James Yahoudy, Author at Aptus Capital Advisors

Why Invest?

James Yahoudy — Thu, 30 Nov 2023 16:49:53 +0000

Investing can be fun. Well, at least some days. Maybe a roller-coaster is a better description. The hardest part is finding a way to keep the train on the tracks by focusing on what matters. On one hand, we have the fear of losing money, driving people to be conservative, and on the other, greed can give investors an outsized risk they didn’t need to take on.

Investing behavior is rooted far beyond the surface of each person. We all come from different backgrounds, raised by different people, and have lived through our own distinct time periods. All these things and more factor into how we invest.

At the annual small talk family finance summit or what other people might call Thanksgiving; I was reminded of the challenging behavior gap we all face as we invest. In one corner, an uncle is talking about how things are about to crash. He spoke about how the national debt is going to capsize us. All his savings are in CDs. Later, outside, I spoke to another uncle, discussing blockchain and Ethereum investing. He had zero worries about our government or the most recent geopolitical issue; he was more focused on the momentum of crypto.

These two people grew up in the same household and are within 5 years of age, yet have completely different ideas in how they should invest. The point being that investing is very personal. Taking a step back to understand “the why” behind your investment, can hopefully drive how you invest.

Simplifying The Why

Consider the idea of training for a marathon. Prior to the race, you will need to start training 18 weeks in advance. Each week, you have a mix of different runs and a defined plan to ramp up to about 50 miles per week through 3-5 runs. Once you get to that point, which takes time and consistency, you are closing in on running 26.2 miles.

It is very hard to determine how to train for a marathon without understanding how many miles you need to run and the date you will run them. Even with that knowledge, running 26 miles is not easy. Goals-based training is the same as goals-based investing. Understand what the money is intended for, invest accordingly, try your best to consistently work toward that goal, and make tweaks based on your progress.

Managing Risk

“The biggest risk is always what no one sees coming, because if no one sees it coming, no one’s prepared for it; and if no one’s prepared for it, its damage will be amplified when it arrives.”

– Morgan Housel

While there will always be surprises, we want to prepare as best as we can for the unexpected. When big events move the markets, many investors have an instinctual urge to change their risk appetite. The problem is that big changes could significantly impact your long-term outcome. We have a saying that the best way to generate alpha is by mitigating risk. So, the first step to thinking about risk is understanding which factors we can control and which we cannot.

For example, while we know there will be big moves in markets, we cannot predict when catalysts for that change will take place. Managing risk by attempting to time the market can significantly impact how you compound capital. Missing out on positive days by being “risk-off” is a good way to introduce another risk to the equation: longevity risk.

Source: Aptus data as of 9/30/2023

When you exit the market, you may miss some of the downturn (if you get that timing right), but with that, you have the potential to add other risks. By spending less time in the markets you’re increasing your probability of negative returns. As shown below, the more time you spend in markets the lower the probability you have that your returns are negative in the long run.

Source: Aptus data as of 9/30/2023

In our view, investors also tend to focus too much on the short-term “noise” in the market. There is usually a great deal of variability in the day-to-day, with different economic, geopolitical, and company-specific news constantly moving markets. Instead, focus on the end goal and getting a structure in place that gives you the best chances for success.

The right structure helps you avoid making big moves that may expose you to either missing out on those best days of the year or letting your emotions of short-term noise drive your long-term investing plan.

In my first marathon, I had a little too much enthusiasm. The first-half pace was almost twice as fast as the second-half. With that, I barely finished and had to make friends with the folks in the medical tent afterward. Don’t make that rookie mistake that will deter you from hitting your goals or, in my case, barely making it on life support.

When making changes to your risk, do your best to pace yourself and avoid letting over or underwhelming enthusiasm change your behavior. That behavior can easily lead to an inconsistent risk profile and, eventually, a bad outcome.

Team Over Players

As you start to ponder how you put together your investing and related risk plan, it is important to use every resource you can. As said much better in our Team Over Players post from a few years ago, it takes a cohesive group with different skill sets that complement each other to win championships.

The resources a financial advisor has at their fingertips can be the difference-maker to staying on track with your investment plan. That guidance can be the key to avoiding emotions getting in the way of long-term goals.

The seminal 1986 study by Brinson, Hood, and Beebower showed that asset allocation decisions were responsible for 91.1% of a diversified portfolio’s return pattern over time.

If I am building a house, I want expertise in electrical, plumbing, and framing to help build a proper structure. Your team to maintain a sound structure as you invest is just as important.

In Summary

There will be setbacks. The longer your time horizon, the easier it is to handle said setbacks. Avoid water cooler or Thanksgiving chatter to uproot your investing plan. Also, remember there are no shortcuts to running a marathon.

Your risk appetite will evolve over an investing cycle, just as your goals do. Your long-term goals cannot be achieved overnight; take the small wins where you can, and how you invest will be clearer each day.

In honor of the great Charlie Munger, Let’s end with a quote from him who says it best:

“Its so simple to spend less than you earn. Invest shrewdly. Avoid toxic people and toxic activities. Try to keep learning all your life. Do a lot of deferred gratification because you prefer life that way. And if you do all those things you will almost certainly succeed. And if you don’t… You are going to need a lot of luck. And you don’t want to need a lot of luck. You want to go into a game without any unusual luck.”

