The Tariff Tantrum: Why Patience Still Pays

Posted On April 6, 2025 By Scott Stratton, CFP(R), CFA In Financial Planning /  

This week, the stock market threw a tariff tantrum — and for good reason. Economists, business leaders, and investors alike agree: the administration’s sudden new tariffs are bad news.

Starting this week, U.S. tariffs include:

  • 20% on imports from the European Union
  • 24% on goods from Japan
  • 34% on products from China
  • Overall range: a minimum of 10%, and up to 50%

While the White House describes these as “reciprocal,” they’re not actually based on other countries’ tariffs on U.S. goods. Instead, the new tariffs are tied to each country’s trade deficit with the U.S. — the higher the deficit, the steeper the tariff.

Why Tariffs Backfire

The logic behind these tariffs might sound simple: make imports more expensive so people buy American. Unfortunately, that’s not how the real world works.

  • Other countries are retaliating. They’re imposing their own tariffs on U.S. goods, making American exports more expensive — and less competitive — overseas.
  • Prices are rising. Estimates suggest these tariffs could cost American households an extra $2,100 to $4,600 a year.
  • Factories can’t pop up overnight. Even if demand shifted suddenly, new U.S. production would take 3–5 years to ramp up.

Bottom line? These tariffs aren’t boosting exports or domestic manufacturing — they’re just increasing costs. It’s a lose-lose proposition for families and businesses alike.

The Market’s Harsh Reaction

The response on Wall Street was swift — and brutal. On Thursday and Friday, U.S. stocks lost $6.6 trillion in value. That’s the largest two-day drop in history.

As the saying goes, “Stocks take the stairs up and the elevator down.” The ride down can be fast and painful — but it’s part of the journey.

Panic Will Not Profit

Yes, investors are panicked. And yes, we’ll likely see more selling early this week. But am I selling anything in my own portfolio? Absolutely not. Am I advising clients to “get out” of the market? Again, no.

I don’t have a crystal ball, but I do have history on my side. And if history tells us anything, it’s this:

Panic selling never works.

Here are some interesting charts on market corrections. First, from Vanguard, here are US Equity drawdowns since 1980.

Since 1980, the U.S. stock market has been in correction territory (down 10% or more from recent highs) about 30% of the time. Bear markets — drops of 20% or more — happen, too. And recovery can take time.

Looking at monthly returns, the next chart shows up months versus down months.

You can see that there are nearly as many down months as up months. The stock market does not go straight up nor does it go down forever. It is volatile, with good months and bad months, and good years and bad years.

These charts show the volatility of stocks, but mask the cumulative gains. In fact, since 1980, the S&P 500 has delivered a total return of 16,415%, or about 11.99% annually. That’s the big picture — and it’s why long-term investing works.

No Pain, No Gain

In 2009, I saw that investors who got out did worse than those who did nothing. The same thing happened in March of 2020. The human brain often tells us to do the wrong thing at the worst time. But real success comes from staying invested — even when it’s uncomfortable.

Trying to time the market rarely works. But owning a simple index fund and not selling? That’s the most likely way to access the 11.99% historical returns over time.

We’ve built your portfolio to withstand volatility. Most of our clients have 30% to 50% in bonds, including five-year bond ladders for retirees. That means we don’t need to sell stocks when they’re down.

What We Can Do Now

Even in market downturns, there are smart moves we can make:

  • Rebalancing: When stocks are down, it’s a chance to buy — not sell.
  • Tax-loss harvesting: Use losses to offset gains and reduce your tax bill.
  • Dollar-cost averaging: If you’re still investing, this is your opportunity. Stocks are on sale.

We’ve been saying for a while that the market, especially tech, was overvalued and due for a pullback. Bubbles don’t pop because of valuations — they pop when an external shock happens. This tariff tantrum may have simply triggered what was already overdue.

Keep The Faith

It’s easy to focus on the negative — but don’t let fear cloud your long-term vision. Investors who panicked in 2001, 2009, and 2020 missed out on the powerful recoveries that followed.

I’m no fan of these tariffs. I hope they’re just a negotiating tactic — or that billionaires who lost hundreds of millions of dollars this week can push for a better path. But regardless of what happens next, I know this:

We’ve seen this before, and we’ve come out stronger every time.

Each investor should have a solid financial plan. That plan should account for volatility — even when it’s driven by unpredictable policy. We’re not selling based on headlines. We’re staying focused on long-term goals.

If you’re feeling uncertain or want to revisit your plan, don’t hesitate to reach out. That’s what I’m here for.

Stay steady. Stay smart. And hang in there.

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Market Correction of 2025

Market Correction of 2025

Posted On March 16, 2025 By Scott Stratton, CFP(R), CFA In Portfolio Management /  

The US stock market entered “correction” territory this week, with a decline of 10% from the recent peak on February 19th. Investors are concerned about the impact this will have on their portfolios and retirement plans. In today’s newsletter, we are going to share some facts about market corrections and give three strategies we use to help investors handle the market correction of 2025.

10% drops are common in the stock market. Over the last 125 years, there have been 56 market corrections. Of those 56 corrections, 22 went on to become a “Bear Market”, a drop of 20% or more. On average, we have a market correction every two years and a bear market every five years. It is not unusual for a correction to reverse course fairly quickly. Since 1980, the stock market was higher 12-months after a correction 81% of the time. The average gain, 12-months post-correction, was 13.4%.

The outlook worsens somewhat if a recession occurs at the same time as a market correction. When this happens, the correction is often longer and more likely to develop into a bear market. The risk of recession has worsened over the past months. The Atlanta Federal Reserve has a statistical model to estimate GDP in real time, called GDPNow. At the end of January, they were projecting Q1 GDP would grow by nearly 3%. By March 6, this estimate has plummeted to -2.4%.

At this point, these are just projections. Still, investors’ appetite for risk decreases greatly when there is uncertainty. Today’s tariff plans, government cuts, and turmoil are certainly factors in the market correction of 2025. And frankly, US stocks had gotten very expensive and were ripe for a pull-back.

Strategies For Market Corrections

Where does this leave investors? Market corrections are a normal part of the investing cycle. Young and middle-aged Investors should do nothing. Don’t sell your funds, and whatever you do, don’t stop Dollar Cost Averaging in your 401(k) or IRA. There have been 21 market corrections since 1980. You should make no effort to “time” the market by trying to predict what you think will happen.

Market Corrections are often a great time to be adding to your diversified portfolio – in hindsight. At the present moment, fear is the more common thought than opportunity. But years from now, March of 2025 may look like an attractive time. (Five years ago, March of 2020 was horrifically painful at the time, but from today’s vantage, looks like an “obvious” opportunity.)

For Investors who are closer to retirement or in retirement, you have less ability to recover from a correction or a bear market. You may have income needs from your portfolio. This is why we advocate having a “Bond Bucket” consisting of individual bonds laddered from 1-5 years. This will provide all the income and withdrawals needed for the next five years, or longer. This allows us to leave our stocks alone during a market correction and not have to sell anything.

If the recent correction has you feeling you are too exposed to risk, what can you do? Here are three ideas:

A. Diversification

While the S&P 500 is down 4% year to date, International Stocks are up 9%. 5% of that 9% move is from the dollar falling against the Euro. While 2024 was all about US Tech stocks, performance has reversed in 2025. International is doing better than US. Value is now outperforming Growth. Equal Weight Indexes are doing better than Cap Weighted.

