“Old” Reminders for “New” Year’s Resolutions
FIVE THINGS YOU SHOULD KNOW
- Equity Markets – were higher this week with U.S. stocks (S&P 500) up 3.79% while international stocks (EAFE) rose 2.63%.
- Fixed Income Markets – were mixed with investment grade bonds (AGG) down -0.72% while high yield bonds (JNK) rose 0.74%.
- Omicron Concerns Cool – it appears market selloffs in recent weeks amidst the outbreak of the Omicron variant of COVID-19 were overblown, with several positive reports coming out this week suggesting the new strain isn’t as serious as first thought. GlaxoSmithKline research released this week showed that current vaccines are effective against Omicron. Meanwhile officials out of South Africa (where the variant was first identified) have noted patients with Omicron have needed far less medical intervention than those with the Delta variant, with White House medical adviser Dr. Fauci echoing encouragement from the reports.
- Inflation Not Slowing – following a large uptick in October, consumer prices rose another 0.8% in November and now sit 6.8% higher than November of last year. While price increases were seen broad-based across sectors, gas prices (+58.1% YoY) and used vehicle prices (+31.4%) showed that energy and travel saw an unprecedented 12-month climb. As expected, the news saw Fed pressures to begin tightening monetary policy reach new highs while consumer sentiment also took a dip.
- Key Insight – [VIDEO] In the video this week Jake discusses the incredible market run over the last few years and how understanding your portfolio allocation is critical as it lines up with your financial plan. [ARTICLE] As we approach the end of the year, and are making some New Year’s resolutions, Ben shares some timeless investing truths and related facts to keep in mind for those resolutions around your financial life.
INSIGHTS for INVESTORS
“Old” Reminders for “New” Year’s Resolutions by Ben Klundt
Quite often in life, if not always to some degree, there are things we know we should be doing to reach our goals. We’ve all read some type of self-help book and thought…that seems like common sense, I could write this book, yet the practice and implementation of it can be difficult. For example, think of all the impending weight loss goals in the New Year – eating healthier and working out more are easier said than done.
As we come to the end of another year, we thought it best to revisit some of the commonly known, but less commonly practiced fundamental truths of investing. Maybe you’re in an ideal position and want to share this with your family, or perhaps you’re thinking it’s time to get serious and this is the final burst of motivation you need. Whatever it is, we’re here cheering you on! Now, let’s get into the fundamentals.
#1 Stay Invested
We know in our heart of hearts we can’t outperform the market by trying to make big calls as when to go cash and when to get back in the market. It’s incredibly hard to do, and yet we also know it is very likely at some point in an economic cycle that emotions will creep in to tempt you into making such a poor decision. Don’t get me wrong, this doesn’t mean we can’t take advantage of tactical trades as we see fundamental shifts, or engage in prudent rebalancing, but it does mean we cannot let a tough stretch in the market scare us into cashing in our chips and walking away. I will defer to a well-known quote which I think is critical for investors to keep in the front of their minds: “Successful investing is not about timing the market, but time IN the market.”
The chart below is especially telling because of how many of us remember the pain of the early 2000s and again during, “The Great Recession of 2008”— the latter of which was one of the worst periods since the Great Depression. What’s astounding about this terrible period, with TWO nasty bear markets, is that even had you bought at the top in 1999, you could have made a 5.62% average annual rate of return had you remained invested.
The chart below also shows how quickly the rate of return declines, and even turns negative, if you miss just a few days over the 20-year period!
#2 Start Now and Be Consistent
When you’re young you have the incredible gift of time, and in this case, time truly is money. I often use the chart below in 401k presentations. Many don’t get how big of a deal compound interest is, and how not getting started early to maximize its power can mean you’re saving a very high percentage of your income later in life, may have to work past your desired retirement date and/or are spending significantly less later in life. Conversely, beginning to save early on can mean considerably more money to spend in retirement and/or reach an earlier point of financial independence.
The chart below does a great job of showing what the first 10 years of savings really means to your ending account balance. Consistent Chloe is the “winner” in this situation, but what I find the most interesting is the difference in inputs between Late Lyla and Quitter Quincy, with similar outcomes. In this situation you have Late Lyla who only contributed a total of $24,000 over 10 years, versus Quitter Quincy who contributed a total or $72,000 over a 30-year period, but you can see they come out with comparable ending balances at age 65 with the only difference being when they started.
#3 Ride the Volatility
The last “old” reminder to keep in mind is also demonstrated by the chart above and holds that, “volatility is the price investors pay to make money in the market over time.” If you don’t want to experience the volatility of the market (see Nervous Noah up above), you also won’t experience the returns.
