Bonds and Interest Rates

Posted On March 31, 2023 By Scott Stratton, CFP(R), CFA In Portfolio Management /

How are Bonds and Interest Rates correlated? Bonds move inversely from Interest Rates. When rates rise, the price of bonds fall. This simple fact led to the downfall of Silicon Valley Bank and Signature Bank this month. Banks invest your deposits in bonds and earn a spread on the difference between what they pay you and the bonds they buy. Banks are not vaults with piles of cash – they are bond investors. That is their business model.

In 2020, these banks bought long-term bonds with yields of 1-2 percent. Fast forward to 2023, and yields are now 4-5 percent on the same bonds, and some of those bonds are now trading at 90 cents on the dollar. A bank with $10 Billion in these bonds now has a paper loss of $1 Billion.

If they can hold to maturity, these bonds will return back to their full value. But if a large number of depositors all want their money out today, the banks have to sell their bonds for a huge loss. And if that loss is large enough, the bank becomes insolvent and doesn’t have enough assets to cover their deposits.

Bank Failures

When a bank fails, the FDIC steps in and seizes the bank. What is remarkable about these two bank failures in March is the size of the losses. These two banks represent $319 Billion in assets, which makes 2023 the second worst year ever for the FDIC, and it’s only March. In 2008, bank failures totaled $373 Billion in assets. So it is easy to see how bad things could get in 2023, if two bank failures in March almost reached the losses of the Global Financial Crisis of 2008.

These banks are collateral damage from rising interest rates, thanks to the Federal Reserve. The Fed held rates for too low for too long after the start of the pandemic, and helped create the accelerating inflation. Now they are raising rates to slow the economy.

While the Federal Reserve did set this in motion, the poor risk management at the Banks should bear the brunt of the blame. We have been talking for several years about reducing the duration of our bond holdings and lowering our interest rate risk. And I thought everyone else was doing the same, it seemed pretty obvious to me. But no, there were banks buying these long bonds which were just waiting to get crushed. When customers realized the size of bank losses, they pulled their deposits and there was a run on the bank. Could other banks follow? Maybe. If customers pull out their deposits en mass, it is possible.

I am not terribly concerned about this spreading to other banks, because the Fed has launched a new program. The Bank Term Funding Program will provide loans to banks so that they can hold on to their longer dated Treasury bonds and not have to sell for a loss. It will provide liquidity so that the banks can hold these bonds for longer. And like other government programs, I can see this program being expanded and made permanent.

It is remarkable to me how much of our news today has its roots in bonds and interest rates. The bank crisis, inflation, recession, unemployment, retirement programs, real estate and mortgages, etc. These are all linked. What should the individual investor do? Here are our thoughts:

FDIC Coverage

I would never have more than $250,000 at any bank and exceed the FDIC coverage limits. I heard about a corporate subsidiary that had tens of millions at SVB, which failed last month. Luckily, it looks like the FDIC has arranged for all of those large account holders of SVB to be made whole. But I would not just assume that FDIC coverage is now unlimited. Instead of exceeding FDIC limits:

You could use more than one bank and stay under FDIC limits.
We can buy brokerage CDs from multiple banks in your Ameritrade account. Each issuer will carry $250,000 of FDIC coverage. Today we have 6-month CDs at 5%. Investors are often surprised that I can show them much better yields from Chase or Wells Fargo than they can get at their local branch.
Ladder Treasury Bills. There are maturities every week. Treasury bonds are high quality and the most liquid market in the world.

Bond Strategies

Our core holdings for bonds consist of owning individual bonds laddered from 1-5 years. We buy investment grade bonds including Agency Bonds, Treasuries, Corporate, Municipal, and CDs. Today, the yield on Agency bonds is very competitive with Corporates. And CDs are yielding higher than Treasuries.

With today’s yields, I would avoid taking on significant credit risk. We are not buying any junk bonds, and have sold our Floating Rate bonds. In addition to rising interest rates, we are seeing liquidity problems in some areas of the bond market. It may become difficult or impossible for some low credit quality companies to refinance their debt in 2023 and 2024. It is probable that defaults will rise, another casualty of the Federal Reserve heading the economy towards a likely recession.

Inverted Yield Curve

While the Fed raised the Fed Funds rate 0.25% at their March meeting, the bond market moved the opposite direction. Over the past month, the 2-year Treasury has actually fallen from 4.89% on March 1, to as low as 3.76% on March 23rd. The bond market remains inverted, with the 2-year yields higher than the 10-year yields. This is a strong historical predictor of recession. The bond market is priced as if the Federal Reserve will begin cutting interest rates in 2023, which is not what Jerome Powell is saying at all. The Fed’s commentary shows that they anticipate raising rates to 5.10% (from the current 4.75-5.00%) by year end. The movement in the bond market is bearish for the economy and stocks.

So now there is the potential for the opposite movement of the bond see-saw. If rates do go down this year or next, bond prices will rise. If we enter a recession, investors will want to shift towards safety and the Fed will lower rates. This would be a good time to have longer duration bonds with higher credit quality. And so we have begun buying longer bonds, 7-15 years. And if nothing happens and we just hold these bonds, we have yields to maturity of 6%. That is also a good outcome, an alternative to stocks, which have a similar expected return today.

In spite of seeing losses in bonds in 2022, looking forward, bond returns look strong. Still, it is crucial to be mindful of the risks and to take steps to mitigate them. Here are some additional ways to improve safety in a bond portfolio:

Diversify Across Different Types of Bonds

It’s important to diversify across different types of bonds, such as corporate, municipal, and government bonds, as well as across different industries and sectors. This can help reduce the impact of any one bond issuer or industry experiencing difficulties.

Consider Active Bond Management

Active bond management can help adjust the portfolio to changing market conditions and credit risks. It may be worth considering investing in low-cost actively managed bond funds or working with an investment advisor who specializes in bond management.