Here’s the thing about diversification: we don’t know when it is going to work. In years like 2024, performance is concentrated in a small number of stocks. Investors felt like diversification was hurting their performance, as International lagged US markets. However, these trends are eventually self-correcting. As one category becomes too expensive, another category becomes too cheap to ignore. Investors see International doing well, and sell their US funds and buy the International funds. This selling pressure depresses the US prices and increases the International prices. Remember, stock prices do not equal intrinsic value! Prices go up when there are more buyers than sellers. That’s it.

Our portfolios are highly diversified and the market correction of 2025 is showing why this is an important facet of portfolio construction. The temptation to chase performance often leads to worse results, and we prefer the patient, long-term approach of diversification.

B. Create Income

If you need retirement income from your portfolio, now or in the next couple of years, I suggest creating income from your portfolio. Stocks are highly volatile as we are seeing today. An aggressive portfolio of stocks carries a sequence of returns risk. That means that there is a higher chance of failure in retirement if there is a Bear Market at the beginning of your retirement. Stocks are great for long-term growth, but we don’t buy them for preservation and income.

In addition to the Bond Ladders mentioned above, another tool for retirement income is the Multi-Year Guaranteed Annuity, or MYGA. A MYGA is a fixed annuity, which guarantees you a rate of return for a set period. Today, we can purchase a 5-year MYGA at 5.60%. You can take out your interest monthly (great for retirees) or allow the MYGA to compound and walk away after five years. It’s tax deferred and there are no investment management fees. So, the 5.6% is your net return. MYGAs are non-callable, which is better than most bonds. (And according to several forecasts, 5.6% is higher than the expected return of US stocks for the next decade.)

We bought a lot of MYGAs in 2024 before the market correction of 2025. And I’m very glad we did. It’s not a magic bullet, but for those needing or wanting income, a MYGA is worth a closer look.

C. Index Funds

At every correction or downturn, Investors are tempted by the thought that an Active Fund could be more tactical or could profit from all the volatility in the stock market. It wouldn’t just sit there and do nothing. It could be defensive sometimes or more aggressive at others. It could avoid the loser stocks and stick with the winners.

Unfortunately, the data shows the opposite. Actively managed funds do worse than their benchmark. And the longer you invest the worse active funds do. The Standard and Poors Index Versus Active (SPIVA) report for 2024 was released this month. The study tracks all actively managed funds, including those which closed, for the past 20 years.

In 2024, 65% of Active US Large Cap stock funds did worse than the S&P 500. Over 10 years, that number increases to 84% and at 20 years, 92%. The lesson is clear: active managers do not add value. We are better off using low-cost index funds. If it was possible for mutual funds to time the market or only pick the good stocks, we’d see different results. It is less risky to stick with an Index Fund than to try to select an Active manager who you think will outperform.

Interesting Times

“May you live in interesting times” is a curse referring to times of turmoil and difficulty. Perhaps 2025 will qualify as interesting times. It feels like following the news could become a full-time job and that everything we are seeing is described as “unprecedented”. A lot of people feel overwhelmed and concerned.

Reacting to news, however, can be dangerous for your portfolio. We have a lot of history around market corrections to understand what is going on. They are a frequent, but temporary, interruption to the progress of global growth and productivity.

For investors who want to take additional steps to protect their portfolio, we have three recommendations. Diversify extensively, create income when income is needed, and stick with Index Funds. As unpleasant as market corrections are for investors, they are a natural part of the economic cycle. The key is having a good financial plan in place and then maintaining the resolve and patience to stick with the plan. All of this is very individual to your unique scenario, so please don’t hesitate to email me if you’d like to discuss things further.

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Tax Optimization for High Net Worth Investors

Portfolio Tax Optimization for High Net Worth Investors (Updated for 2026)

Posted On February 4, 2025 By Scott Stratton, CFP(R), CFA In Portfolio Management /  

Tax planning is not an afterthought — it’s a core part of preserving and maximizing wealth, especially as you approach or enter retirement. For high-net-worth investors with $500,000–$5 million in investable assets, proactive tax optimization can meaningfully improve after-tax returns and preserve more wealth for income, legacy, and peace of mind.

Below are practical strategies tailored for investors like you — married couples, pre-retirees, and retirees who want to keep more of what they earn without chasing gimmicks.

Portfolio construction decisions are just one piece of the puzzle. Long-term results improve when investment strategy is coordinated with comprehensive tax planning for retirees, especially during the transition from accumulation to distribution.

2026 Long-Term Capital Gains Tax Rates & Thresholds

In 2026, long-term capital gains (on assets held more than one year) remain subject to 0%, 15%, or 20% federal rates, depending on taxable income. These thresholds are slightly adjusted for inflation:

Tax RateTaxable Income (Single)Taxable Income (Married Filing Jointly)
0%Up to ~$49,450Up to ~$98,900
15%~$49,451–$545,500~$98,901–$613,700
20%Over ~$545,500Over ~$613,700

These figures apply to federal capital gains tax — state taxes may also apply.

This structure means gains are marginally taxed (like ordinary income), and timing can dramatically affect your liability.

1. Asset Location — Put the Right Holdings in the Right Accounts

Asset location is the practice of placing investments in accounts based on how they’re taxed:

  • Tax-inefficient assets (e.g., high-turnover mutual funds, REITs) belong in tax-deferred or tax-free accounts
  • Tax-efficient assets (e.g., broad index ETFs) are often best in taxable accounts
  • High-growth assets often go in Roth IRAs so future gains are tax-free

This strategy reduces the drag of taxes over time and is especially important for high-net-worth portfolios.

2. Tax-Loss Harvesting — Use Losses to Offset Gains

Tax-loss harvesting involves selling securities at a loss to offset realized capital gains. The IRS allows:

  • Capital losses to offset capital gains dollar-for-dollar
  • Up to $3,000 of excess losses against ordinary income annually
  • Unlimited carryforward of unused losses to future years

The wash-sale rule prevents repurchasing identical securities within 30 days before or after the sale, but you can strategically swap into similar positions to maintain exposure. This works great with ETFs.

This is one of the most direct ways to reduce your current and future tax bills.

3. Long-Term Holding — Lower Your Effective Tax Rate

Holding assets longer than one year shifts gains into the long-term category, which often carries significantly lower rates than short-term gains — which are taxed as ordinary income.

This is a simple yet powerful discipline for reducing overall tax exposure, particularly for investors in or near retirement.

4. Charitable Giving & Donor-Advised Funds

Donating appreciated securities is highly tax-efficient:

  • You avoid capital gains on the donated shares
  • You generally receive a deduction equal to the fair market value
  • Donor-Advised Funds (DAFs) allow you to “front-load” charitable giving in high-income years

If you’re age 70½ or older, Qualified Charitable Distributions (QCDs) let you give up to a set limit directly from an IRA to charity — reducing adjusted gross income (AGI) without itemizing. These can also lower Medicare IRMAA exposure if coordinated with income planning.

