Tag: pandemic

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Inflation

Inflation: Why it’s So Destructive and Why the Fed Must Kill It

“While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses”

- Jerome Powell, August 26, 2022

Upon utterance of these words the equity markets promptly tanked ending the day with a cascade of selling and the S&P500 finished down over 3%. The selling continued over the next several days. Some have jokingly been referring to the Fed Chief as “President” Powell as the markets currently care little about anything else other than analyzing every word he utters for any hint as to whether theFed is dovish (lower interest rates) or hawkish (higher interest rates).

Well, after hearing the above quote, market participants deemed this to be hawkish, which means it was time to sell. News reporters seemed to think the markets were waiting for a sign from the Fed that they were going to back off the rate hikes they have indicated are coming. Why they would think that when inflation (CPI) is currently running 9% year over year is beyond me. We want the Fed to raise rates. Let me explain.

There is no greater drag on our collective financial futures than inflation. Even more than higher taxes or investment fees. Over the last 50 years (Aug 1972-Aug 2022), the S&P 500 has returned a nominal 10.5% CAGR (Compound Annual Growth Rate) with dividends reinvested. After adjusting for CPI, that figure drops to 6.3%. The difference in real dollar amounts is staggering. After 50 years, a $1,000 investment turned into $147,269. However, in purchasing power terms this only increased to $21,215!

The average CPI over this time period was very close to 4%. Think about what 9% would do to our hard-earned dollars over any extended period of time. I want the Fed to keep raising rates, even over 4%, if necessary. Monetary policy(Fed actions)got us into this(along with some fiscal stimulus) and now must get us out. If the Fed needs to induce a recession to get inflation down, so be it. The equity markets will likely recover, and we will be much better off in the long run with lower inflation. The S&P 500 is down 20% YTD as of this writing, what if the recession is already priced in? On the topic of interest rates, I’ve had a number of clients and friends inquiring about whether they should wait for mortgage rates (currently ~5.9%) to decrease before they buy. To be blunt, this makes little sense. As mortgage rates go higher, housing prices must come down (at least on a nationwide basis). The vast majority of homes are purchased with a mortgage, and there is an upper limit on the payments that households can afford. Always remember that the maximum mortgage amount a bank will lend you is based on the monthly payments and their relation to your income, not the home price or interest rates. For example,a $500,000house with 20% down requires a $400,000 mortgage. At 3%, P&I on this home is $1,686per month. At 6%, this jumps to $2,398/month, a 42% increase! To keep payments at the original $1,686/month, the maximum mortgage amount would drop to $281,200.Combined with the original $100,000 down payment, this suggests a home price of $381,200, a decline of over 20%!

I think this is very realistic, particularly in areas of the country with the highest appreciation over the last few years (think Texas, Florida, and Nevada). The bottom line is you are much better off with cheaper property at a higher interest rate than the other way around. You can always refinance later if rates come back down. If you find a house that you can afford and plan to live in for at least ten years, I wouldn’t be concerned about the interest rate but instead, focus on the purchase price.

 

 

Important Information:

Leading Edge Financial Planning LLC (“LEFP”) is a registered investment advisor. Advisory services are only offered to clients or prospective clients where LEFP and its representatives are properly licensed or exempt from licensure. For additional information, please visit our website at www.leadingedgeplanning.com.

The information provided is for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor's particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor.

The views expressed in this commentary are subject to change based on market and other conditions. These documents may contain certain statements that may be deemed forward looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur.

All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability, or completeness of, nor liability for, decisions based on such information, and it should not be relied on as such.

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Charlie Education

What Lies Ahead? The Top Ten Investing Principles for Getting Through the Next Market Downturn, Pandemic, Recession, etc.

What Lies Ahead?

Not even Hollywood writers could have created a story like we lived out in 2020. In this video, Charlie Mattingly and one of Leading Edge’s newest advisors, Rob Eklund, discuss what this year has taught us, how to better prepare in the future, and thoughts about the markets and economy going forward.   

Leading Edge financial advisor Rob Eklund, a First Officer for a major airline and a retired Air Force Pilot, review what investors can learn from mission planning in the Air Force and airlines.  For example, how can we be proactive instead of reactive? Many times, people may remark how pilots need quick reactions to be successful.  As Rob and I know, if you are frequently reacting as a pilot, it’s a good indication you did not plan sufficiently.  We believe it’s the same with investing and retirement planning.   

Although, it is to prepare prior to a recession or market downturn, there are many things we can do during the event itself. Vanguard posted the following graphic listing just a few of the value-added strategies that are critical to consider during any market decline.  