Disclosures

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-2311-20.

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The Never-Ending Balancing Act

James Yahoudy — Tue, 11 Jul 2023 19:44:58 +0000

There is a constant pirouette of working, saving, and spending throughout our lives. Regardless of your career and net worth, we all attempt to elegantly balance our budget to achieve our lifestyle and savings goals.

As illustrated below, the amount of spending since COVID has risen significantly. Spending at the household level as we all know fluctuates continuously. Yet, the balancing act in this environment is only getting more intricate, and it prompts a conversation about our own financial health and what we should be cautious of as our spending changes.

Source: The Federal Reserve as of 06.30.2023

What is Causing Us to Spend More?

A large part of the increased spending is that things are just more expensive. Inflation has been persistent here as of late and could remain elevated for multiple years. Fed Chairman Jerome Powell stated recently that the 2% target is not realistic until 2025.

Wages have also taken off during this period, which has helped offset the inflated prices.

Whether your income or spending has increased more is the million-dollar question. If the two are increasing lockstep, it may feel like you have a higher status in society, but you most likely will have a similar outcome. We all could take a lesson or two from Warren Buffett. A billionaire, who has lived in the same house since 1958 well before he amassed his fortune. We understand this is far from reality for most and even me, but the bottom line is more income leads to more spending.

Year Over Year Net Worth Changes

Although net worth remains strong relative to history, the change over the past year brings questions. This chart shows a steep decline in the year over year consumer net worth, the biggest decline in over 30 years.

There indeed was a significant increase in savings during the accommodative environment post-COVID from both fiscal and monetary policy. Also, things were closed, and it was hard to spend. So naturally the drop in net worth makes sense from where we came from. The main point is that you could be the exception to this trend if you start now. There is no better time than the present to start or refresh your balancing act.

Think Nutcracker and Not Stanky Leg

It is very easy to dwell on past personal financial mistakes. I may have made a few on the dance floor over the years, but I still get out there. Managing your budget is not easy, so don’t beat yourself up if you have seen your savings depleted over the past year.

With that said we are in a higher rate environment with inflated prices, so tread lightly going forward. An example of that is to look at the median income vs. median house payment. In 2020, 27.5% of our income was spent on housing, at the end of 2022 that number was 40.9%. The difference one purchase can make on your ability to spend elsewhere or save here is elevated given this environment.

Source: Charlie Bilello as of December 2022

John Bogle founder of Vanguard delivered this story at a commencement speech for Georgetown University in 2007:

At a party given by a billionaire on Shelter Island, the late Kurt Vonnegut informs his pal, the author Joseph Heller, that their host, a hedge fund manager, had made more money in a single day than Heller had earned from his wildly popular novel Catch 22 over its whole history. Heller responds, “Yes, but I have something he will never have… Enough.”

The ability to enjoy your life, be prudent, and at the end of the day be comfortable is a never-ending balance. Ultimately, it is important to understand this environment is unlike what many of us have seen or vividly remember. Yet, if your goal post continues to move with your spending, the environment doesn’t matter.

There is not a one size fits all solution to finding your happy place where you can say you have “enough.” Most investment objectives are based on life goals and not benchmarks. With that being said, we think savings should not be positioned in a way that puts lifestyle at risk. Small steps can go a long way. Take those steps, do everything you can to avoid that one purchase that could derail you from what’s important. Take the extra time to find a way to elegantly find that equilibrium while life spins around you. It should lead to consistent compounding of your net worth that you can be proud of.

Disclosures

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Aptus 2023 Halftime Report

James Yahoudy — Thu, 29 Jun 2023 12:00:04 +0000

As we hit the halfway point in the year, investors remain on edge given recessionary worries, persistent inflation, and a slowdown in growth.

Yet, we continue to see leadership in markets driving us into the 11th best start to the year for the S&P since 1928 (as of 6/15/23). Let’s digest what we have seen YTD, topics covered include:

– Inflation to Growth Frustration
– Outlook for rates – Is it time to take on duration?
– The Good, Bad, the Ugly
– Asset Allocation Commentary

Panelists include:

David Wagner III, CFA

John Luke Tyner, CFA

James Yahoudy, CFP®

To review the slides from our presentation please follow this link

Disclosure

The opinions expressed during this Webinar are those of the Aptus Capital Advisors Investment Committee and are subject to change without notice. This material is not financial advice or an offer to sell any product. Forward-looking statements are not guaranteed. Aptus reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs. More information about Aptus investment advisory services can be found in its Form ADV Part 2, which is available upon request.

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Paying Taxes Isn’t Always Bad

James Yahoudy — Tue, 18 Apr 2023 13:28:51 +0000

As we put a wrap on another tax season, can we reflect? Savings and retirement Income planning, which are really at the core of every financial plan, tend to always have taxation as the common consideration.

We naturally want to pay the minimal amount of taxes today. As our income increases, the amount we pay in taxes becomes more and more apparent and for most, painful. Especially as you start to understand where our tax dollars are going or nowhere to be found in the case of the defense department.

Source: US Treasury Monthly Report as of March 2023

Regardless of where your values lie in government decisions, taxes are a certainty in life. Death and Taxes as they say. The strategic decisions you make on the tax side make more and more of an impact to your long-term plan as your net worth and income increase.