5. Coordinating Roth Conversions

Strategic Roth conversions shift assets from tax-deferred accounts to tax-free accounts. Done in lower-income years (for example, before Social Security and Required Minimum Distributions begin), this can:

  • Lock in tax treatment at current (often favorable) brackets
  • Reduce future RMDs, which can push income into higher capital gains and IRMAA brackets
  • Provide tax-free income later in retirement

Because conversions increase Modified Adjusted Gross Income (MAGI), they can affect Medicare costs and surtaxes like the 3.8% Net Investment Income Tax (NIIT). Planning timing and staging is key — and part of a broader tax-efficient retirement strategy.

Learn more about staging conversions at: Roth Conversions After 60 — When They Make Sense and When They Don’t.

6. Managing the Net Investment Income Tax (NIIT)

High-net-worth investors often face the 3.8% NIIT on net investment income when MAGI exceeds certain thresholds (e.g., $250,000 for married couples filing jointly). This surtax can effectively raise your top capital gains rate to approximately 23.8%.

Strategies to manage NIIT include:

  • Holding tax-efficient assets in tax-advantaged accounts
  • Timing distributions and conversions
  • Reducing MAGI through deductions and income sequencing

7. Estate and Legacy Planning

Estate strategies can significantly reduce tax burdens for beneficiaries:

  • Step-up in basis at death eliminates unrealized capital gains for heirs
  • Gifting strategies, including annual gift exclusions, reduce future estate tax exposure
  • Irrevocable trusts and life insurance trusts can preserve wealth tax-efficiently

Well-structured estate planning prevents unnecessary capital gains and income taxes for the next generation.

8. Integrating Tax Planning with Income Sequencing

Tax planning does not happen in a vacuum. How you time distributions, RMDs, Social Security, IRA conversions, and capital gains interacts with:

A comprehensive plan considers these connections. For example, combining tax‐efficient withdrawal strategies with Guardrails for Retirement Income and How to Reduce IRMAA improves both cash flow and after-tax outcomes. Tax-efficient portfolio design becomes especially important once withdrawals begin, which is why it should be coordinated with overall retirement income planning.

How a Fiduciary Advisor Can Help

Optimizing a high-net-worth portfolio for taxes requires a plan, not a checklist. An advisor helps you:

  • Model multi-year tax scenarios
  • Coordinate asset location across accounts
  • Time Roth conversions to minimize lifetime taxes
  • Integrate tax planning with retirement income, Medicare, and estate strategies

We work nationwide with pre-retirees and retirees who want clarity and confidence in their financial paths — whether or not they hire us for ongoing wealth management.

Learn more:

This topic is often part of a broader retirement or tax planning conversation. If you’d like help applying these ideas to your own situation, you can request an introductory conversation here.

Frequently Asked Questions

What are the 2026 capital gains tax brackets?
In 2026, long-term gains are taxed at 0%, 15%, or 20% federally, depending on your taxable income level.

How does the 3.8% NIIT affect my taxes?
If your MAGI exceeds certain thresholds (e.g., $250,000 joint), the NIIT can apply to your net investment income, increasing your overall tax on capital gains and investment income.

What is tax-loss harvesting?
It is selling investments at a loss to offset realized gains, reducing taxable income now and carry forward losses to future years.

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Investment Themes for 2025

Investment Themes for 2025

Posted On January 1, 2025 By Scott Stratton, CFP(R), CFA In Portfolio Management /  

It’s January 1st and we are looking at our Investment Themes for 2025. We adjust our portfolio models annually, looking to take advantage of the latest information. Using an evidence-based evaluation of the available investment universe, we weight our portfolios towards the categories with attractive long-term return expectations. We don’t time the market – we are buy and hold investors and stay fully invested in a target allocation. Market downturns are an inevitable part of being an investor and we think it is detrimental to try to predict short-term movements. We know that predictions are highly fallible and that there is a real benefit to staying diversified.

This is our process to tactical asset allocation: we always start with the overall “recipe”. The key choice is deciding the right weight of each category. Then within each category, we use low-cost Exchange Traded Funds. That’s because we know that the majority of active managers do worse than their benchmark. We would rather invest in an Index or Factor based strategy.

You can see our past Investment Themes for 2024, 2023, 2022, and 2021 on our website. Now, here are our thoughts for 2025 on stocks and bonds. In an effort to keep this relatively concise, I am giving you a summary below, and not my full analysis and thoughts on each category. And you also don’t see the analysis that goes into the ETF and fund selection process, but that step is secondary to getting the overall allocation right.

US Stocks Expensive But Have Momentum

We’ve just had two years in a row with greater than 20% returns in the S&P 500 Index. US Stocks have gotten more expensive, however, this has largely been a story of a handful of tech stocks driving the returns of the whole market. The market has had poor breadth – the majority of stocks have barely moved at all in the last two years. Much like 1999, we may eventually see a period of poor performance in the overall index, where today’s winners lose their steam. And it is also possible that the 493 stocks which are not the “Magnificent 7” could do better in the years ahead.

The Vanguard Capital Markets Model and research from Goldman Sachs both suggest that the S&P 500 is likely to have returns in the low single digits over the next decade. This is why we have been overweight in Small Cap and International stocks. However, we were too early in 2024 and US Large cap stocks have continued higher in spite of being more expensive than other stocks.

We will be adding to US Large Cap for 2025, reducing our underweight in the category. We will make this purchases by trimming bonds and bringing bonds down to neutral. The momentum in US Stocks is strong right now and we have decided we want to more closely track the market for the time being. For clients who would prefer a larger allocation to bonds, we can switch models, for example from 70/30 to 60/40. I do think we will want more international equities eventually. But until we see signs of a reversal, US Stocks are leading the world.

Equity Notes:

  • Better long-term expectations from international versus US; from value versus growth; from Small Cap versus Large Cap. We will maintain our broad diversification.
  • Going into 2025, US Large Cap has been strong and we want to add to that momentum for now.
  • We prefer equal weight index versus market cap weighted index. We are adding to US Equal Weight Index from bonds.

Bonds and Fixed Income

The Fed has started to cut interest rates and the yield curve has flattened. We have seen the short end of the yield curve coming down and we seem to be out of the inverted yield curve. For several decades, an inverted yield curve always preceded a recession within 12 months on average. Will we escape this recession signal in 2025? At least as of right now, December 2024, there are no signs of a US recession on the horizon.

But the interest rates dropping has given us a wave of bond calls. Our Agency Bonds which were yielding 5.5% to over 6% are all getting called early. We have seen yields as low as 4.8% getting called this month. That means having to replace those bonds with lower yields, presently 4% to 5.25%. That is a bit disappointing, especially if these bonds could potentially be called in another 6-12 months. Agencies, Corporations, and other issuers will continue to refinance at lower rates. Unfortunately, there are not a lot of non-callable bonds, with competitive yields. We will continue to Ladder bonds from 1-5 years, and we principally use Treasuries under 2 years and Agency Bonds from 2-5 years.

MYGA fixed annuities remain a great tool for guaranteed monthly income for retirees. Any investor seeking to lock in today’s interest rates, without the possibility of a call, will like a MYGA. I personally bought another MYGA in 2024 for my Roth IRA and these remain very attractive going into 2025.