 

In addition to the checklist above from Vanguard, we believe there are ten essential principles to help all of us remained focused and less stressed during the next market downturn or recession.  

 

Embrace the efficiency of the markets in the long term.   

 

In the short term, the stock market reflects investor phycology (and many other unpredictable factors).  However, over time, equity prices tend to represent the future cash flows of a business.  We can all share in those future profits if we have the discipline to remain invested.

Don’t try to outguess the market. 

Although there is some debate within the finance community on the exact level of impact on investment returns, most will agree that strategic asset allocation and the amount of time in the market (not market timing) have the most considerable influence on investor returns.    

Resist chasing performance.  

Do not select investments based on past returns.  Funds that have outperformed in the past do not always persist as winners in the future.  Past performance alone provides little insight into a mutual fund or ETFs ability to outperform in the future.  

Let markets work for you.  

The financial markets have historically rewarded long-term investors.  We have the opportunity to earn an investment return that outpaces inflation by supplying capital to the companies we invest in. (I.e., stocks, mutual funds, exchange-traded funds) 

Consider the drivers of returns.  

Evidence shows that buying investments at a fair price (value factor), buying companies that demonstrate a consistent trend of profitability (profitability factor), and companies that tend to be smaller (small-cap premium) point to differences in expected future returns.   

Practice smart diversification.  

Diversification helps reduce risks that have no expected return.  Global diversification can prove beneficial over the long term while reducing the short-term volatility of a portfolio.   

Avoid market timing.  

You never know which market segments will outperform from year to year. Time in the market is much more profitable than attempting to time the market.   

Manage your emotions. 

It’s challenging to differentiate the short-term ups and downs of the market from the long-term returns needed to outpace inflation. In reality, the most significant risk we face is losing purchasing power over the long-term, during retirement, versus the risk of short-term losses in the market.   

Look beyond the headlines.  

There will ALWAYS be a news headline that could prevent you from investing in the stock market.  The news headlines will either attempt to scare you out of the markets or lure you into the latest investing trend.  Either strategy increases viewership, which in turn sells more commercials.   

Focus on what you can control.  

As we mentioned at the beginning of the article, just like pilots plan for their missions in great detail, we believe thorough planning is the best way to ensure a successful investing experience plus a fulfilling and prosperous retirement.   

Please don’t hesitate to call or email us anytime.  We’d love to hear from you! 

Charlie Mattingly

Charlie@leadingedgefinancialplanning.com 

865-240-2292 

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this video will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for your portfolio. Moreover, you should not assume that any information or any corresponding discussions serves as the receipt of, or as a substitute for, personalized investment advice from Leading Edge Financial Planning personnel. The opinions expressed are those of Leading Edge Financial Planning as of 12/18/2020 and are subject to change at any time due to the changes in market or economic conditions.

Categories
Charlie High Income Pilots Retirement Mistakes

Trust Your Instruments, Not Your Gut, When it Comes to Flying AND Investing!

​As a brand-new pilot, one of the first things you learn is how to mitigate the risk of the potentially deadly physiological phenomenon known as spatial disorientation or spatial-D. In pilot speak, spatial-D is when your body is telling you one thing and your flight instruments (and airplane) are telling you something completely different. Sadly, spatial-D has claimed the lives of many pilots.

In this video, one of our newest Leading Edge team members and previous Marine F/A-18 fighter pilot, Mark Covell discusses just one example of spatial-D.  Mark shares how carrier pilots tend to feel like they are pitching up as they are launched off the carrier at night due to the massive acceleration from the catapult. During daytime, VFR conditions this is probably a non-issue. However, in weather, or at night, this type of spatial-D is potentially deadly.

What does spatial-D have to do with investing and retirement planning? Personally, I feel like all of 2020 could be compared to being catapulted off a carrier at night and not knowing what is up or what is down.

During the heat of the battle from February until the markets settled a bit in early April, investor emotions were all over the place. Years of stock market gains evaporated in days, even hours. Furthermore, many people thought, and the news media quickly suggested we were headed for the second Great Depression. And don’t get me wrong, anything was (and is) possible. Sometimes, the unknown can be truly scary.

One slightly humorous example of investor spatial-D was early in the pandemic when the shares of ticker symbol ZOOM shot up due to investors buying up shares as quickly as possible. Zoom Technologies, a so-called penny stock had risen more than 240% in the span of a month before the SEC suspended trading. Unfortunately, the traders failed to realize the ticker symbol ZOOM did not represent the Cloud Video Conferencing company Zoom they thought they were purchasing – Ticker symbol ZM.

Here is the headline from MarketWatch.com dated February 27, 2020.