Monitor Interest Rate Risks

Investors should keep a close eye on interest rate risks and how they may impact their bond portfolio. The longer the duration of the bond, the greater the impact of interest rate fluctuations. Investors may want to consider laddering their bonds to manage interest rate risks.

Use Credit Ratings as a Guide

Credit ratings can provide a guide to the creditworthiness of a bond issuer. Investors should be wary of bonds with lower credit ratings, as they may carry higher risks of default. However, it’s important to remember that credit ratings are not infallible and can sometimes be inaccurate.

In conclusion, while bonds can offer attractive yields and provide diversification to a high net worth investor’s portfolio, it’s important to be mindful of the risks and take steps to mitigate them. By diversifying across different types of bonds, actively managing the portfolio, monitoring interest rate risks, and using credit ratings as a guide, investors can help reduce their exposure to potential losses. Keeping cash in a bank may not be as safe as you might assume, especially if you exceed FDIC coverage. And why have cash earning next to nothing when you could be making 4-5% in short term CDs or Treasury Bills?

Within our strategic asset allocation models, we actually spend more time on managing our bond holdings than our stock holdings. Why? Because it’s that important, and it is an area where we believe we can add more value with our time. Interest Rates are in the news and there are a lot of risks today. Risk is often defined as a danger, but risk can also mean opportunity. We are seeing both dangers and opportunities in 2023, and you can bet there will continue to be a lot of headlines about Bonds and Interest Rates.

Investment Themes for 2023

Posted On January 13, 2023 By Scott Stratton, CFP(R), CFA In Portfolio Management /

At the start of each year, I discuss our investment themes for the year ahead. Today we share our Investment Themes for 2023. 2022 was a lousy year for investors, with a Bear Market in stocks (a loss of more than 20%) and double digit losses in bonds. And to add insult to injury, 9% inflation increased our cost of living even as portfolios shrank. War in Europe, supply chain problems, and political drama added to the uncertainty.

The Federal Reserve is committed to raising interest rates to slow the economy back down to 2% inflation. Economists are predicting a recession in 2023. With all these problems, it is easy to feel pessimistic about 2023 as an investor.

However, there are reasons for optimism. The call for a recession is so clear that it may already be somewhat priced into the market’s expectations for 2023. Many stocks are down 20%, 30% or more from their peaks and more fairly valued today. The large losses in international stocks were driven by a 17-20% increase in the value of the dollar to the Euro and Yen, and that headwind may be turning into a tailwind as the dollar starts to decline.

Today, we have very attractive rates in the bond market, 4.5% on short-term bonds and 5.5% on intermediate investment grade bonds. Bonds look better in 2023 than they have since the Global Financial Crisis in 2008.

My annual investment themes are not a prediction of whether stocks will be up or down this year. We don’t believe anyone can time the market or predict short-term performance. Instead, our process is to tilt towards the areas of relative value, with a diversified, buy and hold portfolio. Here is how we are positioning for the year ahead.

(And if you want to look back, here were our Investment Themes for 2022 and 2021.)

Stocks

In 2022, the Growth / Value reversal became widely acknowledged. For over a decade, growth stocks had crushed value stocks, but that leadership came to an end last year. Now, value stocks are performing better and growth stocks could have further to fall. We are using Value funds across markets caps – large, medium, and small.

International stocks have lagged US stocks, but today offer a better value. These stocks are cheaper than US stocks, have a higher dividend yield, and offer a hedge against a falling dollar. International and Emerging Markets are attractive today, and we are maintaining our international diversification. There are now more low-cost Value funds and ETFs offered in International stocks, and so we have replaced some of our Index Funds with a Value fund.

Overall, we have not made significant changes to the holdings within our stock allocations. What has changed is the expected return of stocks versus bonds. Over the next 10 years, Vanguard has an expected return of 5.7% return on US stocks. Yields have risen in A-rated bonds to where we can get a similar return from bonds. So, we are moving 10% of our stock allocation into individual bonds, 5-7 years with a yield to maturity of at least 5.5%. We are buying AAA government agency bonds (such as Fannie Mae or Freddie Mac), and some A-rated corporate bonds. These are offering a similar return as the expected return from stocks, but with much, much less risk and volatility. We aren’t giving up on stocks, but if bonds are going to offer similar potential, then we are going to add to bonds.

Bonds

Our core approach to bonds is to buy individual A-rated bonds, laddered from 1-5 years. We buy Treasury Bonds, Agency Bonds, CDs, Corporate Bonds, and Municipal Bonds. Yields are up and we want to lock-in today’s yields. For clients who are retired or close to retirement, our laddered bond portfolio will be used to meet their income needs for the next five years.

We use a “Core and Satellite” approach. The 1-5 year ladder represents our Core holdings today. For 2023, we decreased our Satellite holdings in bonds. Last year, we had a large position in Floating Rate Bonds. And these ended up being the best performing, most defensive category within Fixed Income in 2022. They worked exactly as hoped, protecting us during a year of rising interest rates. For the year ahead, though, they are less attractive. These are smaller, more leveraged companies. A year ago, their debt cost them 3%. Today, those companies are facing a recession and their debt now may cost them 7%. Floating Rate bonds have become more risky and more likely to have losses. We have sold Floating Rate and added the proceeds to our core 1-5 year ladder.

At the start of 2022, our focus was to minimize interest rate risk by keeping bonds short-duration. Yields have risen so much that in 2023 we want to extend duration and lock-in higher yields. Unfortunately, with an inverted yield curve, it is more challenging. Still, today, we are looking to add 5-7 year bonds to our ladders when cash is available and we can find attractive bonds.

We continue to own a small position in Emerging Market bonds. These have always been more volatile than other bonds, but history suggests that selling after a down year is a bad idea. The yields going forward are attractive, and many of these emerging countries are actually more fiscally sound than developed nations.

Alternatives

We are always looking for other investments which offer a unique opportunity for the current environment. We want returns better than bonds, but with less risk than stocks. If we can add investments with a low correlation to stocks, it will improve the risk/reward profile of our portfolio.