Today, let’s discuss a few strategic tax considerations that we believe will make an impact to your ability to compound over the long run.

Property Taxes

Although property taxes vary state by state, they typically are a big tax bill each year. If you have kept up with your county appraisals over the last few years, the appraised or taxed value has skyrocketed given the moves in real estate. Regardless how great it might feel to have the government tell you your property is worth way more than you paid, please do not just settle with their conclusion. Protest it. They may ask you to come in and make a case, but occasionally everything is handled online.

Another consideration is paying your property taxes for two years in one calendar year. Usually you have between December and February to pay your property tax bill. Given that most people lean on the standard deduction when filing taxes, there may be a chance to itemize if you pay your property taxes in the same calendar year.

Capital Gains/Losses

If you have a taxable brokerage account, you are probably familiar with dividends and other transactions which each year impact your taxes. Given the recent volatility in markets, harvesting losses can help reduce your tax liability. Although you are limited to $3,000 per year, if you had a larger loss, those dollars can carry over to the next tax year. Be aware of the wash rule when taking any losses, you must avoid repurchasing an equivalent security for 30 days.

As painful as it may be, taking gains is not a bad thing either. Minimizing tax liability is one thing, managing your risk to align with your plan is important too. Do your best to not let taxes be the ultimate decider if you sell a security. It is better to pay taxes on gains than just lose your money. Although your profit is less, you actual win in this scenario.

Roth vs. Traditional

A common consideration we run into is saving in Roth vehicles such as Roth IRA or Roth 401k vs. traditional IRA or 401k. One gives the ability to reduce taxes paid today as it would be a deduction and the other (Roth) you pay taxes today to avoid taxes on gains later.

Source: Hills Bank March 2023

Both a Roth and Traditional are tax deferred, meaning no taxes on gains/losses as you accumulate. You receive a deduction today if you contribute to Traditional IRAs or 401ks. No deduction with your Roth. The big difference is when you retire, Roth funds are tax free (contributions and any gains) while traditional vehicles are fully taxed at ordinary income.

This may not seem like a big difference on the surface, in both scenarios you pay taxes on your income. There is no way around that. If you contribute 100k and that money compounds at 7% over a 30-year period with no additional contributions, your ending balance is $761,225.50. This return stream is not reality, but bear with me. You have ~660k in gains. In your traditional accounts the full amount will be taxed. Roth IRA you pay taxes on the 100k today and nothing more.

The impact of paying taxes today can ultimately be the biggest trick to compound capital and give your plan the flexibility it needs. If you exceed the limits to contribute to a Roth IRA, your employer may have a Roth 401k option, or you could consider a backdoor Roth conversion. Ultimately the time you have to accumulate matters in addition to your income bracket now vs. what is anticipated for retirement. The more time you have, the more favorable the Roth can be for your tax management.

Conclusion

Think of taxes as debt on your balance sheet. Whether it is in the calendar year and you understand there will be taxes owed when you file or longer term when you retire. A prudent investor looks for a strong balance sheet when investing in a company. The same principles can translate to your personal balance sheet. Traditional debt management obviously is important, but a future tax liability matters as well.

We didn’t cover everything on taxes today, this is more what we commonly see as opportunities. At the end of the day taxes are no fun, even for accountants. They are here and will unfortunately always be a part of our lives. Control what you can and although it pains me to say it – paying taxes isn’t always bad. Especially if it helps with reducing longer term debts you can avoid.

Disclosures

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It’s Time to Move Cash Out of The Bank

James Yahoudy — Wed, 22 Feb 2023 16:48:23 +0000

Pulling up to the bank in a gold Cadillac with my grandad when I was 7, I was excited. The chance to open my first bank account and make my first deposit. Not sure if it was the smell of fresh money or the idea of the account having my name on it, but it was a fun experience for me. I had zero idea what interest on a savings account was then. I probably asked the same question 5 times on why my $100 was $104 after not making any deposits. Honestly, the reason why didn’t matter, that $4 was free money to me, and I understood the more I had in the account, the more it would grow.

Although my $100 didn’t grow to make me a millionaire by age 20, it instilled the fundamental principle of saving, and later, I would understand that savings + interest is the value of compounding capital.

Regardless of the economic environment, the same principles I grew up to learn at a young age, should be part of the fundamental backdrop of building a strong financial plan. And today, after multiple decades of little risk-free interest to be found, we finally have yield thanks to our friends at the Fed. Also, thanks to inflation, technically.

Encouraging our clients to take advantage of this new interest rate environment should be very high on the priority list in 2023 client meetings. This can be done in a variety of ways: embracing yield within your portfolio construction, encouraging high yield savings accounts, and even building a custom cash alternative for clients. Large balances in checking accounts should be a thing of the past.

According to the Federal Deposit Insurance Corporation, the average traditional savings account as of January 31st, 2023 is yielding 0.33%. Let’s compare that to the average money market rate of 4.14%. In as little as 1 year, look at the opportunity cost for your clients:

Source (left): FDIC as of 01.31.2023 and Source (right): Charles Schwab as of 01.31.2023

It is probably safe to say most clients do not have a million dollars sitting on the sideline in a checking account. If they do or if it’s a number north of 3-6 months of their annual income, they most likely are saving for a short-term purchase, have excess cash from business operations, or are simply paranoid about the stock market. If the money will be used next month or next year, don’t let clients miss out on earning interest on these funds.

