impact towards compounding wealth through time.

If you have any questions at all, please reach out. We want to help cut through the noise. As always, thank you for your trust.

Disclosures

Past performance is not indicative of future results. This material is not financial advice or an offer to sell any product. The information contained herein should not be considered a recommendation to purchase or sell any particular security. Forward-looking statements cannot be guaranteed.

This commentary offers generalized research, not personalized investment advice. It is for informational purposes only and does not constitute a complete description of our investment services or performance. Nothing in this commentary should be interpreted to state or imply that past results are an indication of future investment returns. All investments involve risk and unless otherwise stated, are not guaranteed. Be sure to consult with an investment & tax professional before implementing any investment strategy. Investing involves risk. Principal loss is possible.

Advisory services are offered through Aptus Capital Advisors, LLC, a Registered Investment Adviser registered with the Securities and Exchange Commission. Registration does not imply a certain level or skill or training. More information about the advisor, its investment strategies and objectives, is included in the firm’s Form ADV Part 2, which can be obtained, at no charge, by calling (251) 517-7198. Aptus Capital Advisors, LLC is headquartered in Fairhope, Alabama. ACA-2506-18.

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Durability in Divergence = Success

JD Gardner — Mon, 05 May 2025 22:47:58 +0000

No matter your time horizon, higher ending values of an investment portfolio are a good thing. That’s usually the goal. Invested wealth grows through time. It’s our job to help deliver solutions that recognize risk tolerance/capacity constraints and provide a return path that’s suitable over time.

Unfortunately, for some, the meaning of ‘suitable’ revolves around minimizing volatility, to the detriment of higher returns. Many have fallen victim to the belief that investors are willing to forgo higher wealth levels to feel safe. (Notice I said ‘feel’ safe).

We get it and aren’t discounting that completely, as we are well aware of the impact portfolio uncertainty can have. We’d just argue the bias assuming that ‘safe’ investments are protecting wealth.

As a reminder, the Aggregate Bond market is widely considered a safe place. Over the last 5 years, the AGG (an ETF that tracks the Aggregate Bond Index) has delivered a cumulative loss of 4%. That’s in nominal terms, meaning real returns (that factor in inflation) would be much worse.

Here’s a sobering chart from our write-up, The Lost Century in Bonds.

That’s 100 years of going nowhere. At the heart of our approach is our conviction that no matter how risk-averse clients are, they’d prefer to improve their wealth.

Disappearing Return is another post worth reading that illustrates the impact of taxes and inflation on “safe” bond returns.

You can feel safe while having your purchasing power stolen. That’s not a proposition many clients would be excited about.

Clients want the highest compounded return possible, aka the highest terminal value of wealth. We’ve been on a 12-year journey to create a business that helps improve compounded returns through the ownership of optionality in portfolios. We’ve gotten plenty of things wrong, but we continue to learn, grow, and work towards daily improvement.

What’s Your Average

Imagine if this were your next 10 years of portfolio returns:

- The average (arithmetic return) is 6.80%
- The geometric mean (compounded return) is 3.88%

Conceptual Illustration: Information presented above is for illustrative purposes only and should not be interpreted as actual performance of any investor’s account. As these are not actual results and completely assumed, they should not be relied upon for investment decisions. Actual results of individual investors will differ due to many factors, including individual investments and fees, client restrictions, and the timing of investments and cash flow.

These next couple paragraphs are the heart of this note:

The ability to compound capital depends on a portfolio’s ability to be durable in the tails. Given our allocation shift from less bonds to more stocks, a shift that creates more potential volatility or dispersion from the mean, this concept needs to be understood.

In this example, you could say the expected return is the average outcome of 6.8%. Just as in the real world, the annual return is very rarely the expected return. Investors must deal with divergences from the expected outcome, sometimes rather large divergences. Dealing correctly is where compounded returns (what actually matters) are made.

Our goal is to be better in the tails, you’ve heard us say that. In right tails, we want to participate. In left tails, we want to minimize the damage.

- Right tail: Large divergences from the expected outcome to the upside -we like these
- Left Tail: Large divergences from the expected outcome to the downside – we don’t like these

Durability in the tails reduces the volatility tax, and closes the gap between the simple average and the compounded average. In other words, it improves the compounded return and therefore increases the terminal value of the invested portfolio.

As we move through time, your portfolio’s success depends on how it handles the outcomes that are outside of expectations.

Your Portfolios

I hope this note is read. I hope it’s understood. The math may sound complicated, but it is as straightforward as can be.