We purchased commodities early in 2022 with inflation spiking. Although they had a good Q1, commodities fared poorly for the rest of the year. We sold most of our commodities in October, and replaced them with TIPS, Treasury Inflation Protected Securities. The price of TIPS fell dramatically through the year, and by October, we could buy 5-year TIPS which yield 1.7% over inflation. TIPS are now a more direct inflation-hedge than commodities, which are frustratingly inconsistent. (If Gold doesn’t do well when there is 9% inflation, when will it shine?) Today, TIPS also offer a better yield than I-series US Savings Bonds.

Preferred Stocks were down in 2022 and we are trimming those positions to add to our Core 1-5 Year Ladder. Still, there are some good opportunities as many Preferreds are now trading at a 30% discount to their $25 par value. Preferreds with a set maturity date should be held to maturity. Perpetual Preferreds (those without a maturity) now offer 6-7% current yields or higher. While volatile, that is a decent level of income, plus the potential for price appreciation if interest rates fall in the future.

Overall, Alternatives are less attractive in 2023 because we now have such compelling bond yields. When we can buy risk-free T-Bills with a 4.5% yield, there is a higher bar for what will make the cut as an Alternative.

Summary

No one has a crystal ball for the year ahead, and our Investment Themes for 2023 are not based on a 12-month horizon. Instead, we are looking for assets that we think will be good over the next 5-10 years. We remain very well diversified, both in size (large, medium, small) and location (US, International, Emerging), as well as in Bonds and Alternatives. We diversify holdings broadly, with 10-12 ETFs, and each fund holding several hundred to several thousand stocks.

Although 2022 was an ugly year for investors, I wouldn’t bet against the stock market after a 20% drop. Historically, the market is usually up 12 months later. The expectations for 2023 are low and I would certainly caution investors to assume a volatile year ahead. Still, in these difficult periods, the best thing for investors is to stick to a good plan: diversify, keep costs and taxes low, and don’t try to time the market.

We take a patient approach and tilt towards the attractive areas, including Value stocks and International. Bonds finally offer a decent yield today and we have increased our core bond holdings and are looking to extend duration. We are making more changes in the bonds and alternatives than to our stock holdings. In 2022, we added more value on the bond side of portfolios, relative to benchmarks, than we did in stocks. So, as boring as bonds may seem, we focus a lot on bonds because we think there is an opportunity to add value for our investors.

Investing isn’t easy, but thankfully, it can be simple. We don’t need a lot of complexity to accomplish our goals over time. Years like 2022 are an unfortunate reality of being an investor. For 2023, we are making small adjustments but focused on staying the course.

Secure Act 2.0 Retirement Changes

Posted On December 29, 2022 By Scott Stratton, CFP(R), CFA In Retirement Planning /

The SECURE Act 2.0 passed this week after being discussed in Washington for nearly two years. The Act could not make it through Congress on its own, but it was stuffed into the Omnibus Spending Bill that was required to avoid an imminent government shutdown. I’ll save that rant for another day and focus on some of the dozens and dozens of changes to retirement planning in the Secure Act 2.0 which will affect you.

First, some background: The original SECURE Act was passed in December 2019. This legislation was the largest change to retirement planning in recent decades. It included increasing the age of RMDs from 70 to 72 and eliminating the Stretch IRA for beneficiaries.

The SECURE Act 2.0 goes even further and has a large number of changes to help improve retirement readiness for Americans. We are not going to cover all of these changes, but focus on a few key areas that are likely to apply to my clients.

Required Minimum Distributions

The SECURE Act 2.0 will gradually increase the age of RMDs from 72 to 75. Next year, the age to start RMDs will be 73, and then this will increase to age 75 in 2033. So, if you were born before 1950, your RMD age will remain 72 and you have already started RMDs. If you were born between 1951-1959, your RMD age is 73. And if you were born in 1960 or later, RMDs will begin in the year you turn 75.

I’m happy to see RMDs pushed out further to allow people to grow their IRAs for longer. For investors, this will extend the window of years when it makes most sense to do Roth Conversions. People are living longer and we should be pushing out the age of RMDs and starting retirement.

Roth Changes

Washington loves Roth IRAs. Anyone who thinks Washington doesn’t like Roths should consider the incredible expansion to Roths in SECURE Act 2.0. Roths are here to stay.

First, SEP IRAs and SIMPLE IRA plans will be amended to include Roth Accounts. This brings them up to par with 401(k) plans which have offered a Roth option for several years now. What does this mean? Roth contributions are after-tax and grow tax-free for retirement. You will be able to now open a Roth SEP or a Roth SIMPLE. Do you have a W-2 job and also self-employment income? You can do a 401(k) at work and also a Roth SEP for your self-employment.

2.0 also eliminates the RMD requirement from Roth 401(k)s. This was an odd requirement, and could easily be avoided by rolling a Roth 401(k) to a Roth IRA. But it still caught some people by surprise, so I am glad they eliminated this.

Starting in 2023, Employers may now make matching contributions into Roth 401(k) sub-accounts for employees. These additional contributions will be added to the employee’s taxable income. So, this may not make sense for everyone.

Forced Roth for Catch-Up Contributions

In 2024, high wage earners will be forced into using a Roth sub-account for catch-up contributions. If you are over age 50, you can make catch-up contributions. If you made over $145,000 in the previous year, your catch-up contributions must go into a Roth 401(k) starting in 2024. You will no longer be able to make Traditional (“deductible”) contributions with catch-up amounts. Oh, and if your company does not currently offer a Roth option, everyone over 50 will be prohibited from making any catch-up contributions.

This one will be a mess and is one of the only negative impacts we will see from SECURE Act 2.0. It will take many months for 401(k) providers and employers to update their systems and figure out how to implement these new changes.

Lots of Roth changes, but what isn’t here? The SECURE Act 2.0 didn’t eliminate the Backdoor Roth IRA. Many in Congress have been wanting to kill the Backdoor Roth, but it lives on. There are no new restrictions on Roth Conversions of any sort. Why so much love for Roths? Washington wants your tax money now, not in 30 years.