Designing the right cash alternative is very specific to the client and advisor. The timeline and risk associated with each may be different. The spread between what a client can get at a traditional bank and your solution is what matters. Based on rates today, a T-Bill ladder with an 8-month average life would yield 4.63%:

Source: Bloomberg as of 01.31.2023

We have introduced the Aptus enhanced income strategy to compliment your money market and T-bill portfolio to increase that spread between what a client can get through their respective bank and potentially through you the advisor.

The overall portfolio is showing a 5.91% yield as of January 31st, 2023. There are certainly other ways to design the client’s portfolio here, possibly opportunities to utilize Munis for tax free income as well. The goal is simply to illustrate that shorter term cash on the sidelines should be put to work in some fashion as who knows how long this rate environment will last.

*As of 01.31.2023

Conceptual Illustration
Information presented above is for illustrative purposes only and should not be interpreted as actual performance of any investor’s account. These figures are entirely assumed to illustrate the concept of hedging during an assumed 10% drawdown in equities. 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.

Disclosures

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2022 … A Test For Retirees & Sequence Risk

James Yahoudy — Mon, 09 Jan 2023 06:42:44 +0000

It’s now time to put a wrap on the year to do some reflecting and planning. At this point last year, your sentiment on your portfolio and maybe even the economy was likely in a totally different place. Simply said, 2022 was painful, almost regardless of your risk tolerance. 2022 was the worst year for the 60/40 portfolio since 1937. Consider the comparison of this past year to the Great Depression and it gives us all a nice reality check.

The reality of this abysmal year has most likely set in for one’s investment and withdrawal plan. Down years hurt every investor but are much more impactful for early retirees. Simply put, your timeline is the longest at this age and your resources are fixed. As we have discussed in prior pieces, early losses hurt much more than losses later in retirement, let’s look at an example:

Conceptual Illustration: Information presented above is for illustrative purposes only and should not be interpreted as actual performance of any investor’s account. These figures assume income at 50k inflated at 2% each year. 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.

The only factor we change from the above is the return stream is reversed. Basically, the losses are taken the last 3 years as opposed to the first 3 years:

Keep in mind the return numbers are the same, just moved to different years. The ending balance is almost 100k different which equates to 10% of the initial balance between the two scenarios. Your income was the same, your assets not so much. We cannot depend on average returns to drive our retirement success. The compounded annual growth rate year-over-year and the sequence of returns’ impact on your income is what matters.

It can be overwhelming to see a negative year like 2022, with negative returns in both stocks and bonds, inflation at historic highs, and then sit down to decide where to go from here. You are either currently on a limited income today as a retiree or plan to be soon and each decision you make can be inflated in the early retirement years.

First, I will say the challenge you are facing is not uncommon. Please do not hit the panic button. Let’s look at how the moves in markets this year may impact your return drivers going forward, then focus on considerations that are within your control that can be impactful to your plan.

Changes In Interest Rates

If you didn’t know before this year, I would bet you know now. The Federal Reserve has a very important role with interest rates. Their mandate is to maximize sustainable employment and maintain price stability. This year they have been working to slow down demand by raising rates, with the hope to stabilize prices.

At the beginning of the year, the Fed Funds rate was targeted at 0-.25%. Fast forward to December of 2022, after 17 rate hikes, the Fed Funds rate currently sits at 4.25%-4.5%.

The yield on the 10-year U.S. Treasury note—which influences everything from mortgage rates to student debt—climbed to 3.826%, from 1.496% at the end of 2021.

There are two sides to the equation as rates move higher. The first being your portfolios (even risk-free savings) have opportunity to generate more return from yield. Savings accounts coming into 2021 were under 1%, and as of January 2023, you can find rates in the 3.3-3.5% range.

On the other side of the equation, affordability of taking on debt for business owners and future homeowners is much different. The number of Americans who can afford a 400k mortgage has almost been cut in half as rates have risen.

Although being a retiree doesn’t preclude you from higher mortgage rates, we find safer growth or income as a more common need. Tighter monetary policy could slow down growth and in turn hurt the economy and your portfolios into 2023. With that said, at least we can now manage with a known quantity of yield and continue to keep a close eye on growth for your longer-term assets. The move in rates in 2022 will finally give savers the ability to earn a more favorable yield going forward than they have the past decade.

Return Expectations

The yield to maturity on a fixed income vehicle is very useful to understand the return outlook. As mentioned early, we believe markedly improved from a year ago. Now that valuations have compressed in 2022, is it fair to assume the return outlook for all asset classes is more favorable? Shorter-term, we think the question is much harder to answer, here is the difference in Morningstar’s long-term outlook:

Source: Morningstar

Over long periods of time, valuations do matter. In fact, valuations explain ~80% of subsequent 10YR returns for the S&P 500. In our view, this year’s bear market provides an attractive opportunity for asset growth of long-term investors. As illustrated below in just a year’s time, we have seen a significant reversion in valuations, which we believe will play an important role in the long-term return outlook.