Asset allocation is what matters. If you can solve problems at that level, everything else is easier. We think there is a massive allocation problem with the ownership of fixed income. I’ll spare you of all the reasons we believe this.

The solution is the ownership of optionality.

Own the risk, hedge the tails.

Our entire approach is designed to own risk assets, as we believe they are the stronger engine to drive returns. We want to hold negatively correlated hedges to protect against the extreme left tails that inevitably occur. The hedges are the brakes.

This is different than the traditional approach, the one that allocates away from risk assets in favor of things that have what we believe to be inferior engines for returns, all in the name of dampening volatility.

We want volatility. Specifically, upside volatility. We want to avoid massive drawdowns, or the left tails. We do that through owning hedges. Return / Vol is not the risk metric that concerns us. We want Return / Drawdown to be as attractive as possible.

The presence of our hedges, and the convexity in their payoff in a left tail, allows us to own the risk confidently.

The team put together a write up that illustrates how using long volatility can benefit portfolios, and free investors of the emotional distractions that come with investing: A Modern Approach to 60:40 (a must read, in my opinion).

Going Forward

There will be bumps along the way, without a doubt. We will experience negative returns from time to time. The ever-present risk in the market is why there is potential for return.

We are confident that if we can improve allocations to perform better in the tails, better outcomes are ahead.

We are working daily to continue to earn your trust. We appreciate you. Please don’t hesitate to reach out with any questions.

Disclosures

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Own the Risk, Hedge the Tail

JD Gardner — Thu, 03 Apr 2025 12:38:31 +0000

The volume of uncertainty has been turned up. The S&P 500 closed the quarter -4.28% after dropping 10% from the highs in mid-February. As Dave points out in our Q1 2025 newsletter, the most likely culprits are:

1. Capital flows
2. Expectations for slower growth
3. Policy uncertainty

How should investors respond?

Own the risk and hedge the tail…that’s the foundation of our approach and in our opinion, the appropriate response. In the middle of uncertainty is a good time to talk through why that’s the case.

Asset Allocation Matters Most

If you break investment choices into 2 broad categories …

1. Risk Assets – Think stocks
2. ‘Safe’ Assets – Think bonds and cash. If you’ve read anything of ours, you understand why we put the term ‘safe’ in quotations

Your ability to compound (grow) your wealth is dependent on your asset allocation.

Read that last sentence one more time. Worry less about which stock you own or which fund manager you have. Worry more about being allocated properly.

The Goal is Compounded Returns

Financial plans work better with higher compounded returns. Higher compounded returns lead to higher ending terminal wealth.

Your assets grow through a multiplicative process where this period’s return is multiplied by the next etc. For example, if you earn 10% on your money one year and then another 10% the next year, your cumulative return over those two years is (1.10 x 1.10) – 1 = 21%.

Compounding being multiplicative simply means the returns build on themselves – each period’s return is stacked on the previous one.

This matters because:

Volatility Tax. We discuss this frequently. The difference in compounded vs. simple returns is a drag on returns that we want to minimize

Negative returns have more impact than positive returns. In other words, we need to avoid large losses

Don’t think linearly (simple returns)…that’s not how wealth compounds.

Here’s a visual using 4 hypothetical portfolios:

Most people think Portfolio D would be the best because its average (simple) is the highest.

But, when you apply this path of returns to a capital base of $100,000, you can see the difference in terminal wealth each path creates.

The Takeaway: The best portfolio was Portfolio B. Despite having a lower simple average, it had the highest compounded return, which translates to the highest terminal wealth.

*Notice the volatility tax (simple average – compounded). Portfolio B’s is almost non-existent. Why? Because it avoided large drawdowns.

Fear Sells

While most people probably don’t think in terms of a volatility tax, it’s the inherent awareness that makes market crash predictions effective clickbait.

The negative impact to a long-term CAGR (compounded annual growth rate) of large losses is easily quantified. The behavioral impact is tougher to quantify. Based on my experience (and my kids point out I have gray hair now, so I feel more qualified to say that), the behavioral reactions by investors to uncertainty are the main culprit of lower CAGRs.

We could load you up with similar graphics as the one above that should instill confidence, but people still want to try and time asset allocation decisions based on the emotions they are feeling.

Remember, it’s our belief that the illusion of ‘safe’ returns is the greatest contributor to longevity risk investors face. And longevity risk should be the main concern.

Disappearing Return is a great summary that walks through why taxes and inflation are destroying the traditional definition of ‘safe’.