529 Plan to Roth

What if you fund a 529 College Savings plan for your child and they don’t use all the money? Currently, you can change the 529 plan to another beneficiary. But if you don’t have another beneficiary, withdrawing the money could result in taxable gains and a 10% penalty. The SECURE Act 2.0 is creating a third option: you can rollover $35,000 from a 529 plan to a Roth IRA for the beneficiary.

Here are the requirements. You must have had the 529 plan open for at least 15 years. You cannot rollover any contributions made in the preceding five years. Each year, the amount rolled from the 529 to the Roth is included towards the annual Roth contribution limit. For example, this year the limit is $6,500. The maximum you could roll from a 529 would be $6,500. But if the beneficiary already contributed $3,000 to an IRA (Roth or Traditional), you could only roll $3,500 from the 529 to the Roth. Thankfully, there are no income limitations to make this rollover. The lifetime limit on rolling over a 529 to a Roth will be $35,000, so this may take 5-6 years assuming the beneficiary makes no other IRA contributions.

You can change the beneficiary of a 529 plan to yourself. So, could you take an old 529, change the beneficiary to yourself and then roll it into your own Roth IRA? It is unclear in the legislation if a change in beneficiary will start a new 15-year waiting period. We will have to wait for additional rules to find out.

Other SECURE Act 2.0 Retirement Changes

So many changes! (Here is the most detailed summary I have seen so far.) These won’t impact everyone but I am studying all of these to see who might benefit:

IRA catch-up amounts will be indexed to inflation and increase in $100 increments.
401(k) Catch-up contributions will be increased for ages 60-63. The amount will be $10,000 or 150% of the annual amount, whichever is higher.
QCD (Qualified Charitable Distributions) limit of $100,000 will be indexed to inflation.
New exceptions to the 10% premature distribution penalty.
Emergency Savings Accounts, allowing people to access their 401(k)s without penalty. (Bad idea, but so many people in distress do this and then have to pay penalties and taxes, hurting them even further.)
QLAC limit increased to $200,000.
Allowing matching 401(k) contributions for payments towards student loans.
Tax credits for small employers who start a retirement plan.
New Starter 401(k) plans.
Lower penalties for missed RMDs.

I appreciate that Washington wants to make it easier for Americans to save for retirement. The SECURE Act 2.0 has a vast amount of retirement changes to incentivize the behavior the government wants to see. For those who are able to save for retirement, they are making it easier to save and accumulate assets. Your retirement is your responsibility! And retirement planning is my job. I’m here to help with your questions, preparation, and implementing your retirement goals.

Callable Bonds versus Discount Bonds

Posted On December 3, 2022 By Scott Stratton, CFP(R), CFA In Portfolio Management /

Bond yields are up this year and we are seeing newly issued bonds with 5 to 6 percent coupons. Which is better – to buy a new issue or an older one with lower coupon? Here is what we are looking at as we buy individual bonds.

Yield To Maturity

The return of a bond from the date of purchase to its maturity is its Yield to Maturity or YTM. We calculate YTM with three things: the bond’s interest payments, the price of the bond, and the number of years to maturity. While bonds are generally issued and redeemed at a Par value of $1000, they inevitably trade at a premium or a discount to Par.

The bonds of any issuer tend to have the roughly the same YTM, but the price can differ. For example, a newly issued 5-year bond could have a 6% coupon (interest payment) and a price of $1000. This bond has a YTM of 6%. But an older bond with 5-years remaining might have a 3% coupon. Today, that bond would likely trade for $872, and have the same 6% YTM. In the first one, the 6% coupon, all of your YTM is solely from the coupon. In the second bond, the 3% coupon, part of your return is coupon and part is from the price increasing from $872 to $1000 over five years.

I think most investors would prefer the first bond, the 6% coupon, and get the same steady income each year. They’d rather have the current income rather than the capital gains of the second bond. However, the annual return on both, held to maturity, is the same 6%.

Callable Bonds

Unfortunately, there is one problem. Most corporate and municipal bonds are callable. That means the issuer has the right to refinance their debt and buy back your bonds early, before the five years are up. So, if interest rates drop from today’s 6% to 4% two years from now, they can buy back your 6% coupon bonds at 1000. And now you have to replace those 6% bonds at a time when interest rates are only 4%. This is called Reinvestment Risk.

However, the discount bond (the 3% coupon) won’t get called in this scenario. The issuer will not refinance a debt that costs them 3% for the new rate of 4%. You hold it for the full five years and receive your expected YTM of 6%. It’s better to buy the discount bond with a 6% YTM than a 6% coupon bond at par because of the Call Risk of the 6% coupon.

I’m sharing this because clients may hear me talking about bonds at 6% but then see a bond listed as a 3% bond on their statement. No one really knows what interest rates will do over the next five years, but they will probably move around quite a bit, like they have over the last five years. And that Call Risk is a real problem for bonds with a high coupon. If you really want to lock in your return from a bond, you have to understand its call features.

Callable Bonds Don’t Appreciate

One other consideration – callable bonds don’t have the ability to appreciate much. If the issuer can redeem anytime for $1000, that bond is not ever going to trade at a significant premium. However, if interest rates fall, our discount bond (the 3% coupon) can increase in price in a hurry. It can move up from $872 quickly. We can have a bigger return in the short run, and even sell that bond if we want.

In managing our bond ladders, I focus primarily on Yield To Maturity, not the current coupon. We prefer to buy discount bonds, which have lower call risk, when possible. Non-callable bonds are even better, but harder to find in all categories. Today, interest in bonds is high (pun intended), and so we have been writing a lot about how we manage this important piece of your portfolio.

Stocks Versus Bonds Today

Posted On November 14, 2022 By Admin In Portfolio Management /

Where is the best opportunity – in stocks or bonds? I’ve been enthusiastic about the rising interest rates in 2022 and this has impacted the relative attractiveness of stocks versus bonds today. What do we expect from stocks going forward?