Source JP Morgan as of Dec 31, 2022

Our investment team does a great job simplifying where portfolio returns come from: Yield + Growth +/- Valuation Change. To this point, historically, yield has contributed roughly 36% of total return of the S&P 500. Yet, in the 2010s, it only contributed 14%. We believe yield will be a much stronger contributor to performance in the near term for both your stock and bond allocation.

Looking Forward: Asset Allocation

You now see the silver lining of a painful year as you look through the windshield in how you manage your future sequence risk. At this point, we are not making a huge bet that we are through the pain in markets. We don’t think as an investor you need to either. Attempting to time the market to manage sequence risk could very easily do more harm than good.

The traditional way to manage risk is to increase your bond exposure. As 2022 illustrated, the correlation between stocks and bonds is not always negative. In addition to bonds, we incorporate the ownership of volatility to manage risk and allow portfolios to stay invested. By owning a small allocation of volatility which has the potential for asymmetric payoff, we can remain invested and not add timing risk as we look to mitigate drawdown risk.

Like any asset management firm, we have our thoughts on both short-term and long-term return drivers. The known in any environment is the yield. Today, after a decade of abysmal yield, your shorter-term retirement bucket can now lean on this side of the return picture. There is no need to take growth bets for your shorter-term income needs in this environment. Take what the market is giving you.

We lean on yield through the traditional mechanisms of stock dividends and bond interest, but we add a third income producer of selling volatility. As we look at portfolio positioning going forward for retirees, we think using options for income is a much better mechanism than taking on credit or rate risk to drive yield.

Looking Forward: Flexible Withdrawal Plan

After re-evaluating your short term (next 5 years) bucket and related asset allocation, consider the number of years you have remaining in your retirement plan. The longer your time horizon the more you will need to be aware of your future sequence risk. In just one year’s time, you can see how the data for future success changes. As both market returns and expectations change, your income plan should adapt as well.

30-Year Starting Safe Withdrawal % by Equity Allocation, 2021 vs. 2022, 90% Success Rate

Morningstar’s 2022 State of Retirement Income Research suggest a 50/50 portfolio starting withdrawal rate of 3.8% over a 30-year time horizon as safe. 2021 their research identified this number as 3.3%. For additional context with that same 50/50 portfolio during periods from 1930 thru 2019 the “safe” withdrawal rate for the worst 30-year period was 3.7% and 6.0% for the best. Historically speaking, we are not in an overly optimistic timeframe as we incorporate Morningstar’s expected future returns, but we are better than at the start of 2022.

Your asset allocation, the market environment that prevails during retirement income period, and the length of retirement all are drivers in determining the “right” withdrawal rate. David Dredge of Convex Strategies recently said: “It’s not predicting what you think you know. It’s constructing resilience in what you can’t know.” Understanding the data for both your withdrawal rate and asset allocation is critical and we believe the resilience is created by carefully monitoring and adjusting as your environment changes.

Summary

Although 2022 has been anything but rosy, we do believe the long-term return picture is much more optimistic. Return drivers for portfolios include yield, growth, and valuations changing. One element of sequence risk that can cause additional harm to your plan is the need to sell assets at depressed values in order to generate your needed withdrawal. Considering the new interest rate regime we are in today, embracing yield to drive returns, especially within your shorter term bucket, will be key to avoiding this.

As your time horizon expands for life in retirement, how you manage sequence risk becomes much more important. Avoid attempting to time the market as the results could put more pressure on your plan. The advantage of owning volatility as an asset class is that it gives investors the opportunity to make choices yet minimize regret and mistakes from market timing.

There is a silver lining to an extremely painful year as you position for retirement. A quote from Howard Marks that especially applies to sequence of returns risk: “Successful investing requires thoughtful attention to many separate aspects, all at the same time. Omit any one and the result is likely to be less than satisfactory.” As you adapt to negative portfolio returns, higher than expected inflation, or whatever is in store during your retirement, remember this quote. It may not be an easy path but keep a close eye on all the moving factors and be willing to adjust. We believe this will give your retirement plan the ability to battle sequence risk with much more resilience.

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. The opinions expressed are those of Aptus Capital Advisors, LLC. The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass. Forward looking statements cannot be guaranteed.

The S&P 500® Index is the Standard & Poor’s Composite Index and is widely regarded as a single gauge of large cap U.S. equities. It is market cap weighted and includes 500 leading companies, capturing approximately 80% coverage of available market capitalization.

©2022 Morningstar, Inc. All Rights Reserved. Information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information.

Information contained herein has been sourced from Morningstar Direct. While this information is thought to be reliable, Aptus Capital Advisors, LLC does not guarantee its accuracy and assumes no responsibility or liability for its use.

The content and/or when a page is marked “Advisor Use Only” or “For Institutional Use”, the content is only intended for financial advisors, consultants, or existing and prospective institutional investors of Aptus. These materials have not been written or approved for a retail audience or use in mind and should not be distributed to retail investors. Any distribution to retail investors by a registered investment adviser may violate the new Marketing Rule under the Investment Advisers Act. If you choose to utilize or cite material, we recommend the citation be presented in context, with similar footnotes in the material and appropriate sourcing to Aptus and/or any other author or source references. This is notwithstanding any considerations or customizations with regards to your operations, based on your own compliance process, and compliance review with the marketing rule effective November 4, 2022.