If a 10% drawdown turning into a 50% drawdown in equities is the fear, then hedge that risk away; don’t re-allocate towards the illusion of safety.

It’s the Tails That Matter

The chart above shows monthly outcomes for US equities for 100+ years. We’ve overlaid a normal distribution bell curve to the actual returns observed. Keep this in mind:

Frequency: The bell curve focuses on how often returns happen

Magnitude: This focuses on the impact of returns

Tail returns are the returns to the extreme left and extreme right of the distribution plot. They occur less frequently; they are the outliers. As the chart illustrates, while the tails occur less frequently, their combined contribution to long-term returns is 67.30%. Notice that of that total, the left tail carries the highest contribution. That jives with the multiplicative math – negative returns have more impact than positive returns.

When our focus is on generating the highest compounded returns possible while minimizing large drawdowns, we must recognize that magnitude is more relevant than frequency.

Think about the multiplicative process above.

The tails matter most as they impact long-term returns. Said another way, large losses should be avoided while positioning to capture as much of the upside as possible.

We want to be better in the tails.

Your Portfolios

Our entire approach is designed to own risk assets as we believe they are the stronger engine to drive returns. We want to hold hedges to protect against the extreme left tails that inevitably occur. The hedges are the brakes, and they’re negatively correlated to the engine.

This is different than a traditional approach that allocates away from risk assets in favor of things that have what we believe to be inferior engines for returns, all in the name of dampening volatility.

We want volatility. Specifically, upside volatility. We want to avoid massive drawdowns, or the left tails. We do that through owning hedges. Return / Volatility is not the risk metric that concerns us. We want Return / Drawdown to be as attractive as possible.

The presence of our hedges and the convexity in their payoff in a left tail allows us to own the risk confidently.

Own the Risk, Hedge the Tail

The team put together a write-up that, in my opinion, is a must read: A Modern Approach to 60:40

It illustrates how using our two flagship funds can impact portfolios and free an investor of the emotional distractions that come with investing.

Here’s a teaser:

There will be bumps along the way, without a doubt. We will experience negative returns from time to time. The ever-present risk in the market is why there is potential for return.

We are confident that if we can improve allocations to perform better in the tails, better outcomes are ahead.

We are working daily to continue to earn your trust. We appreciate you. Please don’t hesitate to reach out with any questions.

Disclosures

*Conceptual Illustration: Information presented in the above charts are for illustrative purposes only and should not be interpreted as actual performance of any investor’s account. As these are not actual results and completely assumed, they should not be relied upon for investment decisions. Actual results of individual investors will differ due to many factors, including individual investments and fees, client restrictions, and the timing of investments and cash flows.

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Winning the Long-Term Money Game

JD Gardner — Tue, 04 Mar 2025 21:56:35 +0000

If we gave you a million dollars to invest today, with the objective of delivering the highest compounded annual growth rate (CAGR) over a typical 30 year period, where would you invest that money?

Here’s the catch, you only have 2 choices:

Stocks
Bonds

Let’s consider a few things about each option.

Stocks

Stocks represent claims on the future earnings of a business. They offer the possibility of compounding returns through the growth in the underlying business, valuation adjustments, and dividends that can grow as the business grows.

From a practical perspective, you can own stocks through low-cost vehicles that are extremely tax efficient. Qualified dividends are taxed at long-term capital gains rates (depending on income: 0% to 20%), and the growth and valuation components of the compounded return is even more favorable as you can defer paying taxes until you sell.

In a perfect world, your pre-tax return is close to your after-tax return. The power of deferring can help close that gap.

Read this short post from Brian to drive this point home: Snowballing Returns – The Hidden Magic of ETFs. One favorite of mine from his piece:

Deferred taxes allow an investor to compound at the higher pre-tax rate over time, pushing after-tax return towards the 10% pre-tax return. For instance, comparing the after-tax return of a 10% pre-tax 30-year investment under various tax scenarios:

- Scenario 1 – No Taxes: 10% compounded for 30 years turns $100 to $1800 = 10% annualized return

- Scenario 2 – Annual Long-term Tax Rate (20%): After-tax return is 8%

- Scenario 3 – Annual Short-term Tax Rate (37%): After-tax return drops to 6.3%

- Scenario 4 – Deferred Tax Payment: Compounding occurs at the pre-tax rate until the sale in year 30 = 9.2% annualized

*Aptus Conceptual Illustration

In sum, we see stocks as a blend of potential for a) compounded growth and b) tax efficiency in that growth. We want less friction along our path of compounding.