Vanguard’s Investment Strategy Group publishes their projected return for stocks for the next 10 years. And while no one has a crystal ball to know exactly how stocks will perform, this is still valuable information. They look at expected economic growth, dividend yield, and whether stock values (P/E ratios for example) might expand or contract.

Their median 10-year expected return for US stocks is 5.7%, with a plus or minus 1% range, for a range of 4.7% to 6.7%. This is actually up from the beginning of the year. As stocks have fallen by 20%, we are now starting from a less expensive valuation. But a projected return of 5.7% for the next decade would be well below historical averages, and most investors are hoping for better.

Is Vanguard being too pessimistic? No, many other analysts have similar projections which are well below historical returns. For example, Northern Trust forecasts a 6% return on US stocks over the next five years. And of course, these are just projections. Returns could be better. Or worse!

Bonds Are An Alternative

Last week, I bought some investment grade corporate bonds with a yield to maturity of 6% over three to five years. Bonds have much less risk than stocks and have only a fraction of the volatility of stocks. As long as the company stays in business, you should be getting your 6% return and then your principal back at maturity.

If we can buy a good bond with a return of 5.5% to 6.0%, that completely matches the projected stock returns that Vanguard expects. Why bother with stocks, then? Why take the risk that we fall short of 6% in stocks, if we can get a 6% return in bonds? Today, bonds are really attractive, even potentially an alternative to stocks.

For many of our clients, bonds look better than stocks now. And so we may be trimming stocks by year end and buying bonds, under two conditions: 1. The stocks market remains up. We are not going to sell stocks if they fall from here. 2. We can buy investment grade bonds, 3-7 years, with yields of at least 5.5% and preferably 6%. And we have to find different bonds, because we aim to keep any one company to no more than 1-2% of the portfolio.

We won’t be giving up on stocks – not at all. But we may look to shift 10-20% of that US stock exposure to bonds.

Three Paths for the Market

I think there are three scenarios, all of which are okay.

Stocks do way better than 6%. The risk here is that stocks could perform much better than the 5.7% estimate from Vanguard. Maybe they return 8% over the next five years. Well, this is our worst scenario: we make “only” 6% and are kicking ourselves because we could have made a little bit more if we had stayed in stocks.
Stocks return 6% or less. In this case, it is possible we will get the same return from bonds as the expected return from stocks. And if stocks do worse than expected, our bonds might even outperform the stocks. That’s also a win for bonds.
Stocks decline. What if the economy goes into recession, and stocks drop? If stocks are down 10% and we are up 6% a year on bonds, we will be really happy. In a recession, it’s likely that yields will drop and the price of bonds will increase. The 6% bond we bought might have gone up in value from 100 to 104. Then, our total return on the bond might be 10%, and we could be 20% ahead relative to stocks’ 10% drop. And in this scenario, we don’t have to hold the bonds to maturity. We could sell the bonds and buy stocks while they are down.

Smoother is Better

I’m happy with any of those three scenarios. Many investors are feeling some PTSD from the market performance since 2020. Many will be happy to “settle” for 5.5% to 6% from bonds, versus the 5.7% expected return from stocks. And of course, stocks won’t be steady. They may be up 20% one year and down 20% the next. It is often a roller coaster, and so increasing bonds may offer a smoother ride while not changing our expected return by much at all.

Should everyone do this? No, I think if you are a young investor who is contributing every month to a 401(k) or IRA, don’t give up on stocks. Even if the return ends up being the same 6%, you will actually benefit from the volatility of stocks through Dollar Cost Averaging. When stocks are down, you are buying more shares. So, if you are in accumulation, many years from retirement (say 10+), I wouldn’t make any change.

But for investors with a large portfolio, or those in or near retirement, I think they will prefer the steady, more predictable return of bonds. When the yield on bonds is the same as the 5-10 year expected return on stocks, bonds make a lot of sense. The risk/reward comparison of stocks versus bonds today is clear: bonds offer the same expected return for less risk. We will be adding to bonds and adjusting our portfolio models going into 2023.

Q3 Portfolio Results

Posted On October 2, 2022 By Scott Stratton, CFP(R), CFA In Portfolio Management /

Q3 Portfolio Results are in and no surprise, it’s ugly. Today we are going to dive into the numbers and give a realistic overview of the situation. More importantly, we are going to share some reasons for optimism, or at least patience. And we will discuss the remarkable situation being created from currencies and interest rates.

Market Returns YTD

We use two benchmarks to design and evaluate our portfolios. For stocks, we look at the MSCI World Index, using the ETF ticker ACWI. For bonds, we use the Barclays US Aggregate Bond Index, or AGG. Year to date through September 30, the total return of ACWI was -25.72% and the total return of AGG was -14.38. (Source: Morningstar.com)

Our portfolios are a blend of stocks and bonds. For example Moderate is 60/40, which has a benchmark of 60% stocks in ACWI and 40% bonds in AGG. Your hypothetical, benchmark returns YTD are as follows:

Conservative 35/65: -18.35%
Balanced 50/50: -20.05%
Moderate 60/40: -21.18%
Growth 70/30: -22.32%
Aggressive 85/15: -24.02%
Ultra Equity 100/00: -25.72%

Category Performance

This has been a difficult environment. We are doing a couple of points better than our benchmarks across our portfolios, net of fees. Our move to shorter duration bonds and floating rate at the beginning of the year was a positive. And our Value funds have lost less than the overall market. No doubt, it has been a tough year for investors and I am not happy with our results.

Q3 deepened the Bear Market in stocks and extended losses in bonds with rising interest rates. Commodities, which were up dramatically in Q1, reversed in Q3. Thankfully, we have been well positioned in our bonds which has been our primary area of defense.