In the airplane, pilots must fight spatial-D by cross-checking and TRUSTING their instruments. If, as an investor, you did not trust your instruments during 2020, it may have been very costly.

So, it’s a dark night and the weather is terrible.  What are the instruments you trust?  What is your primary and backup instrument? Here are four instruments that I think can save your investments as well as your financial sanity during uncertain times…

1. Cash reserves – Emergency Funds.

    • Having extra cash can prevent withdrawals from retirement accounts or excessive credit card debt in emergencies.  Studies also show having cash in a bank account makes people happy. In an article posted on PYMNTS.com,  “Can Cash Really Make You Happier”, Joe Gladstone, research associate at the University of Cambridge in the U.K. and co-author of two recent studies about money and happiness said,

“We find a very interesting effect: that the amount of money you have in your bank account right now is a better predictor of happiness than your aggregate wealth,” Gladstone explained. “Having more money in their bank account makes people feel more financially secure, which leads to an increase in happiness.”

2. Have a working knowledge of financial history.

    • You don’t have to be an expert or financial historian, but I believe being familiar with financial history is akin to training before you go on a flying mission.  Pilots call this chair flying.  Athletes and musicians use a technique called visualization that helps them prepare for uncertainty and reduce anxiety for a sporting event or concert.

3. Admit that times are scary, and you do not know what’s going to happen.

    • This may sound silly, but I’ve seen many people get themselves into a “square corner” because they assumed that something was going to happen when in fact there was no indication or possible way of knowing what the future may hold.  We have heard investors say “my gut tells me…” many times.
      • Some of the best investors in the world invest with the mindset of preparing to be wrong. That’s why diversification is not popular or “sexy” because it’s like admitting you don’t know what’s going to happen in the future, so you must prepare for multiple scenarios.  However, diversification can feel disappointing but prove to be a profitable strategy over the long term.

BlackRock Investment Management Company posted the graphic below on their investor education website about diversification and “S&P Envy” over the last 20 years.

4. Prepare and Plan by having a clear vision of your goals and priorities.

    • If you don’t understand the “why” behind your investments as well as why you’re investing and saving in the first place, you will most likely bail-out of your plan during difficult and uncertain times.  Changing your investment plan mid-crisis creates a very high likelihood that your investment returns will be significantly lower.
    • Simon Sinek started a movement by encouraging businesses to “Start with Why.” It’s a powerful mindset that leads to trust, inspiration and success.  I believe the same applies to your financial and investment game plan.

5. Remember that you are invested in companies – not politics.

    • Sometimes our politics clouds the investment and retirement planning picture.  This rule falls under the axiom; “control the controllable.”  If you’re allowing your politics to affect your investment game plan than you may want to see rule number 2 above.

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this video will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for your portfolio. Moreover, you should not assume that any information or any corresponding discussions serves as the receipt of, or as a substitute for, personalized investment advice from Leading Edge Financial Planning personnel. The opinions expressed are those of Leading Edge Financial Planning as of 12/09/2020 and are subject to change at any time due to the changes in market or economic conditions.

Categories
Charlie Education Kevin

Don’t Abandon Your Financial Plan in Response to Headlines – This is Why

It’s tempting to abandon your financial plan when the world is experiencing unprecedented circumstances.  Although the pandemic is new and scary, don’t let the headlines play on your fears and knock you off your path.    

History shows that recessions and recoveries are filled with short term spikes and falls. These short term events often serve as a distraction to our long term goals.  Having a financial plan and sticking with it through the ups and downs has proven time and again to give you the best chance of success.  

In truth, the greater potential danger to our financial plan is not the pandemic and market volatility – it’s inflation (the loss of purchasing power in the future). If you react to the headlines and lock in your losses by withdrawing from the market you are also pulling your money from the opportunity to keep up with inflation and therefore, running out of money in retirement.

Stand firm and trust your plan.  Feeling unsure?  Give us a call, 865-240-2292.

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this video will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for your portfolio. Moreover, you should not assume that any information or any corresponding discussions serves as the receipt of, or as a substitute for, personalized investment advice from Leading Edge Financial Planning personnel. The opinions expressed are those of Leading Edge Financial Planning as of 05/06/20 and are subject to change at any time due to the changes in market or economic conditions.

October 20, 2022

Categories
Charlie Education Kevin

How will the coronavirus affect my investment portfolio?

The question everybody seems to be asking these days is: How will the coronavirus (now officially named COVID-19 by the World Health Organization) affect my investment portfolio? 