Notes for Bonds in 2025

  • We reduced our overweight in bonds to neutral, given ongoing bond calls and falling rates.
  • Our focus is on high quality US short-term individual bonds, laddered from 1-5 years.
  • The spread on investment grade corporate and municipal bonds is too low. They have more risk than Treasuries and Agency bonds.
  • High-yield bonds are yielding over 6%. If you believe the estimates of the S&P 500 returning only 4-5% over the next decade, high yield corporate bonds are a lot less volatile than owning Equities, with a comparable or better return.
  • We continue to own Emerging Market bonds. They had a great 2024 and have attractive yields entering 2025. Other international bonds are too low yielding and also very volatile.
  • We had considered selling our TIPS (Treasury Inflation Protected Securities) in September when prices were high. However, with the possibility of inflation returning due to proposed tariffs, we are maintaining our allocation to TIPS.
  • After a strong rally in 2024, Preferred Stocks seem to have topped out for now. We are reducing allocations from 5% to 3% in most portfolios.

What Not To Do

With the incoming administration in Washington, we will undoubtedly see a number of programs which could impact the economy positively or negatively. We are following these developments closely. The positive impacts for investors could include deregulation, lower income taxes, and lower corporate taxes (stocks are valued on their profits, which are after-tax). On the other hand, we worry about tariffs causing inflation, retaliatory tariffs from other countries hurting US exports, and inflation due to deporting millions of workers. And then there is the massive government debt, which now costs over $1 trillion in interest alone each year. (Last week’s rant – Congress hastening Social Security’s insolvency to 2033, just 8 years away.)

We can’t make light of any of these situations. We are prepared to adjust our portfolios as needed. However, I think that making significant changes to our investment allocations is both unwarranted right now and probably harmful in the long-run. Regardless of who was in the Oval Office, the US stock market has had a great track record of going up and to the right. Profits today are strong and hopes are high for AI-driven growth and productivity. And so there is a risk of putting too much focus short-term political concerns and missing the growth of the US and Global economic engine.

One of the challenges of making our Investment Themes for 2025 was resisting the temptation to make a lot of changes. We can see what is working right now. If you have a good plan and allocation, I don’t think that you need to throw it all away in 2025. No one knows what the market is going to do. Many other investors have the same thoughts or concerns and so these are often already reflected in the price of stocks.

10 years from now, portfolios are likely to be significantly higher than today. We will likely have forgotten all about 2025 entirely, just as we don’t think much about 2015 today. Our Investment Themes for 2025 are important, but our behavior and process are more important than any one particular year in the market. We don’t know what the new year will bring, and that’s okay. We do know what has worked consistently: holding a diversified allocation, using index funds, and keeping costs and taxes low. That is our focus and unwavering commitment to you.

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Social Security to End WEP and GPO

Social Security to End WEP and GPO

Posted On December 27, 2024 By Scott Stratton, CFP(R), CFA In Financial Planning /  

In a surprise move, Congress passed the Social Security Fairness Act, which will end the WEP and GPO programs. The WEP (Windfall Elimination Provision) and GPO (Government Pension Offset) reduced Social Security benefits for retirees who receive a government pension that did not participate in Social Security. The legislation is headed to President Biden, who is expected to sign it into Law.

What are the WEP and GPO?

Some government jobs do not participate in Social Security, as they are covered by their own pension program. This includes many police, firefighters, some state employees, and about 40% of teachers. There are about 2.5 million such retirees today. Many who receive a pension also had other jobs (before, after, or during) where they paid into Social Security. The WEP/GPO programs reduced Social Security benefits since these retirees were already receiving another government pension. These were designed to prevent retirees from “double dipping” into two government pensions and have been around since 1983 and 1977.

Employee participation in Social Security was up to state and local governments. For example, teachers in Texas do not participate in Social Security but teachers in New York do. So, the teachers in TX do not have FICA withheld from their paychecks, but do have 7.7% withheld to pay into the Texas Teachers Retirement System. The teachers in NY have money withheld for both Social Security and for the state teachers benefits. And the teachers from NY can collect both a pension and their full Social Security in retirement.

But what was unfair to the Texas teacher is that if they also worked 10+ years at a different job, their Social Security benefits from that job were reduced under the WEP. But the NY teacher does not get dinged for collecting both a pension and SS, and gets the full amounts.

The WEP reduces an employee’s own Social Security benefits, when they also receive a government pension. The GPO reduces Social Security spousal and survivorship benefits by two-thirds, for individuals who receive a government pension.

Planning Strategies

This change creates an opportunity for additional planning for many employees. We should evaluate your individual situation, and make calculations for your exact numbers. Here is our general advice:

1: There is now a larger incentive for teachers, police, etc. to qualify for Social Security benefits. You need 40 quarters of contributions to become eligible for SS. You can track your eligibility online at SSA.gov by creating an individual account. Teachers and others should look for summer work, self-employment, or for a part-time job in retirement, to qualify for Social Security, if they have not already done so. Having both retirement benefits will be enormously valuable.

If you are thinking about going into a career that does not participate in Social Security, please think about how to get 40 SS credits. At the same time, it is now much more attractive for retired police and firefighters to work another type of job after they retire.

2: You will want to think carefully about the timing of your Social Security benefits. In many cases, government employees retire relatively young, but it may pay to delay Social Security to receive a larger benefit. This can help reduce longevity risk. Again, we should be running the calculations individually. You do NOT have to claim both a pension and SS at the same time or year.

3: Spousal benefits. Many more government employees will now be eligible for a larger spousal benefit (based on their spouse’s earnings). And so we now need to think about when a spouse claims their benefit and when the other spouse should claim their spousal benefit. There are no deferred retirement credits for spousal benefits, meaning you should never defer from age 67 to 70, if your SS benefit will be a spousal benefit. If you are divorced, but were married for at least 10 years, you may be eligible for a spousal benefit in Social Security, based on your ex-spouse’s contributions. This is true, even if you never worked in a SS-eligible job.

Really, Washington?

The repeal will increase Social Security benefits for 2.5 million Americans today, and more in the future. The benefits will be retroactive to December 2023. The additional cost will be $195 Billion over the next 10 years. (And more for each subsequent decade.) Unfortunately, Congress did not include any way to fund this increase in benefits, so these costs will be added to the Government debt. This bill will accelerate the bankruptcy of Social Security by about six months, presently estimated in 2033.

While government employees have been lobbying for a repeal for decades, I am a bit surprised that Congress suddenly felt that this was a priority. I didn’t hear any politicians talking about the WEP and GPO during the campaigns this fall or summer. Recently, we’ve heard the goals of trimming $2 trillion from government spending. Instead, some of those same Congresspeople just voted to add $195 Billion in new spending over the following decade.

I have been writing for 17 years about how Social Security is broken. We have to either reduce benefits (such as increasing the retirement age), increase taxes, or some combination of both. Instead of understanding this necessity, our elected officials just decided to make Social Security more expensive. And while I support and appreciate government employees, including many family members, many of the government pensions were already fair, if not generous, compared to Social Security benefits.

There are a large number of retirees who do not need additional Social Security benefits. The average age of millionaires in the US is 61. The average net worth of Americans age 65-74 is $1,794,600 according to a 2023 Federal Reserve Study. (Granted, the median is much lower than the average.) From 2019-2022, 65-74 year olds saw their net worth increase by 27%, whereas Americans aged 35-44 saw only a 9% increase and 45-54 year olds (my age cohort) saw an increase of just 1%. While there are many poor elderly people, there are also many retirees who are doing very, very well.