International stocks are down more than US Stocks and this has detracted from our returns. A large component of the loss in International stocks is due to the currency exchange. The dollar is up 16% to the Euro, and the dollar is up 25% to the Japanese Yen. So, even if a European stock was flat on its price in Euros, it would be a 16% loss in dollars.

Don’t Time The Market

When the market is up, and I say that we don’t time the market, everyone nods in agreement. But when stocks are down 25%, even the steeliest investor may want to throw in the towel. It’s natural and it’s human nature. It’s also the worst thing an investor can do.

But Scott, this time is different!

The economic outlook is terrible. The Federal Reserve is determined to crush inflation regardless of the short-term pain it inflicts on the economy. The 30-year mortgage hit 7% this week. Corporate earnings are starting to decline and consumer confidence is plunging.

Yes, all this is true. But, the stock market is a leading indicator. Stocks move ahead of economic data and investors aim to predict what will happen. Even if markets are not perfectly efficient, it is possible that a lot of the future economic woes are already priced into stocks. Stocks typically rebound before we fully exit a recession.

I am not making light of the severity of the current market impact or the economic situation which faces the world. But when we see the historic graphs of when the stock market was down 25% and where it was a few years later, it is pretty obvious that we should to stay on course.

In fact, I have spent a lot of time kicking myself for not being more aggressive in March of 2020, when we had such an amazing buying opportunity. But these opportunities are only obvious in hindsight. In real time, these feel like horrible, painful times to be an investor. Selling didn’t work in 2002, 2008, or 2020. Those were years to stay invested, so you could recover in 2003, 2009, or the second half of 2020.

International Stocks Improving

Q3 has been especially tough for international stocks and they’ve fared even worse than US stocks. Shouldn’t we focus more on the high-quality US companies then? After all, the dollar continues to go up. Why fight that trend?

There are going to be future ramifications of the strong dollar. Besides that it’s a great time to go visit Europe or Japan, let’s think through the implications of a strong dollar. For US companies, a strong dollar hurts us. It makes our exports more expensive to the rest of the world. And it makes the foreign profits of US companies look smaller. (Almost half of the profits from the S&P 500 index comes from foreign sales.) Over time, a strong dollar will hurt the US stock market.

On the other hand, the strong dollar can benefit foreign companies. As US imports become more expensive, they can gain local market share. Their products are now cheaper to US consumers and we buy more imported goods. They sell more and have higher profits.

This creates a leveling mechanism where currencies may tend to pull back towards each other rather than continue to widen apart. A stronger dollar will help Europeans (including through our increased tourism), and those international companies will see their profits grow. When the dollar eventually weakens, that currency headwind will become a tailwind, pushing foreign stocks higher. I don’t know when the dollar will reverse, but based on their improving fundamentals, I don’t think now is the time to give up on international stocks.

No More ZIRP, Bye Bye TINA

In 2008, central banks reduced interest rates to zero to save the global economy. For the next 11 or so years, we had a Zero Interest Rate Policy, nicknamed ZIRP. The US had just begun to test the waters of moving up from 0%, when COVID-19 hit. And we went right back to 0% and piled on unprecedented stimulus to the economy.

The stimulus worked. It worked so well, in fact, that we created 8-10% inflation around the world this year. And so now, central banks are raising rates around the world. Last week, I wrote about being able to buy a 5% US government agency bond for the first time in over a decade. It’s a game changer.

For the past 14 years, 0% interest rates meant that There Is No Alternative to stocks. You simply could not invest in bonds. It became such a reality, that it became its own acronym. Like FOMO or LOL, every advisor knew TINA meant There Is No Alternative. Well, bye bye TINA, because bonds are back.

Bond yields are up and we can now buy high quality bonds with 4-6% yields. At those rates, we have a very real alternative to stocks. While we patiently wait for an eventual stock market recovery, we can buy attractive bonds right now. We are laddering our bonds from 1 through 5 years and will hold bonds to maturity. For clients with established withdrawals or Required Minimum Distributions, we are buying bonds to meet those needs over the next five years.

Discouraging but not Discouraged

Q3 has been rough, especially September. All the expectations about weak Septembers and mid-cycle election years certainly came true in 2022. I know the markets are incredibly disappointing right now, looking back over the last nine months. Both the stock and bond markets have double digit losses for 2022. I don’t think that has ever happened before and it means diversification hasn’t been much help.

We did make a few beneficial choices at the beginning of the year, with short-term bonds and Value stocks. Looking forward, there are reasons to be optimistic. Historically, after a 25% drop, stocks are usually higher 12 months later, and often see a double digit gain. Our international stocks have been hammered by the strong dollar. But that may ultimately be beneficial for foreign companies and the dollar may even reverse. Bonds yields are up and now there is a real alternative to stocks. (Can I coin TIARA, there is a real alternative? You heard it here first…)

No doubt these are frustrating times. I feel your pain and I am in the same boat, personally invested in our Aggressive Model. We’ve seen this before – Bear Markets in 2020, 2008, and 2000, and many before that. In fact, before 2000, Bear Markets were about once every four years. And one of three years in the market is down, historically. Every one of these drops feels unique and like the sky is falling. And in time, they work out eventually. I am looking at the markets daily and am ready to make adjustments. But sometimes, the sailor has to sail through the storm to reach their destination and it’s all part of the journey. We need patience, but also to keep asking questions and thinking long-term.

5 Percent Bond Yields

Posted On September 25, 2022 By Scott Stratton, CFP(R), CFA In Portfolio Management /

They’re back – 5 percent bond yields are here. For the first time in over a decade, I bought a high quality bond with a 5 percent yield this week. It was a Freddie Mac bond maturing in five years, with a 5% coupon and selling for a few pennies under par. That’s a AAA government agency bond at 5%.

Since the Great Recession of 2008, we’ve lived with very low interest rates, which has penalized savers and conservative investors. When I started as an advisor, some 18 and a half years ago, 5% yields were readily available. We could make a balanced portfolio with half in 5% bonds and half in dividend stocks. The stocks offered a dividend yield of 3% or more. And that portfolio would provide a 4% withdrawal rate for retirees – without touching their principal.