Look at Noah, he managed to lock in a magical cash account (don’t ask me how he got that return on cash) which paid him 2% over the 40 years he was putting money away. Nervous Noah and Consistent Chloe have the same inputs, (time frame and dollars invested), the only difference is Chloe took advantage of investing in equities whereas Noah took a conservative approach.
It’s completely natural, in fact it’s a physiological reality, when markets pull back investors feel fear and can conclude the market or their plan “isn’t working.” To combat this, you must push through the feeling, stick to your process, and stay consistent. When I was a kid, I had a disdain of running (still kind of do) and I remember my dad telling me when I wanted to slow down, or it started to hurt, I just needed to push a little harder and run a little faster.
The ultimate secret to success is, when you want to quit and feel as though it may not be working, remember why you started and that you knew such trying times would be part of the journey. Use the power of your goals and dreams to hold you accountable to your plan. I think the same can be said for New Year’s resolutions.
If you want to talk through what this means for your financial plan, or just get a better handle on your finances, we’re always here to help, client or not!
We also included a great piece from Brian Wesbury below on the market’s recent volatility, why it occurred and why it should work itself out. Enjoy!
Have a great weekend!
Ben and the team at TEN Capital
Volatility and Fear
Brian S. Wesbury, Chief Economist
Robert Stein, Deputy Chief Economist
Date: 12/6/2021
At the close on Friday, the NASDAQ Composite Index was down 6.1% and the S&P 500 was down 3.5%, from their recent all-time record highs. The 10-year Treasury yield, which was 1.67% as recently as the week of Thanksgiving, was yielding 1.35% at the close on Friday. Oil prices have fallen about 22% from their highs and Bitcoin was down about 28% over this past weekend.
Some investors are worried about the Omicron variant of COVID-19, and maybe further variants to come. But many are concerned about the Federal Reserve speeding-up its pace of tapering quantitative easing, which could set the stage for interest rate hikes in 2022. Meanwhile, the odds of passing President Biden's signature fiscal plan – the so-called Build Back Better proposal – appear to be no better than 50%, down significantly from earlier this year.
What this reminds us of is the "stop-go" Keynesianism of the 1970s, where policymakers would whipsaw between goosing the economy through loose money and extra government spending, then battling the ensuing inflation by tightening monetary policy, slowing the growth of spending, or even by raising taxes. This ping-pong policymaking was not healthy for the stock market: the S&P 500 increased at a 1.6% annual rate in the 1970s as consumer prices rose 7.4%.
In recent weeks, the stock market has decided the economic pain associated with an eventual tightening of fiscal and monetary policy is more likely to come sooner rather than later. Investors realize the budget deficit in the year ahead is likely to be much smaller than the past couple of years, which will be good for the long-run but could be an economic headwind in the near future.
Meanwhile, the Fed meets next week and recent testimony by Fed Chairman Jerome Powell indicates it will likely hasten the pace of tapering. One theory is that the Fed could finish tapering as early as March next year. That's consistent with the futures market for federal funds, which appears to be pricing in two or three rate hikes in 2022 (assuming the rate hikes are 25 basis points each).
We think taking the economic pain earlier rather than later is the better option. The next report on consumer prices arrives on Friday and we are estimating an increase of 0.7% in November. If we're right, that would mean consumer prices are up 6.8% from a year ago, the largest increase for any twelve months since the early 1980s.
The longer the Fed waits to address this, the harder it will be to stop. In the early 1980s, Paul Volcker ended up pushing the federal funds rate to nearly 20%, which caused a brutal set of recessions. Some tightening now, versus more tightening later, would signal wisdom in managing monetary policy.
We also think the economy could handle both a faster taper and earlier rate hikes. Remember, even when it's tapering, the Fed is still expanding its balance sheet, it's just doing so at a slower rate. Meanwhile, with inflation approaching 7%, the "real" (inflation-adjusted) federal funds rate is lower than it ever was in the 1970s.
But mark us down as skeptical about two or three rate hikes in 2022. Policymakers and politicians may be willing, but the flesh is weak. After the last time the Fed finished a tapering operation, back in 2014, it raised rates only when the 10-year Treasury yield was above 2.00%, not below. It's hard seeing the Fed getting aggressive with rates with the 10-year yield south of 2.00% and, right now, we're at about 1.4%. Maybe the Fed will raise once; two or three times seems like a stretch, even if the economy could handle it and inflation suggests more rate hikes are needed.
Sooner or later, though, the US will have to pay a price for COVID era looseness in both money and fiscal policy. For now, we're betting more of the pain comes after 2022.