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Should You Care About Inflation?

James Yahoudy — Thu, 28 Jul 2022 20:22:03 +0000

As we see another fed fund’s hike of 75bps this week, we thought it would be worthwhile to simply talk about the basics of inflation. It is very easy to get caught in the storm of negative headlines. Today, let’s just get back to the basics and try to focus on factors within our control to support your goals.

What is inflation?

Inflation is a rise in the overall level of prices for goods and services consumed by households. The different areas of inflation are typically what matter most to you the consumer, as each family consumes and spends in different ways. As we sit today, the headline consumer price index or CPI increased 9.1% from the prior year in June of 2022. The CPI is the broad measure of goods and services related to cost of living. If you exclude food and energy, also known as core CPI, the number rose 5.9%.

Source: compoundadvisors.com as of June 2022

Although 9% seems scary on paper, it is important to understand where the increase in prices is coming from as illustrated above. During a “normal” environment we all understand that price change is part of our life. As a general rule, when the economy is healthy, a moderate lower single digit inflation rate is to be expected. Don’t think of inflation in terms of higher prices for just one item or service. Inflation refers to the broad increase in prices across a full sector or industry such as energy.

Historically speaking, the inflation rate in the U.S. has averaged 3.22% per year over the past 100 years. Prices surged after World War II ended. In 1947 inflation jumped over 20%. In the 1970s, the United States experienced its longest stretch of heightened inflation because of two surges in oil prices. On the other hand, we have experienced deflation in the wake of the Great depression and the 2008-2009 financial crisis.

What causes inflation?

A supply and demand imbalance would be the most succinct way to describe the cause. To break it down in more detail, there are two main drivers of inflation:

Demand-Pull Effect: When there is an increase in the supply of credit and money, this in turn stimulates the overall demand for goods and services. If that demand increases more than the economy’s production capacity, demand exceeds supply which leads to higher prices. In layman’s terms: a shift in demand where supply cannot catch up.

Cost-Push Effect: This occurs when production costs increase for certain goods and the producers pass any increased costs to the consumers. So, to the contrary of demand-pull, cost-push inflation is determined by supply side factors. Causes would include rising oil prices, wages, taxes, imports, & food. In 1973 OPEC restricted production, which then caused oil prices to jump up 400%. This then caused industries who were oil dependent to see massive increases in production costs.

Why should you care?

The principal of your hard-earned money not functioning as best as it can is a tough pill to swallow. The million dollars you needed as your retirement bucket in 10 years, now needs to be 1.2million. Or your goal of buying a mountain house seems harder to achieve as home prices have moved so much higher. Well-attuned investors understand that in order to meet their goals, they must consider inflation’s impact on their plan.

As much as I want to talk about politics and what is right for the economy like Carl at the water cooler – that doesn’t matter. Inflation is systemic and completely outside of our control. The national headline numbers are not as important as what costs are changing the most in your world. Personal spending changes should be much more of your concern here.

Back to the basics

First, the cash flow in your household becomes much more important. Christine Benz of Morningstar created a simple tool to calculate your household CPI, which is certainly a good starting place. When it comes down to it, cash flow or budget planning in an inflationary environment is more important than ever. Keep a close eye on spending. Possibly the discretionary bucket of your budget is where you are seeing the biggest cost increase? How has your savings plan been impacted from the increases in costs?

After you have confidence in your spending/savings plan, this is where investing matters. Finding opportunities for your savings to contribute to both your short-term and long-term goals. Balancing the right risk with your expected returns to allow stocks, bonds, real estate, and whatever asset that is appropriate for you to contribute to your wealth building. The same way a negative rate (inflation) can deplete your dollar, a positive rate that is compounded over time can help fight that increased cost.

Source: US News July 2018. Disclosure: Neither past actual nor hypothetical performance guarantees future results

Sometimes going back to the principals of what we are all trying to accomplish is well suited as we navigate the negative news and inflation talk. The above graph illustrates the result of saving $200 that is earning 7% in annual return. In year 11, you can see the interest outweighs the contribution. The beauty of compounding returns… The power of the dollar saved today, even as costs increase, can never be discounted.

It Pays to Remain Invested

Given the macro headwinds, finding a path to positive returns in the short term this year has been almost impossible. Increases in cost of living hurt your bottom line. Your portfolio drawing down paired with that hurts even more. There is no way to sugar coat this. It is just as painful for us as financial planners as it is for you. There may be a myriad of reasons for not staying invested. We believe time in the market is much more important than timing the market. To prove this – just look at the chart below depicting returns, excluding some of the best days in the market:

It is impossible to predict market swings and the longevity of inflation. However, you can manage risk and your budget regardless of being in your accumulation years or retirement. Rely on your principals of diversifying your assets and emphasizing the importance of that extra dollar saved today. Getting back to the basics when you are facing a headwind should serve you well in today’s environment. Warren Buffet says it best, “the most important quality for an investor is temperament, not intellect.”

Disclosures

The visuals shown are for illustrative purposes only and do not guarantee success or a certain level of performance.