We Must Save Social Security

Social Security is an entitlement program where current taxes pay for current benefits. The SS taxes you paid in 2024 are not being saved for you. They are paying your parents or grandparents this year. And this worked because there were 40 workers for every retiree in 1940. Today, however, there are less than three workers per retiree and this will gradually approach two workers per retiree by 2050. And so, we ought to ask if ending the WEP and GPO is intelligently alleviating elder poverty, or is it just giving away money to older Americans and leaving a massive debt to our grandchildren?

Unfortunately, we can’t save Social Security by keeping it as is. Something has to change, and soon. In our retirement planning process, Social Security is an essential component of the financial plan. When I remove Social Security benefits from our MoneyGuidePro retirement software, the plans usually project a strong possibility of failure. We need to be telling our elected officials that saving Social Security is a top priority. Some difficult decisions need to be made. We’ve been waiting a long time for politicians to speak honestly about Social Security, to debate intelligently about solutions, and to show the will to do the right thing even if it’s unpopular. Unfortunately for us, the day for fixing Social Security is not going to be today.

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How To Invest When Stocks Are High

How To Invest When Stocks Are High

Posted On November 3, 2024 By Scott Stratton, CFP(R), CFA In Financial Planning /  

More investors should be asking about how to invest when stocks are high. The first three quarters of 2024 were the best for the S&P 500 Index since 1997. But what is the outlook going forward for investors?

In a new paper by Goldman Sachs, they project that the return of the S&P 500 Index for the next 10 years, 2024-2034, will be only 3%. How did they reach this dismal projection? The model considers projected earnings growth, current valuations, interest rates, likely recessions, and stock market concentration.

How bad is it?

  • The return would be in the worst 7% of 10-year returns since 1930.
  • There is a 72% chance that the S&P 500 will do worse than a 10-year Treasury Bond.
  • While their median projection is 3%, the 95% confidence range is between -1 and +7%.

The projections from Goldman are quite similar to the analysis from Vanguard. Currently, the Vanguard Capital Markets Model has a 10-year projection of 4.2% for US stocks. Both projections are very alarming, a far cry from the 11% annualized returns of the S&P 500 over the long-term.

Which Projections Matter?

In the short-term, markets are really impossible to predict. Long-term investors should not make portfolio decisions based on short-term projections. I remember one firm said there was a 100% chance of a recession in 2023. But it never happened. Short-Term predictions can be wrong and there are too many variables and surprises to consider. No one has a crystal ball and short-term predictions are about as accurate as guesses.

Long-term projections, however, may have some value in that there can be an eventual reversion to the mean. Periods of above average performance are often followed or preceded by below average performance. If you start with stocks being very expensive, then often the following decade has below average returns. And when you start with cheap stocks, like we had in 2003, March of 2009, or March of 2020, the following periods are typically above average.

Our approach is to ignore the noise of quarterly or annual projections. But we do position our portfolios towards the long-term trends of what the historical evidence suggests, based on today’s situation. We are not going to attempt to time the market, but we are going to listen to what market history tells us. Let’s talk about three ways investors can position their portfolios for a potentially low-return decade ahead.

Which Equities?

While both Goldman Sachs and Vanguard have low projections for the whole market, both also see opportunities in certain areas. The S&P 500 Index has been a great performer over the past decade, but other categories could do better over the next decade.

Goldman’s analysis believes that the current market concentration will be a major detractor from performance. What is market concentration? The biggest stocks have become the most overvalued, and the weighting of the largest 10 companies is exceptionally high today. While the regular, cap-weighted S&P 500 returns are projected at 3%, Goldman projects that the equal-weighted index could return 7%.

What is an equal weighted index? An equal weighted index invests the same dollar amount into each stock. If there are 500 stocks, each has a weight of 0.2%. And there is an easy solution here, because we can invest in an Equal Weighted Index fund.

Vanguard also expects better returns when we look outside of the US Growth segment. Here are their 10-year median return projections:

  • US Growth: 1.1%
  • US Value: 5.7%
  • US Small Cap: 6.0%
  • Developed ex-US stocks: 8.0%

This is why we diversify. Past performance is no guarantee of future returns. Even with the low projections for the entire market, there can be categories which could do better. This is the first strategy: diversify away from growth and cap-weighted indexes, and towards the areas with higher expected returns, such as equal-weight, value, small-cap, and international stocks.

DCA and Rebalancing

If you are a younger investor, I don’t want you to look at these reports and think you should forget about investing. The market will not go in a straight line over the next decade and there will undoubtedly be both large drops and large rallies. If you are investing monthly into your 401(k) or IRA, keep doing that. You are dollar cost averaging (DCA) and can benefit from all the volatility. Focus on your accumulation and diversify into low cost index funds in many categories.

For larger portfolios, even a relatively low-return environment can benefit from rebalancing and ongoing portfolio management. In fact, it is during long bull markets that rebalancing is the least helpful. In volatile markets, rebalancing allows us to benefit from the differences between stocks and bonds cycles. With rebalancing, we can sell stocks when they are high (like now) and buy stocks when they are low (like we did in March of 2020). This is part of our ongoing risk management process.

Bonds

Our third pillar of investing in a low-return environment is Bonds. Bonds are back. Our approach is to buy individual high-quality bonds and ladder them for five years. This means we have the bonds in place that will mature each year to meet the cash flow needs of our clients. For retirees, this means we do not have to touch our Equities to meet income requirements when the market is down. This gives us additional flexibility rather than always having to sell Equities to meet withdrawal needs. We want to create certainty with our bonds: income and capital preservation.

More conservative investors may find that this is an opportune time to overweight bonds and have more predictability in their portfolio. We can still get up to 5.4% on a 5-year fixed annuity today. That remains a compelling safe return. Most of the time, people are expecting to get 10% in the stock market. But if we are only expecting to get 3% to 5%, then it hardly seems worth it to take the gamble on stocks. Today, the expected return of a portfolio that is 80% stocks and 20% bonds is hardly different from one with 40% stocks and 60% bonds. Historically, those two portfolios are very different, but not today. Unfortunately, however. there will be a lot more volatility with 80% stocks than 40%.

High Stock Market Equals Low Returns

This can be a difficult lesson for investors to accept. Our natural tendency is to project the current returns into the future and assume the bull market continues. And maybe it will for a while longer. But long-term investors should understand that when the stock market is high that means projected returns are low.

Thankfully, we have a plan and our portfolios reflect the long-term outlook. We diversify into other categories with better expected returns. We dollar cost average and rebalance. And we consider the role and weighting of bonds for each client’s needs. There is no doubt that the projections from Goldman Sachs and Vanguard will prove to be imperfect. The future is always an unknown. Our plans will change, evolve, and adapt. But our focus will remain on doing our best work for planning and creating a portfolio strategy using the information, evidence, and research that is available.

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The Bank of Mom and Dad

The Bank of Mom and Dad

Posted On October 22, 2024 By Scott Stratton, CFP(R), CFA In Financial Planning /  

More and more young adults are relying on the Bank of Mom and Dad. For perhaps the first time in US history, today’s 30 year old faces a tougher time than their parents did. Today’s young adults may be worse off than their parents were at age 30. And it’s not because of laziness. It has gotten harder for young people to reach the same milestones as their parents.