Of course, the unsatisfying answer is: we honestly have no idea.  You can count the unknowns.  The virus is now up to more than 73,332* cases and almost 1,870* fatalities—and counting.  But nobody knows whether the virus will eventually run rampant across the Chinese economy or burn itself out.  Nobody knows if it will spread widely beyond China and become a global crisis or remain largely confined to the Middle Kingdom.  Either way, it’s hard to predict the impact of the virus on the Chinese or global economy, much less on the U.S. and global stock markets.

There are three different ways to guesstimate the impact of our latest pandemic:

The first and easiest is to look at how U.S. and world markets responded to past health scares. When the public became aware of the SARS epidemic (a previous strain of the coronavirus) back in 2003, the S&P 500 index fell 14% over the subsequent two months, from mid-January to mid-March. But, according to a historical look-back by the MarketWatch economists, the market was up 20.76% a year later. The Avian flu outbreak in 2006, the Swine flu outbreak in 2009, the Ebola outbreak in 2014 and the Zika epidemic in 2016 saw initial downturns between 5.5% and 7%, but a year later, the markets had recovered by between 10 and 36 percent.

We can note that the S&P 500 index fell 3% in the two weeks after January 17, when the coronavirus outbreak first made headlines. Since then, the index has bounced back to all-time highs.

The second is to assess the impact that the COVID-19 outbreak is having on the Chinese economy—which, while its stocks are seldom a major part of U.S. investment portfolios, would certainly affect the world economy through disrupted supply chains and reduced demand for products and services sold by outside firms. China now makes up 15.5% of the global economy. It is a major purchaser of commodities like oil and agricultural products, and companies as diverse as smart phone makers and auto companies rely on its manufacturing output.

The Chinese government is trying to contain the spread of the virus by imposing severe travel restrictions and by forcing 50 million people in affected areas to remain in their homes—which, of course, means they are not going to work and not being productive. At the same time, however, the Chinese government is pumping liquidity into its economy—an estimated 1.7 trillion yuan from the People’s Bank of China—in order to contain the economic damage it is causing with the quarantine measures. Will the two balance each other out? We can note in passing that the SARS epidemic caused a temporary 2.4% decline in Chinese production. Nobody knows if the new epidemic will have the same, greater or lesser impact.

The third way to evaluate the potential damage of the pandemic is to focus on certain individual companies that are being affected by the initial phase of the outbreak. A recent U.S. News & World Report analysis singled out Carnival Corp., whose Diamond Princess cruise ship is currently quarantined at a dock just off the Japanese coastline—with 3,600 passengers onboard. More than 200 of them have come down with the coronavirus, which means that this single ship has more cases than any individual country besides China. Carnival stock is down about 17% since mid-January.

The article also mentions Wynn Resorts, which has major holdings in China’s gambling Mecca of Macao. The company’s Macao resorts have been shut down by the Chinese government, causing Wynn to lose $2.6 million a day. The stock is down roughly 15% from its peak.

You may not have heard of Yum China Holdings, but it is the parent company of the KFC, Pizza Hut and Taco Bell brands. The $20 billion company has had to shut down its China-based locations, and the stock has lost 15% of its market value this year.

Finally, consider Nike, which has closed half of its company-owned stores and stores managed by partners in China. About 17% of the company’s revenues come from China, and Chinese factories produce about 20% of Nike products. Nike’s stock doesn’t seem to have been hammered like the other companies on this list, but you can expect a reported decline in earnings this quarter.

So what does this mean? Anybody who tells you that they know how the COVID-19 epidemic will play out in American household portfolios would have to be considered a charlatan. We simply don’t know. But so far, history suggests that the market reactions to past pandemics have been temporary, just like all other kinds of market downturns. Not knowing when to get out and back into the markets constrains our options to hanging on and hoping—maybe expecting—that this time around won’t be very much different.

We’re always available for your questions.  Don’t hesitate to reach out, 865-240-2292.

Charlie & Kevin

*As of 02/18/20 according to the World Health Organization

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk and there can be no assurance that the future performance of any specific investment, investment strategy, or product made reference to directly or indirectly in this video will be profitable, equal any corresponding indicated historical performance level(s), or be suitable for your portfolio. Moreover, you should not assume that any information or any corresponding discussions serves as the receipt of, or as a substitute for, personalized investment advice from Leading Edge Financial Planning personnel. The opinions expressed are those of Leading Edge Financial Planning as of 02/15/2020 and are subject to change at any time due to the changes in market or economic conditions.

Sources:

Of Dollars and Data, How Will Coronavirus Affect Your Portfolio?
MarketWatch
US News & World Report
CNN
Nasdaq.com
Zacks

October 20, 2022