Bonds

Remember, the objective here is highest CAGR over 30 years…period. While there’s a place for bonds, this note is focused purely on an asset’s ability to compound capital over 30 years – compound being a key word.

Bonds are debt instruments. A government or a business needs capital. They raise debt to get it. Let’s follow that capital over 30 years and think critically on whether the things we find valuable at the surface level provide any value at all. Words like safety and stability, do they mean what we think they mean?

You loan $1 million to a business or the government for 30 years. The irony here is, where does the value created from a bond end up? Hint – it doesn’t accrue to the bond holders. As a business owner, especially in a growing business, equity is far more expensive to give up than the annual interest costs of debt.

As the bondholder, you send $1 million to the company where they use that capital to do whatever they need to do for the business. In return, they agree to pay you 4% annually. (Let’s just use 4% for simple numbers, the current 30-year rate is ~4.50%)

Each year, you get $40k and at the end of the term you get your $1 million back.

Safety and stability seem like appropriate descriptions for this setup if the company is solid. Their appropriateness begins to leak when you think about the friction of taxation and the value of your dollar over this period.

Taxes

The table below illustrates how ordinary income tax rates will destroy the interest from bonds. A 4% pre-tax yield turns into 2.4%.

*Aptus Conceptual Illustration

Interest from bonds is paid on the face value (or par value) of the bond and it is simple interest, not compounded.

Purchasing Power

Most people just assume your money value will be the same in 30 years. That’s just not the case. Not only are you taxed inefficiently, but you are also receiving dollars back in fixed amounts annually that are worth less, and less, and less.

The end result is often a negative rate when you factor in taxes AND inflation. Meaning, you are safely losing over time. Here’s a sobering pic to illustrate this point:

What could be causing this? This might have something to do with it:

If supply of something can be increased substantially, it’s Economics 101 to assume that it will lose value over time. Even the mighty US dollar is not immune to that.

Going off the script a little bit here – I’m not sure why more people don’t see this and aren’t upset about it. Productivity should lead to dollars buying MORE stuff, not less stuff. That’s not allowed to happen, our debt loads couldn’t handle it. We seem to have bought into the belief that a small amount of inflation is necessary. It’s not. Your wealth is being confiscated under the illusion of safety.

The environment is one where the investor is responsible for converting dollars into something that can protect purchasing power, those things are risk assets they are not bonds.

We have structural deficits that we don’t think will go away. The investment implications of that statement simply mean, as Lyn Alden says, “Nothing stops this train.”

It’s our belief that assets with supply constraints, risk assets, will far outpace the “conservative” assets in the future.

I understand there are arguments to the points I’m making, I’m just not sure they matter. Highest CAGR possible, that’s the objective. I don’t see accomplishing that objective via fixed income.

Back to the Question

If you have to generate the highest terminal wealth (the thing that drives the success of a financial plan) and can only invest in stocks or bonds…,what do you do?

I’d imagine I know the answer.

Another simple question, do you expect stocks to be higher or lower 30 years from now vs today?

I’d imagine I know that answer too.

The question I can’t answer – knowing the above, why are there so many assets with horizons far greater that 30 years stuck in blended allocation funds or ‘safe’ assets exposing the investor to purchasing power erosion?

A logical explanation could be a misinterpretation of risk. Volatility or historical stock market crashes have warped investors’ minds away from longevity risks in favor of drawdown risks.

Keep in mind, we spend half our time talking about fixing the allocation issues that come with too much fixed income, while the other half is spent talking about the devastation drawdowns have on CAGRs! We understand the importance of avoiding true nasty stock market environments.

Our Business and Your Portfolios

Coach Brownell used to tell us if we wanted things to be better (better meals, easier practices, etc) – just win games. Winning makes everything better.

In our job today, higher CAGRs are synonymous with winning games. Clients are happy, advisors’ businesses grow faster, and we don’t get fired. This is the way!

We build strategies to improve CAGRs. We are convinced that risk assets are mandatory, in larger size than historical allocations. In simple terms, can we take a 50/50 portfolio and turn it into a 65/35 to benefit the client over time.

We recognize that you can’t make this move to more stocks and less bonds with the hope of never experiencing volatility. It’s why we run option-based strategies that blend in convexity through hedges. We want to build solutions that empower more risk to be absorbed at the portfolio level with confidence. Bigger engines with better brakes.

As of 3/3/2025, according to Bloomberg, the 5-year total return for TLT (long term treasury ETF) is -32.63%…yes, that includes the income.

Investors are realizing the need for risk assets. Aptus is building solutions that can provide more stock exposure, with confidence that drawdowns will be contained.