Thirty years ago, the average house price in the US was $154,200. Today, it is $501,700. The average private university tuition was $11,481, 30 years ago. Today, my Alma Mater, Oberlin College charges $66,410 for tuition alone and has a total annual cost of $86,800. Many of my classmates pursued a 5-year double degree program, which today will probably cost over $450,000.

Wages in many careers have not kept pace with inflation. Students are encouraged to go to the best college possible and to pursue advanced degrees, racking up massive student debt. 45% of student loans are on an income driven repayment plan, and over one million Americans have so little income that they qualify for a $0 monthly payment on their federal students loans. Of course, the interest still accrues and they cannot discharge student loans in bankruptcy.

The cost of healthcare has risen more than inflation and child care expenses have made it difficult for parents. Many have calculated that after-tax, they are better off having one parent stay home.

I think the Wealth Inequality in America is likely to widen rather than shrink for the decades ahead. Who will come out ahead? Adults from wealthy families will likely stay ahead of young adults from less privileged backgrounds. We would like to think that America is a meritocracy, but it is becoming harder for young people to create their own economic security. 70-year old millionaires can lecture young people about hard work, but it’s not in touch with the reality of the times.

I’ll leave it to Washington to solve the nation’s problems, but I doubt that solutions will be coming soon. I think parents are going to have to look out for their kids more and for longer than just getting them to age 18 or 22. Parents will have a role in making sure their children become wealthy. We can only take care of our own family, so let’s start there.

This does not mean setting up a massive Trust Fund so that your kids don’t have to earn a living. No, parents don’t want their kids to become dependent on their generosity. We don’t want to create the moral hazard that they would fail to pursue their own career to the fullest. But there are ways that The Bank of Mom and Dad can help establish your child’s financial success, security, and stability.

The Good News

The good news is that wealthy parents tend to have wealthy children. At age 30, children’s income is highly correlated to their parent’s income. Children may not listen to what you say, but they often make similar decisions as their parents, including in their careers.

Minimizing Student Loans

Here is an important rule of thumb for college students. Keep your total student loans to no more than one-time (1X) your future salary. Entering a career with a $50,000 salary? Your student loans should be $50,000 or less to allow you to repay over the standard 10-year schedule. And only a surgeon making $350,000 a year should ever consider having $350,000 in student loans. But I have seen people with incomes under $100k with that level of student debt.

Here’s some advice for parents:

  • Make sure your kids are thinking about the 1X rule and choosing a college which will not cripple them with future debt. It’s okay for your children to have some skin in the game and have to pay or borrow a little for college. But don’t let them be foolish and invest $500,000 into a field that will only pay $50,000 a year. Debt is not the path to economic security.
  • Start saving earlier in a 529 Plan or be willing and able to absorb more of the college costs at the time they are in school.
  • Aim to have them go into a field with 90% plus employment. There are great careers which are highly in demand and offer a terrific salary. Are there jobs which will have this exact degree as a pre-requisite? Seek degrees with value.
  • After college, help your kids be mobile. In their 20’s, it is the time to pursue a career and go where that takes them. If the great jobs are on Wall Street, Silicon Valley, or wherever, that flexibility gives them a leg-up versus older job candidates who are unwilling to move. My wife’s company has promoted her four times, including most recently to Paris. This is how you build a career in 2024, not by going back home and living in the same town as your parents.

Fund Their Roth IRAs

I got my first job at age 16 at the minimum wage of $3.35 an hour. I worked at the Long Point amusement park for about four weeks before it burned down from an electrical short. The owner didn’t have insurance and that was the end of the 80 year old park – and my first job. I do think having a part time job is a great learning experience and can help young people develop important skills.

Anyone who has earned income can fund a Roth IRA, including someone who is 16 or younger. What I would suggest parents do is allow your kids to keep their income while the parents fund their children’s Roth IRAs. You will give them a tremendous advantage in their future wealth by getting this early start. You can invest up to $7,000 a year, or the level of their annual income, whichever is lower.

Let’s say you fund a Roth IRA for your son or daughter for $5,000 for 10 years from age 16 through 25. We invest in an Index Fund and earn 7% per year. By the time they are age 66, they would have $1,181,000 in their tax-free account, all thanks to Mom and Dad funding a Roth IRA for their first 10 years of part-time work. That’s the power of compound interest.

Annual Gift Exclusion

If you have enough in resources to know that your retirement is secure and you will have more than enough, then you may want to start giving away some money during your lifetime to your children. The annual gift tax exclusion for 2024 is $18,000 per person. You can give that amount to each child and a married couple can double that, to $36,000 per child per year.

Every article seems to get this wrong: If you give away more than the annual exclusion you don’t immediately owe a gift tax. But you must file a gift tax return and the amount above the exclusion will reduce your lifetime unified estate/gift exemption. For 2024 that amount is $13.61 million and again it is double for a married couple. Most parents are going to be below the lifetime exemption amount and could give away more. But, the easiest first step is to use the full $18,000 annual exclusion.

This could be a great way to gradually create an account which your adult children could use as a house down payment, or to start a business, or pursue extra career development. This account could also serve to teach them about long-term investing, the benefits of index funds, and planning for goals.

Housing and Living Expenses

Certainly a lot of parents are helping their young adults with housing, a car, health insurance, cell phones, etc. Hopefully, this will allow them to focus on developing their long-term career and avoid going into debt. In a lot of expensive areas, kids are returning home to live with their parents after college. This can help them pay down their student loans faster. And with rents having gone up so much since 2019, this seems to be becoming more and more common.

What about buying a duplex for your child to House Hack? There are lots of creative ways to help your children with expenses. The goal is to have them get started investing and be able to save aggressively or pay down debt faster.

Managing The Bank of Mom and Dad

No One Is Self-Made. We have all benefited from the Education system in America, as well as the laws and regulations which promote free trade and protect employee rights. Compared to the rest of the world, the US remains a great place to become an entrepreneur or highly paid professional. We shouldn’t forget the unique opportunities we have to find economic security in the US. But even with all the benefits, the fact remains that parents have a very large role to play.

It is getting harder for today’s young adults. Inflation is a problem for housing, college tuition, health care, and starting a family. Those costs have grown much faster than incomes. As a result, young adults are falling behind previous generations. The Bank of Mom and Dad can help with planning, wisdom, and yes, sometimes with more money. Nearly half of all first-time homebuyers under age 35 have had some family assistance with their purchase.

Hopefully, well-to-do parents are already thinking about how they can create inter-generational wealth. What are the most effective ways and times to be giving money to your kids? What can go wrong or what are some unintended consequences? How do you treat two or three kids with different needs and abilities to handle the money? These are not easy decisions or conversations. But they are vital discussions to be having as a family, and yes, with your financial planner, too.

We can help you determine what you can truly afford and think about how to best help children with your financial support. We have a number of families where we work with the parents and with their children in their twenties and thirties. Wealth is a habit, and financial planning is a skill. Being good with money is not a skill which is being taught in school, unfortunately. But parents do have a role in talking about money, and even more importantly, modelling the behavior and generosity which you hope to instill in your children.

