Financially Speaking: All I Want For Christmas Is...
At this time of the year, it’s good to stop, take a breath and reflect. Perhaps you are thankful for your family and health. Remember, health is the first wealth. You can have all the money in the world, but if you don’t have good health, nothing else matters. Maybe your life feels like it is in good order, but you are a little concerned about your investments.
It’s funny how Christmas keeps getting earlier each year. I know the date is always the same, but retail companies keep putting out their holiday merchandise sooner than year before. As I write this article today, it is Oct. 30, tomorrow is Halloween and Christmas decorations have been out for a month already. Maybe we should reflect on Halloween a little more with what is going on with the stock market. We have been both treated and tricked this year while investing in the markets.
Just look at the numbers. We have been treated with the S&P 500 index up 9.8% over the past 12 months, up 8.6% year-to-date, and up 20% for the first seven months through July 31. But we have been tricked over the past three months with the S&P down 8.9%.
You cannot invest in the S&P index directly, but you can invest in an ETF (Exchanged-Traded Fund) or a mutual fund that mirrors or tracks similarly to the S&P. The main difference between the two is a mutual fund order is executed once per day, with all investors on the same day receiving the same price. An ETF trades like a stock and is bought and sold on a stock exchange with price changes throughout the day.
With the S&P 500 index, you are getting exposure to the top 500 companies. When you break it down further, the top seven companies (Apple, Microsoft, Amazon, NVIDA, Alphabet A and C shares, Meta [Facebook] and Berkshire Hathaway) make up 27.4% of the index. So, when you hear the S&P 500 index is down or up, it is the top companies influencing the returns. There are also ETFs and mutual funds that invest in the top 500 companies equally instead of weighted by company size. Check them out on the internet and you may be surprised that the returns are totally different.
When building a portfolio, you will have bonds, cash, and stocks. The amount of bonds and cash will depend on your risk tolerance (how much risk are you willing to accept to meet your goal). Over the past 15 years, the total bond market index returned 2.5%.
Over the past 2 years, the total bond market index has been negative, down 1.8% in 2021 and 13% in 2022. Money market rates have been low over the past 15 years as well, hitting an all-time low in March 2008 at 0.25%. Interest rates have been a major complaint of clients. Why should they invest anything in bonds or money markets when they were barely getting dust on their money. A familiar comment about bonds in 2021 and 2022 was, “I should have just kept that portion of my portfolio in my mattress.”
Well, good news, you can actually make money on bonds and cash today. As of this writing, (10/30/2023), treasuries are paying attractive interest rates. The 12-month Treasury Bill is paying 5.38%, the two-year Treasury Note is paying 5%, the five-year Treasury Note is paying 4.79%, while the 10-year Treasury Note is paying 4.84%. Money markets are paying north of 5%. So instead of buying bond mutual funds, you can buy various treasuries that mature on different dates. I know that the 12-Month T-Bill rate is great at 5.38%, but you may be better off spreading your conservative money over several years. This may provide income while minimizing exposure to fluctuating interest rates.
You hear Jay Powell and the Federal Reserve state they want to get back to a 2% inflation target. Think about it, if you have money spread over 10 years (various maturities), you will be earning a higher return than inflation. The key to making money is earning a higher return on your investments than the inflation rate. So, today you can buy treasuries and money markets and get a fairly good rate of return.
I’m not recommending investing all your money in treasuries and money markets. The stock market has made a great return over the past 50 years. The S&P 500 has averaged 10.7% over the past 50 years through the end of September 2023. Now remember that 10.7% (when reinvesting dividends) is an average, not the actual returns each year. Sometimes it is difficult to stay in the market. Here are a couple of examples. In 2007, the S&P 500 was up 23.4%, and in 2008, it was down 38.4%. In 2021, it was up 26.8%, and 2022, it was down 19.4%. So, in order to average the 10.7%, you would have had to stay invested in the market. Now, be honest with yourself, did you panic in 2008 and 2022? I’m sure most people did. Our job was to keep people off the ledge during those times and stay invested in the market. Again, if you invest based on your risk tolerance, it is easier to stay fully invested.
As 2023 winds down, review your portfolio and see if you want to harvest any losses for the year. Tax harvesting is selling investments at a loss so you can use the losses to offset gains in other investments. You can then take the money from the sale and use it to purchase another similar investment so you can stay invested in the market.
As the year ends, can Congress actually get something accomplished? Can the stock market recover, and can we have a Santa Claus rally this year? I believe the best way to answer is from a quote from the 1989 John Hughes classic, “National Lampoon’s Christmas Vacation.” As Clark Griswold (Chevy Chase) said to Cousin Eddie (Randy Quaid), “If I woke up tomorrow with my head sewn to the carpet, I wouldn’t be more surprised.”
I would like to wish all of you a Merry Christmas or Happy Hannukah and I hope that 2024 is one of good health, happiness, and prosperity!
Fred Dunbar, CLU®, ChFC®, RFC®, AIF®, is the former President of Planning Directions, Inc., a registered investment adviser, and Common Cents Planning, Inc.. Securities are offered through Commonwealth Financial Network®, member FINRA/SIPC. Fred may be contacted at 800-647-0762, by e-mail at freddunbar@commoncentsplanning.com or by mail at 239 Baltimore Pike, Glen Mills, PA, 19342.
This commentary is meant for general informational purposes only and is not intended to be a substitute for professional financial, tax or legal advice.
Investing involves risks including the potential loss of principal. Past performance is no guarantee of future results. Indices are unmanaged, and investors cannot actually invest directly into an index. Unlike investments, indices do not incur management fees, charges, or expenses.
Bonds are subject to availability and market conditions; some have call features that may affect income. Bond prices and yields are inversely related: When the price goes up, the yield goes down, and vice versa. Market risk is a consideration if sold or redeemed prior to maturity.
Certificates of deposit (CDs) typically offer a fixed rate of return if held to maturity, are generally insured by the FDIC or another government agency, and may impose a penalty for early withdrawal.
All investment results were from the U.S. Dept. of the Treasury website, Bankrate.com and large ETF and mutual funds.