We could not be more excited about our business today and what’s being built. We recognize that if you are reading this, you are part of that, and work daily to continue to earn your trust. We appreciate you. Please don’t hesitate to reach out with any questions.

Disclosures

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Losing Money Safely

JD Gardner — Wed, 05 Feb 2025 19:26:30 +0000

You can let fear keep you out of risk assets (stocks), a lot of people do, but they are going higher with or without you. The show will go on. It must.

There will be ups and downs as there always are, but the pickle the Fed and our government find themselves in is evident, and in our opinion, their actions are clear.

This is a real time look at the situation: US Debt Clock. Here’s the highlights:

$36+ Trillion of debt

Federal debt to GDP is now ~123%

The solvency of the U.S. Treasury now relies on liquidity.

Think about that.

With the debt loads we have, and the deficit spend what it is; Trump or no Trump, tariff or no tariff, you’d better own risk assets.

To pay our debts, the Treasury is reliant on low rates and continued liquidity (that’s a fancy way of saying more money in the system) from the Fed. If the Fed doesn’t provide liquidity, it’s more expensive for the government to borrow and service the debt.

Risk assets thrive on liquidity and struggle without it. What scenario do you think plays out? More liquidity or less?

The Path Out

The Fed has a dilemma:

Too tight for too long => asset prices drop, economy slows, deficits balloon, and the government cannot make good on its debt

Too loose for too long => speculation wins, inflation runs, and risk asset pricing continues to rise

Both scenarios result in a path out of the current situation. The price you pay is where the rub is.

The first scenario is one of fiscal responsibility and this would create economic destruction. That’s all it gets for an explanation. One sentence. No more time wasted on that because its about as likely as a 12 point buck walking out for me next week in Baldwin County, Alabama.

The second scenario is where our money is, figuratively and literally. Sure, we are hopeful for true productivity that leads to real growth, and believe some of that is in the cards. We also believe it will be matched with a healthy dose of inflating our way out.

Explicit vs. Implicit

Some may argue my next couple sentences are too cynical. That’s OK. We can disagree on certain things. My main objective is protecting wealth, and it’s blatantly clear to me that higher CAGRs are the way to protect capital in real terms, while ‘safely’ holding cash and cash-like securities is a great long-term plan to have wealth confiscated.

Explicit taxation to improve the fiscal position of our government is far less digestible to voters than inflating the problem away. Silently stealing the value of the dollar from those that hold dollars is effectively what’s done.

For example, if you store $100,000 in a safe for the next 10 years, what’s it going to be worth in terms of goods and services? Our best guess is that ‘safe’ $100k loses value.

While it may feel safe, if it buys you 30% less goods and services, your $100k turns into $70k, that’s a 30% drawdown in real terms. How about 20 years? That’s a reasonable timeframe for many of your clients…at just 3.5% inflation (barely half of money supply growth), you’re down half!

Source: Calculator.net

Too many people fail to realize that what matters is the value of your dollars relative to the goods and services you’ll need to buy. Real returns should be the focus, not nominal.

Risk assets benefit from liquidity. Even if they are only going up nominally, they are still going up. Many avoid the risk of stocks in favor of holding bonds that cannot protect purchasing power and are incredibly tax-inefficient.

Our Solution

Yes, we are advocating for allocations to shift more towards equities and think that shift provides the best opportunity to protect and/or improve wealth.

No, we are not advocating a “sit tight and ride it out” mentality.

Stocks are the better engine to drive towards higher returns. We must own a better engine, but equip it with the best brakes we can find. Preferably, brakes that have no correlation issues! We advocate actively-managed hedged equity and other forms of convex payoffs, to blend with more of the additional equity exposure.

We think of risk in terms of purchasing power protection and drawdown of account value. The extra equity helps with higher CAGRs, and the presence of hedges help with drawdown.

Moving Forward

Dave’s Market Outlook is chock full of information that supports our general approach to helping position hard-earned capital for higher CAGRs.

We couldn’t be more convicted in our More Stocks, Less Bonds, Risk Neutral mindset. We believe we are improving our ability to deliver and message around that conviction.

“Better in the tails” as we like to say, as those tails matter when it comes to compounding returns. We believe we’re best-positioned to help investors accomplish the better in the tails objective.

We are beyond thankful for the opportunity to work with you. As always, thank you for the trust.

Disclosures

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How Do You Define Safe?