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A Plan Will Always Have Something Unexpected

James Yahoudy — Thu, 23 Jun 2022 15:11:26 +0000

A family member, a young boy yet to reach his 3rd birthday has inspired me and this piece. He went from a potential concussion to 3 weeks in the hospital, and today getting a lung deflated to remove a peach size mass. The resilience and strength that both him and his parents have shown is a simple reminder of what we are all capable of. There is now a path to full recovery, a chance to get back home.

To say this was all a bit unexpected would be an understatement. Sitting in the waiting room, scrolling through multiple pages of bills from different doctors, departments, and tests was already overwhelming. Once the family is through this marathon of getting back physically and emotionally, the stack of current and future invoices can very easily further complicate your situation.

I hope and pray that your family can avoid health scares from any children in your life. I am thankful for the care given and confident a normal healthy childhood is months away for him. Hug your kiddos a few extra times this week as I certainly will.

My catalyst to put some words on paper here is to mention we never know what life will bring, no matter how much we try to prepare ourselves. As fool proof as your plan is, you will have curve balls thrown your way. Your hurdles could be physical, emotional, financial or all the above. Author David Kekich notes that “Anxiety is caused by lack of control, organization, preparation, and action.” I understand there will always be life events that happen that are outside of our control that cause extra stress. Planning for unknowns is a strange concept, but in my opinion an important one. Today, let’s explore preparing your financial plan for the unexpected.

Risk Management

Insurance

Corporations do risk assessments and audits of their insurance programs on a regular basis. Individuals should do the same.

When is the last time you gathered all your insurance policies and got a refresher of what your coverage is and isn’t? Do you have an understanding what your deductible and out of pocket maximum is for your health insurance? Do you have personal injury protection or uninsured motorist coverage within your auto plan? What amount and type of life insurance is needed if you or your spouse were to have an unforeseen death? Do you have disability insurance and if so, what is your coverage? What benefits do you have through your employer in addition to what you have directly with insurance carriers?

This audit should include all of the above and more. The assessment will help you better understand two key items:

The amount of out of pocket you will have if an issue comes up
Potentially kick start evaluating if the cost and coverage is right for your family

Investment

Unexpected costs can come up in all different life stages, including retirement. So each of your savings buckets need to have the proper asset allocation that fits your specific goals. Understanding your risk and ensuring you are not taking on too much risk for any potential shorter-term needs is crucial to planning for the unexpected.

The thought of a recession happening again in our life is not a question of if, it is a question of when. History has shown we can survive economic and geopolitical turmoil. The question is how are you positioning your short-, mid-, and long-term buckets for success? Adapting your portfolios to both your individual circumstances and the market will help you manage risk and have the right resources available when you need it.

Saving

Emergency Fund

If you are new to creating a financial plan, you will quickly find out that everything is interconnected in some form. A budget may drive your travel plans, debt management may drive your cash flow, and so on… As you plan for the unknown and look to determine how much of an emergency bucket you might need, understand your out-of-pocket costs if your house floods. If you have health scare. Let that be the foundation of your emergency fund magic number.

Maybe you have the best insurance coverage out there and your cash bucket can be less, giving you the opportunity to invest your savings in longer term investments. The analysis of how much cash you need in an emergency bucket will be driven by your insurance coverage, number of dependents, job situation, other goals, and ultimately what makes you the most comfortable.

Saving to Save

The ability to use your short-term savings bucket for an unexpected expense to help your other goals stay on track is one way we can all prepare. If that preparation removed 1% of your anxiety about this unforeseen circumstance it is worth it. It may help you avoid derailing your debt management or allowing your lifestyle budget to stay in place. Being able to travel or eat out or whatever makes you happy will do nothing but help with the emotional side of any added stress.

The concept of saving to save is something that some people in my life would roll their eyes at (not naming names). The next level of any savings plan once you hit your emergency fund goal, have a balanced budget, payoff debt, allocate proper dollar amounts to retirement, education savings, etc. is simply save for no apparent reason. That money can be used for an unexpected cost or maybe it gives you the opportunity to start that business that you always dreamed about. Ultimately, just giving you flexibility. This concept is what differentiates the people who appear wealthy to the folks who are wealthy.

Final Thoughts

“Room for error lets you endure a range of potential outcomes, and endurance lets you stick around long enough to let the odds of benefiting from a low-probability outcome fall in your favor.”

– Morgan Housel, Psychology of Money

If you take a look at the past few years you can see the above quote come to life. A pandemic, astronomical stimulus and monetary policy in 2020 and 2021. To 2022 where we continue to see record inflation, a humanitarian crisis in Ukraine, and on pace for one of the worst years on record for the 60/40 portfolio. Build in room for error to help your plan stay intact.

Putting words on paper does not make my current situation easier. Nor should it sound like a resolution to anxiety driven from an unforeseen life event. Life is full of good and hopefully not many bad surprises. I have recently seen the strength of family coming together to do everything they can to support one another. You can never underestimate how resilient we can all be as we are facing a crisis. The truth is you can’t prepare for everything, and I understand that, but taking steps to better understand your risk and what you need to manage that risk will help.

Disclosures

The post A Plan Will Always Have Something Unexpected appeared first on Aptus Capital Advisors.

ETF Trends – Managing Risk & Volatility in an Inflationary Environment

James Yahoudy — Mon, 06 Jun 2022 19:37:58 +0000

Our Founder JD Gardner sat down to discuss managing risk in this inflationary environment with Todd Rosenbluth of ETF Trends and James Davolos Portfolio Manager at Horizon Kinetics. Enjoy!