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Extra Catch-Up for 2025

Extra Catch-Up Contributions for 2026

Posted On October 5, 2024 By Scott Stratton, CFP(R), CFA In Retirement Planning /  

Summary: For 2026, the IRS increased retirement plan and catch-up contribution limits for participants age 50 and over. There are now age-based catch-up tiers and income-based Roth catch-up requirements under SECURE 2.0. Understanding these updates helps in planning retirement contributions and tax-efficient saving.

How Catch-Up Contributions Work

Age-50+ catch-up contributions allow individuals age 50 or older by year-end to contribute above standard deferral limits in qualified retirement plans (401(k), 403(b), and some 457 plans) and IRAs. These extra contributions are designed to help older workers increase savings as retirement approaches.

2026 Contribution Limits

For tax year 2026, the IRS has updated limits and catch-up amounts as follows:

Employer-Sponsored Plans (401(k), 403(b), 457(b))

  • Standard deferral limit: $24,500
  • Age 50+ base catch-up: $8,000
  • Enhanced catch-up (ages 60-63): $11,250
    Total maximum when eligible: up to $35,750.

IRA Catch-Up Contributions

  • IRA contribution limit: $7,500
  • IRA age 50+ catch-up: $1,100
    Total IRA possible for age 50+: $8,600.

SIMPLE IRA Plans

  • Standard limit: $17,000
  • Age 50+ catch-up: $4,000
  • Enhanced (ages 60-63): $5,250 (for eligible plans)

New Roth Catch-Up Requirement in 2026

Under the SECURE 2.0 Act, beginning in 2026, higher-earning participants age 50+ must designate catch-up contributions as Roth (after-tax) once they exceed the regular deferral limit if their prior-year wages exceed a threshold (indexed; ~$150,000 for 2025 wages affecting 2026). This means such catch-up amounts are subject to taxation when contributed, not when withdrawn.

Why it matters: Some employers may require Roth catch-up contributions if plan design allows. If the plan does not support Roth contributions, some participants may not be able to take advantage of catch-up features.

Age-Based Catch-Up: Why It Matters

The IRS continues to recognize that workers closer to retirement often have a stronger need (and ability) to save more:

  • Age 50+ base catch-up: a general bump to allow additional contributions.
  • Age 60-63 enhanced catch-up: for those in their early 60s, acknowledging a shorter time horizon to retirement.

These age-based tiers remain even with the Roth designation rule for eligible higher earners.

Planning Considerations for Retirees

Tax Treatment

Traditional catch-up contributions have historically been pre-tax, lowering taxable income today. In contrast, Roth catch-up contributions are made after tax, meaning they won’t lower current taxable income but may grow tax-free in retirement if distribution rules are met.

Job and Wage Tracking

The ROTH-designation requirement is based on prior-year wages for the same employer. Changing jobs or varying wage sources may affect eligibility for pre- vs. after-tax catch-up contributions.

Interaction With Retirement Timing

Boosted catch-up limits can be useful for:

Frequently Asked Questions

Q: Do catch-up contributions count toward the annual limit?
Catch-up contributions are in addition to the regular elective deferral limit — they do not reduce the base deferral maximum.

Q: When do I qualify for catch-up contributions?
You qualify if you are age 50 or older by December 31 of the tax year. For enhanced catch-up, you must be ages 60-63 in that year.

Q: Will catch-up contributions affect my RMDs?
No — catch-up contributions impact saving limits but do not directly change Required Minimum Distributions (RMDs) or their timing. For discussion of RMD timing, see RMDs & Timing.

Q: Do SIMPLE IRA catch-ups work differently?
Yes — SIMPLE IRAs have their own catch-up rules and limits. They follow similar age-based tiers but different numeric caps.

Related Reading

Catch-up contributions can meaningfully affect your long-term retirement savings strategy, especially when combined with tax and income planning decisions. If you’d like a planning-first discussion of how the 2026 catch-up limits might fit into your personal retirement picture, you’re welcome to Request an Introductory Conversation.

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Hard Work Doesn't Create Wealth

Hard Work Doesn’t Create Wealth

Posted On September 21, 2024 By Scott Stratton, CFP(R), CFA In Behavioral Finance /  

When asked about their success, some wealthy people are quick to cite hard work as their key to success. I’m sure they have worked hard. But hard work doesn’t create wealth.

“Hard work” is a classic example of the correlation-causation fallacy. Wealthy people did work hard, but the vast majority of hard working people are not going to become wealthy. Instead, I want to talk about what really helps people to become wealthy: intention and process. Once those are in place, there may well be hard work, discipline, patience, and grit. Those are the fuel for creating wealth, but they are not the engine. The engine is creating intention and process.

Intention

Wealth is not an accident, it requires intention, financial literacy, and planning. When we are clear on our goals and values, our decisions start to become more aligned. My wealthy clients have made economic security a high priority. They focus on building a high income that supports their goals. Their intentions shape their education, careers, spending habits, personal vision, and other life-long decisions. Wealthy people have a wealthy mindset and focus on the following:

  • Living below your means. Most Americans spend 100% of their income. (Some spend more and go into debt.) If you can make frugal choices on your house, car, and leisure spending (especially eating out and vacations), you can place yourself in a situation where you can save a meaningful amount of money.
  • Delayed gratification. Your future self will thank you for the actions you take today. The more you can save today, the faster you may reach your finish line. Focus on increasing your income, not so you can spend more, but so that you can save more.
  • Understand things will not make you happy. We live in a consumer culture of materialism. There are too many people who are focused on appearing successful rather than being successful. Your home is not an investment, it is an expense.
  • Track your net worth, know your assets and liabilities. Have a plan. Most Americans spend more time planning a week of vacation than they do their entire future. Hoping you become wealthy is not a plan.
  • Start early. Compounding is amazing. Believe in the process and stick with it.

At retirement age, some investors will be millionaires. And they will work alongside people who have the same paycheck but who will retire with almost nothing. The successful made different decisions. They put in the maximum in their 401(k), not the minimum to get the company match. Their decisions reflected their intention to achieve financial success.

Process: Automatic Beats Hope

The process of becoming wealthy is simple. Save regularly over time and invest efficiently. It’s really not rocket science. The key is to make the process automatic. If you wait until the end of the year to fund your Roth IRA, you might not have an extra $7,000 lying around for you and your spouse. But if you set up monthly contributions of $583, you can achieve the same result. And then you don’t even have to think about it. Otherwise, if you are putting yourself in a position where you are hoping you can save, you are setting yourself up to fail.

  • Automate your contributions to your 401(k), IRA, 529 or other accounts. You can’t spend the money that is automatically contributed. Increase these contributions every year until you reach the maximum.
  • Don’t time the market. You will experience a Bear Market every 4-10 years. If you panic and sell everything, you cannot recover. In hindsight, every Bear Market (2000, 2008, 2020), was an amazing buying opportunity. Keep buying all the time. When you are young, you should love buying in a Bear Market.
  • Don’t aim to beat the market. In 20 years as a wealth manager, I’ve never met anyone who was wealthy because of their brilliant stock picks. The market does whatever it does. And what it has done over the years is fantastic and more than enough. Focus on what you can control: your savings rate. And then keep costs, taxes, and turnover low. Index funds work.
  • Be an optimist. You have to have some faith in the process. Not a blind faith, but the fortitude to stick with the plan when times are tough.