JD Gardner — Wed, 15 Jan 2025 20:12:30 +0000

Brian wrote a recent post that’s relevant to this month’s writeup. It’s worth a few minutes of your time as it provides perspective around how you should think about investing your hard earned money: The Lost Century in Bonds.

Volatility is not risk, and the appearance of stability does not define safety. True risk is far more sinister as it uses the comfort of stability today to rob your future purchasing power.

This realization is what matters most, as an awareness of this impacts how you think about the almighty investment decision – asset allocation.

Your risk-free asset has far more risk than you’d care to know. That’s what we want people to understand.

“I’m being safe…I have an investment with guaranteed payments, or a CD, or a Treasury bond, etc”.

You’re not being safe. You’re being robbed.

Nominal vs Real

I can’t make up the timing of this email; it was just received as I started typing this section:

“Kindly find enclosed invoice…

Unfortunately, inflation also hits our business. To make the impact as minimal as possible to you, we decided to pass on only 6.5% for the 2023 fees. We do hope for your understanding of the slight price increase.”

We will use this real-world price increase to drive home this point.

Let’s assume the note above is from a local lunch spot where we grab lunch for the office for $100 cash. There are two items in this transaction…the cash and the food. $100 is sufficient to feed the office for a day.

That was yesterday, but today the restaurant raises prices by 6.5%. My cash didn’t move – it’s still $100, but the real stuff I buy moved higher. The same amount of money from yesterday buys me less food today. In other words, my $100 ain’t what it used to be.

My nominal return was 0%. My real return was -6.5%.

Most people think of the difference between nominal and real to be the official Consumer Price Index (CPI) provided by our government. We question the CPI as an accurate reading of price levels, but let’s go with it.

The chart below shows how price levels are always increasing. In other words, the real value of your dollar is constantly dropping.

We’ve all heard that 2% is the target for inflation. Why? Why is deflation (price declines) from productivity viewed as a bad thing and 2% inflation a good thing? Wouldn’t deflation be a natural free market response to productivity? Shouldn’t it allow our money to buy more stuff and not less?

I have so many questions.

What’s the Hurdle?

With invested assets, we seek real returns, which require a nominal return over and above some measure of price levels. While CPI is the default hurdle rate for generating real returns, we’d point out a couple of things.

Our government’s deficit spending (currently between 6-8%) is a better target for achieving real returns.

An even better hurdle rate, in our opinion, is the growth in supply of dollars. Since 1960, our money supply has increased by ~7.4% annually. This M2 chart is a decent approximation, looks like that CPI chart only has a much higher (and more realistic) rate of debasement:

If you remember our post from June, debt creates more money in the system. As debt grows so does money supply. I’d argue that the historic 7.4% figure will be higher given the current backdrop, one that most likely creates the need for more debt…a lot more debt.

The point is, to achieve real returns—the kind that matters—you must own growth assets. I define growth assets simply: stocks. More stocks, less bonds.

Centrally-planned and controlled monetary systems create the necessity to absorb near-term volatility, and recognize that’s not the risk you should lay awake at night worried about…we will come back to this point.

Bonds: Not Good

Brian’s post emphasizes the devastating effect taxes and inflation have on the real returns of bonds. The post ends with this chart below. It illustrates the difference between real returns in stocks vs 10-year treasuries. Again, how do you define safe?

Source: Aptus, Shiller as of 06.30.2024

Take 3 minutes and read that post!

But Don’t Stocks Have Drawdown Risk?

Yes, and big drawdowns at that.

They are painful behaviorally and create a volatility tax in the compounding of capital. Those are friction points we want to avoid.

This is the heart of our business. To message around our convictions in the need to alter allocation towards growth assets, and to create strategies that facilitate this shift while keeping risk in check.

We advocate the combination of more stocks + hedges that carry a known correlation and protective convexity. The correlation is negative, meaning hedges go up when stocks go down. Convexity means the payoff can be multiples of the premium paid to own the hedges.

We don’t own hedges to reduce risk. We own hedges so we can take on more risk. Their presence allows us to confidently absorb risk knowing that the risk so many investors worry about (large drawdowns) is the exact event that triggers convex payoffs from the hedges lying in wait.

Closing

In investing, the most important decision is asset allocation. My convictions grow by the day that for investors to preserve and improve wealth, they need to truly understand what is safe and what isn’t.

More stocks, less bonds.

There’s a place for bonds. Don’t get me wrong. They can provide income and some clarity on future outcomes. But safe? I would agree with you that bonds are safe, but then we’d both be wrong.

Thanks for reading. I could spend hours talking about this stuff, the need for a true store of value, the issues of centrally planned anything, etc. If you want to discuss, just hit me up. As always, thank you for your trust.