I am happy to see 5 percent bond yields return and to me it is a remarkable threshold. We have many clients who will be quite happy with these bonds in their portfolio. And at 5%, the return from bonds is high enough that the risk/reward of stocks will become less appealing. To many, a sure 5% return is more attractive than a potential 7-8% stock return that can go down 20% over a couple of months.

It’s Complicated

So, should you sell all your existing bonds (or stocks) and buy some 5% bond yields? Well, it’s a little more complicated than that. Here are some things to keep in mind.

First, you probably already own 5% bond yields, if you have any bonds. As interest rates rise, bond prices fall. Here is an example of how two one-year bonds could have 5% yields:

5% coupon and price is 100 = 5% yield to maturity
2% coupon and price is 97 = 5% yield to maturity

The reality is that 5% yields are available today because the price of bonds has gotten crushed in 2022. If you have individual bonds or bond funds, it’s likely some of those bonds are already priced to 5% yields. You might not need to do anything to achieve 5% returns over the remaining life of those bonds.

Second, the Fed is not done raising interest rates. As interest rates increase, bond prices will go down. Even though we are buying 5% yields today, it is possible that these bonds will be worth less than we paid six months from now. And when you look at the cover page on your statement, you will be disappointed that your portfolio is still “losing money”. More about this later.

Third, selling stocks when they are down 20% has been a poor choice historically. Yes, the stock market is not out of the woods yet and it is likely there is more pain to come. Still, it is possible that stocks could recover their 20% losses faster than switching to bonds now. Even at 5%, you’d need 5 years to make back the 20% loss in stocks. Market timing is usually a worse choice than sticking to a long-term plan. Be cautious about making big changes.

Lastly, inflation is still 8-9 percent. Even though I am excited about 5 percent bond yields, it remains a negative real return. You are still not keeping up with today’s inflation. It’s better than making 0% in your checking account, but let’s not forget that you aren’t actually growing your purchasing power.

Three Things We Are Doing

We started the year having moved to short-term bonds in expectation of rising interest rates. This worked well and greatly reduced losses. Now that higher rates are here, we are taking a three-part approach.

Individual bonds over funds. Where practical, we prefer to own individual bonds over funds. Then we can hold the bonds to maturity and receive back our principal. It is simple. With funds, there are a lot of moving parts and many funds are constantly buying and selling bonds. If the price of our bond drops to 97, at least we know we plan to hold it and eventually receive 100.
Laddered 1-5 years. We build laddered bond portfolios from 1-5 years, so each year we have bonds maturing. Clients can take cash or reinvest. In some cases, we are buying 6 month bonds and waiting to buy longer bonds later.
We are adding to core bonds and reducing other categories of bonds and alternatives, given the yields available today. Cash and dividends are getting reinvested into bonds now.

Although inflation is high right now, it will likely be coming down in 2023. The Federal Reserve is raising rates and is planning to put the economy into recession and increase unemployment. The magnitude of the reversal from the Pandemic stimulus of 2020 is unlike anything the world has ever seen. The economy and the stock market may be in for a wild ride. And in this environment, I think 5 percent bond yields have never looked better.

Cash Back Credit Cards

Posted On July 20, 2022 By Scott Stratton, CFP(R), CFA In Financial Planning /

I am a big fan of cash back credit cards for good reason: this past year I’ve gotten back $1,294.18 from my two personal credit cards. Both cards have no annual fee and I pay my balances off every month and pay no interest charges. We are moving away from cash payments with our spending today and so it makes sense to get cash back on money you would have spent anyways.

This has certainly been a big spending year, with our wedding last October and a trip to Europe this August. Additionally, we spent over $20,000 in renovations and furnishings for our two new Airbnb properties in Hot Springs. You can check out our listings here: The Owl House and The Boho Loft. So, all the spending adds up.

Two Percent Cash Back

There are a lot of cards that offer 1 to 1.5% cash back, and those should be pretty easy to find. Today’s top cards offer 2% cash back, and there’s a good list of 2% cards on the Nerdwallet site. I’ve had the Fidelity Rewards Visa Card for years. It has no annual fee and gives me 2% cash back, deposited automatically into a Fidelity brokerage account each month. I can then transfer the cash out to my checking at any time. (My brokerage accounts are all at TD Ameritrade – I only keep the cash back at Fidelity.)

I don’t really worry about the interest rates on these cards since I never carry a balance. If you do have a balance, you’re probably better off finding a zero-interest balance transfer card and working on paying off your principal. I do prefer a card with no annual fee. And I’m not a big fan of hotel points or airline miles. I know others who are loyal to one airline and prefer an airline credit card, but I believe the airlines have made it harder to redeem points in recent years. (If you’ve had a great – or a terrible – experience with airline cards, I’d love to hear about it. Please send me a message.)

Discover 5%

I’ve also had a Discover Card since 1999. It provides 1% cash back on everything and 5% cash back on a category that changes each quarter. So, I use my Visa for most purchases and the Discover card for the 5% categories. Here is the 5% Cashback calendar for 2022:

January-March: Grocery Stores and Gym Memberships
April-June: Gas Stations and Target
July-September: Restaurants and PayPal
October-December: Amazon and Digital Wallets

I don’t spend as much on Discover, except for the 5% categories. Customer service at Discover has been excellent.

Store 5% Cards

There are a number of store-branded credit cards which offer 5% discounts or credits. These may not be cash back, but if you frequent these stores, they may be a better deal than your 2% cash back credit card. Presently, the only one I have is the Target Red Card. The Red Card gives me an instant 5% discount off my purchases at Target. I set up the card to autopay from my checking each month and don’t think about it after that.

I’m also looking at three other 5% store cards. The Lowe’s Advantage Card gives a 5% discount on purchases. That’s definitely worth it if you are doing some big projects. Please note that if you get the 10% Military discount at Lowe’s (like my Dad), you cannot stack the 5% on top of the Military discount. However the 5% discount will apply to appliances, unlike the Military discount.