Disclosure

The opinions expressed during this VettaFi ETF Trends Webinar are those of the Aptus Capital Advisors Investment Committee and are subject to change without notice. This material is not financial advice or an offer to sell any product. Forward-looking statements are not guaranteed. Aptus reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs. More information about Aptus investment advisory services can be found in its Form ADV Part 2, which is available upon request.

The post ETF Trends – Managing Risk & Volatility in an Inflationary Environment appeared first on Aptus Capital Advisors.

Strategies to Address Sequence of Returns Risk

James Yahoudy — Wed, 02 Mar 2022 22:45:17 +0000

“The most important job is to strike the appropriate balance between offense and defense” Howard Marks

We recently wrote a piece outlining sequence of returns risk and the impact it may have on a plan. Today, let’s talk more about the headwinds you have in managing that risk in today’s market and how you might think about addressing it. One note, there are two sides to planning for this risk: distribution planning and investment. In the spirit of avoiding a 10page article today we will stick to the investment portion.

Source: Aptus Research

*Assumes Recovery = 8% Net CAGR

There are a number of ways to reduce volatility . The most common and we think important way to manage risk is through asset allocation. Harry Markowitz research on portfolio selection dating back to 1952 discusses how a portfolios risk is not simply the sum of each individual component. It depends on how each of those components correlate and interact with each other.

Stocks and bonds provide appealing correlation differences. Yet in today’s market is it enough to manage risk and obtain sufficient returns?

Current Market Conditions

Source: Strategas Dec 2021

Price to earnings is typically only discussed in equity markets but can also be looked at from a bondholder’s perspective. By taking the bond’s par value, 100, and dividing it by the 10-year Treasury yield as of December 21’, you can gain some perspective on their elevated prices as well. We are now combining historically tight credit spreads, low interest rates, high valuations in both stocks and bonds, inflationary pressure with a less accommodative Fed. If the time this year in markets has taught us anything, I think it is safe to say conditions are much different than a year ago. Fixed income investors have continued to see similar income and return challenges since September 20^th, 2020 which was the most recent low point in yields (10-year was 0.5%).

Stocks can provide capital appreciation and dividends into our portfolios while historically bonds have provided income and stability. Moving forward, we are faced with an environment of elevated multiples on stocks and abysmally low interest rates on bonds. The market environment we are walking into is potentially VERY different from what we experienced the last 30-40 years where interest rates went from 15% to 0%.

Considering Market Volatility an Opportunity

“Risk isn’t what you think is going to happen, it’s what hurts if it does happen.” David Dredge, Convex Strategies

In our eyes the lifeblood of financial services is the $500k to $3 million family nearing or in retirement that will need to tap assets at some point. They need two things:

Sufficient growth
A return stream they can stomach.

How can we construct portfolios which find adequate return while keeping risk in line?

The most powerful lever we can pull to drive each of the above in today’s market, in our opinion, is altering allocations away from bonds. This may seem counterintuitive to the conversation of how to manage a sequence of negative returns, so stick with me here… Allocating to assets with correlation benefits is important but having 60% of your life savings in an asset class with minimal income today, a limited buoy based on the current rate environment, and no ability to grow just doesn’t make sense to us. If you could allocate less than 5% to an asset which we would argue has better correlation benefits and gives you the freedom to own more equites, would you consider it?

The good news about adding volatility as an asset class is that the natural convexity does not require a significant allocation for it to pay dividends to your clients. In other words, even having 2-3% in ownership of volatility can significantly impact the risk profile of your total portfolio.

Expected returns in a rising market will be negative for a traditional hedge, so the manner in which you use hedges to manage risk matters. The big point here is the potential asymmetric payoff when volatility spikes. Giving you an additional asset class to mitigate sequence risk while giving your clients the freedom to own more stocks to address any growth goals.

Boring Wins The Race

The gap between average and compounding return can be defined as the volatility tax. Our team looks to mitigate the volatility tax by owning volatility. That is an oxymoron, right? The more volatile a return stream is the greater that tax will be. This concept is extremely important for your clients planning for retirement.

Which portfolio would your client pick as they approach/enter retirement?

Portfolio B is the surprising leader in the clubhouse:

Andrew Lo and Stephen Forester’s recent book In The Pursuit Of The Perfect Portfolio includes profiles on some of the most prominent financial minds including Harry Markowitz, Jack Bogle, Bob Shiller, Bill Sharpe, and the list goes on. The authors after talking to so many important financial leaders describe “the perfect portfolio” as one that will adapt to both individual changes in circumstances as well as market conditions. These comments could not be more accurate in my mind as you plan for sequence risk with your clients in today’s market.

The idea of being willing to adapt to the different market cycles is a huge tool in your tool belt to help with achieving adequate returns while not taking on risk your clients cannot handle. The good news is our industry has come a long way for advisors to access options exposure for their clients without the need to trade individual options at the account level.

Challenge the norm in this environment. Allocating 50% to an asset class that is battling hurricane force winds is not the adaptation to markets that I think these prominent minds in finance would envision as being the perfect portfolio.

Disclosures

Advisory services 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-2202-33.

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