Disclosures

The post How Do You Define Safe? appeared first on Aptus Capital Advisors.

Giving Thanks

JD Gardner — Mon, 23 Dec 2024 13:54:54 +0000

Thanksgiving is my wife’s favorite holiday, and because of that, we make the long trek to Cincinnati, Ohio every November. There are a number of traditions, but they all surround the main attraction – her Grandmother’s house, aka “106”.

Her grandparents have been gone for 20+ years, but the house is still in the family and remains the meeting spot. It’s 1000 square feet, probably has plenty of mold and is in need of repair in more ways than one. All that doesn’t stop my wife, her 10 aunts and uncles with their spouses, their children, and their children’s children from piling in. Reach out if you want video evidence of the standing room only atmosphere. It’s got to be 100+ people piled in.

According to Zillow, the house is not worth much…at all. From a real estate perspective, I’d have to agree, but that’s not the right way to look at it. The value is not in the land and the structure of the house. The value is in the people that make 106 a special place for multiple generations.

Thankful

As I sat way too close to Mal’s cousin on the floor amidst the chaos, I couldn’t help but think of the people that make up Aptus, our advisors, clients, and shareholders. It’s hard not to be full of gratitude.

We are surrounded by a growing team of some of the best folks in the business. We get to work with some of the best advisors and their clients. We are building…new funds, new services, new technology, a bigger platform.

We are thankful for the opportunity we have in front of us, and plan to use our energy and resources to be the most valuable partner we can possibly be to you. As we say, thank you – we owe you. Our plan is for our actions to express our gratitude.

Moving Forward

We couldn’t be more convicted in our More Stocks, Less Bonds, Risk Neutral mindset. We believe we are improving our ability to deliver and message around that conviction. 2024 has been a great year of validation for our approach. Hard to believe these models are closing out their 8th year of existence.

Impact Series Fact Sheet

We see “Better in the tails” as the best thing we can do to help your clients maintain and grow their purchasing power, and think we’re well-positioned to help investors accomplish those objectives.

We are beyond thankful for the opportunity to work with you. As always, thank you for the trust and Merry Christmas if we don’t chat before then.

Disclosures

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Portfolio Reminder: Election 2024

JD Gardner — Mon, 04 Nov 2024 21:46:14 +0000

It’s the weekend before the election and I want this month’s note to serve as a quick reminder of What Matters. The linked post is from July of this year and we wouldn’t change a word.

If you need more election specific commentary, Dave wrote an incredible Election Musing on Friday.

Between those links and the chart below, hopefully you can enter the week with some peace and confidence about the future. Your investment horizon is longer than you think. Don’t let polarizing short term events impact long term allocation decisions.

We don’t know what this election holds, but we do believe we are prepared for the outcome.

What We Do Know

The economy is growing, the Fed is lowering interest rates, and if the AI revolution is a fraction of the hype, these factors could all help keep the market’s momentum rolling. We’d argue these things are more important than the election outcome.

To pile on, we are still operating at deficits and neither candidate is going to change that in our opinion. Those deficits must be funded with an increased supply of debt which translates to an increase in the money supply. We believe this continues to be the reigning champ of inputs to allocation decisions.

What Does it Mean?

It means more stocks and less bonds for a typical allocation. For example, rather than 60/40 with 60% in stocks and 40% in bonds, our objective would be to shift the allocation to a higher percentage in stocks and a lower percentage in bonds.

The trick is, can we make that shift in a risk-neutral way? We believe hedges are needed to accomplish this.

Hedges cost us to hold them but provide us with a known correlation to stocks. That known correlation is negative, meaning hedges go up when stocks go down… we don’t have to hope for it, it’s just the math of a hedge.

Hedges allow us to prepare for the right tail because our allocations are more exposed to stocks. Hedges allow us to prepare for the left tail because if our additional stock exposure goes down in price, that’s the exact environment that our hedges pay off the most (I’m trying not to use the word convexity).

Higher compounded returns, that’s the objective. Compounding happens in the tails. Our strategies and portfolios are designed to make allocations ‘better in the tails’.

Closing

In investing, the most important decision is asset allocation.

More stocks, less bonds, risk neutral.

We believe in 10 years, stocks will be higher. We believe over that time frame, bonds are not safe.

Our allocations need to reflect that conviction, and that conviction will not be impacted by the outcome of the election.

As always, thank you for your trust.

Disclosures

The post Portfolio Reminder: Election 2024 appeared first on Aptus Capital Advisors.