Things Always Change

America is the land of opportunity. We’ve never had a more level playing field than today for any American to become wealthy. Unfortunately, it is also becoming harder to get ahead. Many young adults face a tougher time than their parents in buying a house, paying off student loans, and being able to save. The wealth gap is widening and attaining economic security is becoming more challenging.

Even against that backdrop, it is still possible to become wealthy. Everyone wants to be a millionaire, but they have to first figure out how to get to $100,000. Once you’ve done that, getting to $200k and then $400k, is just a matter of time. Wealth creates more wealth. You build a savings muscle and establish your wealth engine, and then it just works for you.

Intention sets your focus and creates the decisions which enable you to save. Take control of your financial life and have a plan. Process is understanding what works and keeping your momentum headed in the right direction. Automate your savings and you remove yourself as the roadblock to your success. Neither intention nor process require hard work. They are a mindset.

You should work hard to develop your career and maximize your earnings. But that hard work won’t create wealth if you don’t have alignment on how your money can create your financial independence for you over time. Years from now, when a young investor asks about the cause of your success, I hope you can give the right answer. It was intention and process, not hard work, that created your wealth.

Related Retirement Income Topics
– Retirement Income Planning
– Guardrails Withdrawal Strategy
– Social Security: It Pays to Wait
– Required Minimum Distributions
– What Is a MYGA?

This topic is often part of a broader retirement or tax planning conversation. If you’d like help applying these ideas to your own situation, you can request an introductory conversation here.

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What is Survivorship Bias

What is Survivorship Bias?

Posted On August 15, 2024 By Scott Stratton, CFP(R), CFA In Portfolio Management /  

Survivorship bias is the problem that the track record of today’s stocks reflects only the ones that survived. The stocks and funds which failed are no longer part of the performance history of today’s stocks or mutual fund databases. And as we will see, over the years, there have been a lot of stocks that have had bad returns and disappeared. We will also discuss how to invest wisely given the reality of survivorship bias.

Growing up in Rochester NY, my neighbor on the left worked for Eastman Kodak. Our neighbor on the right worked for Kodak. And all three neighbors across the street worked for Kodak. Kodak Park was the largest industrial site in the world, stretching for miles along Ridge Road. Rochester was a company town and there was tremendous pride in Kodak. The stock had done well for employees and residents, the company contributed a lot to the community, and the pension plan provided security to tens of thousands of retirees.

Kodak, the stock, was part of the S&P 500 Index and was one of 30 components of the Dow Jones Industrial Average from 1930 until April 2004. The company actually invented the digital camera in 1975, but thought it would be too impractical to ever have value. The rest, as they say, is history. The company had a long decline into obsolescence and filed for bankruptcy in 2012. The once mighty stock went to zero.

Stock Market 1926 through 2023

A new research paper by Hendrik Bessembinder looks at US stocks from 1926 through 2023, a 98-year period. During this period, there were a total of 29,078 US-listed stocks. Today, there are around 5,000. He looked at the performance of these stocks and it is a remarkable picture of Survivorship Bias.

  • Only 31 stocks have been in existence for the entire 98 years. The average stock existed only for 11.6 years. Approximately 24,000 companies have disappeared: either bankrupt, merged, acquired, or taken private.
  • 51 percent of the stocks had negative returns over their entire life, with a median compound cumulative return of -7.41%. Most stocks lost money!
  • Thankfully, the compounding effect of the winning stocks greatly offset the stocks which lost money. The mean performance is much better than the median performance of the 29,078 stocks.
  • If you randomly select 10 stocks from history, your chance of outperforming the S&P 500 is very small. That is because most of the wealth creation in the market comes from a small percentage of top-performing companies. The majority of stocks under-perform the index.

Idiosyncratic Risk

Eastman Kodak, Lehman Brothers, Enron, and General Motors all went bankrupt and their stocks went to zero. Even though the stock market has done well over the long-term, there are still many individual stocks that get destroyed. We call this Idiosyncratic Risk, or “company specific” risk. Unfortunately, even if you do your homework, investors risk being caught in the next Bear Stearns or Washington Mutual.

What can you do to address Survivorship Bias and reduce the Idiosyncratic Risk of individual stocks?

  1. Diversify extensively with index funds. While single companies do go bankrupt, we have never seen all 500 companies of the S&P 500 index go bankrupt at once. An index fund can greatly spread out your risk. Recognize the difference between speculating on an individual company versus investing in the market as a whole.
  2. Note that index funds are not static. Every year, the S&P 500 Index adds growing companies and drops other companies which are on their way down. Sure, there are still surprises where an S&P 500 company disappears suddenly (like Silicon Valley Bank last year), but you still have 499 other holdings.

Fund Shenanigans

It’s not just individual stocks that exhibit survivorship bias. Mutual Fund companies do the same thing, deliberately getting rid of their worst funds. A fund with a poor track record eventually gets so small that it is unprofitable, and the fund company shuts it down. Even more nefarious, companies create dozens of stock funds and then take the ones with a poor track record and roll them into their funds with better ratings. The crappy fund disappears and now it looks like all their funds are 4-star and 5-star funds!

You might think the solution is to avoid the mutual funds with a poor track record and go with a top ranked actively managed fund. Unfortunately, we know that performance is rarely consistent with actively managed mutual funds. Is that my opinion? No, this is what decades of data shows from the Standard and Poors Persistence Scorecard. For example, there were more than 2000 US stock mutual funds in December 2019. The top quartile (the top 25%) included 529 funds in 2019, but not a single one of those funds remained in the top quartile over the next four years, through December 2023. Past performance (you should know this by heart by now) is no guarantee of future results.

One of the consistent findings of the S&P Persistence Scorecard is that the worst performing funds are the most likely to merge or be shut down. And then you can’t find those one-star funds on Morningstar because they no longer exist. That’s survivorship bias. Our approach: use low-cost index funds from Vanguard, SPDRs, and others. Then we are not chasing performance, looking for the hot fund, sector, or country. And we have been saying for a long time: the vast majority of active managers under-perform their benchmark over time.

Keeping It Simple

The stocks which exist today are different from the ones from 98 years ago. Companies come and go. Survivorship Bias masks the poor track record of the many stocks and funds which have disappeared. When we only see the ones which survived and thrived, investing success looks easier and more inevitable than it really is. Unfortunately, there are stocks and funds out there today which will someday suffer the same fate as Eastman Kodak and thousands of other past stocks. Understanding this history will help you be a better investor in the decades ahead.

How can we reduce Idiosyncratic Risk or Survivorship Bias? Fortunately for investors, this complex question has a simple answer. We can diversify and reduce the importance of any one stock in our portfolio. With index funds, we get broad diversification, with hundreds or thousands of holdings, in a low-cost, tax-efficient vehicle. No doubt an index fund will own some stocks that fail, but one stock out of 500 may only move the index by 0.2% for one day. It often is hardly even noticed. And using index funds also helps keep us out of the worst actively managed funds, which sometimes were the best funds from five years ago. These are time tested strategies and the data keeps proving that this approach remains a wise choice for investors.

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