Are You Appropriately Positioned?

JD Gardner — Wed, 02 Oct 2024 21:37:08 +0000

The Fed cut 50bps in September and expects more rate cuts to come. They are not alone as central banks around the world are cutting rates. September saw the most rate cuts since 2020.

JL digs further into the Fed’s positioning in a great post last week: The Fed’s Recalibration.

With two full percentage points rates expected from the Fed by the end of 2025, what could a pickup in global liquidity mean for investors?

I know there are different angles and counters to this perspective, but the reality in rising liquidity (cheaper money and expanding money supply) is the destruction in value of currency. Don’t believe me?

What a Difference 4 Years Makes

This caught my attention, from Bankrate as of January 2024:

A combination of high mortgage rates, rising home prices and low housing inventory over the last two years is pushing homeownership further out of reach for would-be homeowners, especially first-timers. To afford a median-priced home of $402,343, Americans need an annual income of $110,871, according to a new Bankrate analysis. That’s nearly a 50 percent increase in just the last four years.

Just a bit higher than government inflation estimates…seems like shelter is a key piece of many family budgets?

Beating the Same Drum

These posts will take less than 10 minutes collectively to read; please revisit these:

Winning Within the System

What Matters

Taxation by Inflation

With our debt load and our deficit spend, I believe we are on the verge of money creation that dwarfs things of the past. As I’ve said…we either have a debt crisis in the future or a money printer that turns on.

Which do you think is more likely?

There’s no doom and gloom in this note, just the recognition that the real risk investors face isn’t drawdown but protecting the purchasing power of their wealth.

Our solution is and will continue to be… convexity. Portfolios should own hedges that provide convex payoffs that do 2 things:

Allows for a known correlation that helps protect against drawdown
Provides the ability to onboard more equity risk…confidently because of #1

Closing

More stocks, less bonds. We will continue to build solutions and portfolios to deliver on this message. In my opinion, we are providing a path out of the traditional mindset of what is safe and how can I accomplish safety.

We believe our deficit spend is a decent gauge of a hurdle rate (6-8% annually) your clients’ money needs to eclipse to preserve and hopefully improve financial position. If stocks, bonds, or cash are my allocation decisions…I know which one gives us the best chance.

We want to be the premier options-based provider and our numbers, growing track record, and innovation in the space are helping the cause.

As always, thank you for your trust.

Disclosures

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How Do You Define Safe?

JD Gardner — Wed, 04 Sep 2024 21:45:00 +0000

Brian wrote a post last week that’s relevant to this month’s writeup. It’s worth a few minutes of your time as it provides perspective around how you should think about investing your hard earned money: The Lost Century in Bonds.

Volatility is not risk, and the appearance of stability does not define safety. True risk is far more sinister as it uses the comfort of stability today to rob your future purchasing power.

This realization is what matters most, as an awareness of this impacts how you think about the almighty investment decision – asset allocation.

Your risk-free asset has far more risk than you’d care to know. That’s what we want people to understand.

“I’m being safe…I have an investment with guaranteed payments, or a CD, or a Treasury bond, etc”.

You’re not being safe. You’re being robbed.

Nominal vs Real

I can’t make up the timing of this email; it was just received as I started typing this section:

“Kindly find enclosed invoice…

Unfortunately, inflation also hits our business. To make the impact as minimal as possible to you, we decided to pass on only 6.5% for the 2023 fees. We do hope for your understanding of the slight price increase.”

We will use this real-world price increase to drive home this point.

My nominal return was 0%. My real return was -6.5%.

The chart below shows how price levels are always increasing. In other words, the real value of your dollar is constantly dropping.

I have so many questions.

What’s the Hurdle?

Our government’s deficit spending (currently between 6-8%) is a better target for achieving real returns.

The point is, to achieve real returns—the kind that matters—you must own growth assets. I define growth assets simply: stocks. More stocks, less bonds.

Bonds: Not Good

Source: Aptus, Shiller as of 06.30.2024

Take 3 minutes and read that post!

But Don’t Stocks Have Drawdown Risk?

Yes, and big drawdowns at that.

They are painful behaviorally and create a volatility tax in the compounding of capital. Those are friction points we want to avoid.

Closing

More stocks, less bonds.

There’s a place for bonds. Don’t get me wrong. They can provide income and some clarity on future outcomes. But safe? I would agree with you that bonds are safe, but then we’d both be wrong.

Disclosures

The post How Do You Define Safe? appeared first on Aptus Capital Advisors.