The second card I would consider is the TJX Rewards Card which offers 5% back in certificates to use at the store on future purchases. The card and rewards can be used at TJ Maxx, HomeGoods, or Marshalls. We’ve spent a bit there in the past year, but I’m not sure we need it going forward.

And third is the Amazon Prime Rewards Visa. It offers 5% back at Amazon and Whole Foods, plus 2% back on restaurants, gas stations, and drug stores. There’s 1% back on everything else, and no annual fee as long as you are already an Amazon Prime member. This one may make the most sense for us, given how much we use Amazon.

Spend Wisely

Cash Back Credit Cards are a good deal for consumers. I’ve been getting 2-5% cash back on my spending for years, and it helps. I’ve also added a 1.5% cash back card for my business this year, which I probably should have done years ago! Some people are worried that opening new credit cards will hurt their credit score, but this will probably have little or no effect. And if you aren’t planning to buy a house soon, you shouldn’t worry at all.

It pays to do a little research and find the right card for you. Over time, cash back cards put money back into your wallet. And then you can contribute more to your Roth IRA like I’ve been suggesting, right? Helping you become intentional with your money goals is important to me, even if it is something as small as which credit card you use. Little decisions create good habits that keep you moving forward.

Inflation Investment Ideas

Posted On July 15, 2022 By Admin In Portfolio Management /

Inflation continues to shock the Global economy and has become a major concern when we discuss investment ideas. This week’s data showed the Consumer Price Index up 9.1% over last year, and the Producer Price Index is up over 11%. These are numbers not seen since 1981.

Today, I’m going to share some thoughts on inflation and get into how we want to respond to this situation. But first, here is an inside look at the government response to inflation.

Federal Reserve Hitting the Brakes

Last week, I attended a breakfast meeting for the Arkansas CFA Society at the Federal Reserve office in Little Rock. Our guest speaker was James Bullard, president of the St. Louis Federal Reserve Bank and voting member of the Open Market Committee which sets interest rates.

Bullard said that we were at a profound regime switching moment today, and that this is not just a blip in inflation but a “stunning amount of inflation”. He stated that the Fed would move aggressively to reduce inflation and that they were committed to their inflation target of 2%. He thinks the Fed will continue to raise rates until policy rates are greater than the inflation rate and may need to hold those high rates for years to come to bring inflation down.

Bullard felt that the current inflation levels are not simply a temporary supply shock from the Ukraine War. Output is actually up. In March 2020, the Fed responded very quickly to support an economy crashing from COVID-19 shutdowns. 60 days later, markets recovered and housing boomed. He wishes that they had reduced their asset purchases sooner. Instead, the Fed is only now ceasing to buy bonds and is allowing their holdings to run-off as they mature. The global stimulus response was correct, but has overheated.

He was less concerned about the possibility of a recession. Bullard said that recessions are difficult to predict and that the Fed is going to focus on getting inflation under control first. Inflation remains a global problem, but the US Federal Reserve will lead the way on fighting inflation, as the European Central Bank has other issues making them slower to respond.

Inflation, Rising Rates, Recession

It’s important to understand that even if inflation remains elevated for a couple of years, the impact of inflation may only be part of the story. Our investment ideas cannot simply assume high inflation as the only factor. We have to also consider the likelihood of rising interest rates and a recession. We’d love it if the Federal Reserve can orchestrate a soft landing as they apply brakes to this runaway economy. But they have not been very good at soft landings in the past.

The Fed policies are starting to work. Since the June inflation numbers, we’ve already seen the price of oil down by 20%. Mortgage applications are down and we should start to see housing inventories normalize and home prices stop their double digit increases. Interest rates have doubled compared to last year – 5.5% versus 2.75% for a 30-year mortgage – and this will impact how much home buyers can afford to pay. The Bloomberg Commodity Index was at 130 on June 16th and is now at 113, a drop of 13% in one month.

It is hard to imagine additional inflation shocks or surprises at this point. Despite the headlines, markets already know we have inflation. Inflation remains high, but may have peaked and should be starting to come down. The question is what is next? How will the markets respond to the Fed actions? Here are five thoughts about where to go from here.

Five Inflation Investment Ideas

Rising Rates. Bond investors beware. The Fed is going to continue to raise interest rates for an extended period. Keep your duration short on bonds. Consider floating rate bonds, if you don’t have any. Stay high quality – rising rates may cause defaults in weaker credits.
I-Bonds. These are inflation linked US savings bonds. They’ve been in the news this year, but I’ve been writing about them since 2016. Limited to $10,000 in purchases a year. These could do great for a couple of years.
Recession and Stocks. We might already be in a recession today, but won’t know it until later economic data shows a negative GDP for two quarters. Please resist the temptation to try to time the stock market. Recessions are a lagging indicator; stocks are a leading indicator and stocks will bounce back sooner. If you try to get out of stocks, it will be very difficult to get back in successfully. Instead, focus on diversification, with Value and Quality stocks. Avoid the high-flying growth names, we are already seeing those stocks get pummelled.
Roth Conversions. We are in a Bear Market, with the S&P 500 Index down 20%. This could be a good time to look at Roth Conversions, if you believe as I do that stocks will come back at some point in the future. An index fund that used to be $50,000 is now trading for $40,000. Do the Roth Conversion, pay taxes on the $40,000 and then it will grow tax-free from here. This works best if you anticipate being in a similar tax bracket in retirement as today.
Cash is Trash. Inflation is reducing your purchasing power. Thankfully, rising interest rates means we can now earn some money on Bonds and CDs. We can build laddered bond portfolios from 1-5 years with yields of 3-5%. And we have CDs at 3% as short as 13 months. Those are a lot better than earning 0% on cash. If you don’t need 100% liquidity, short-term bonds, CDs, and T-Bills are back.

Perseverance and Planning

I believe in long-term investing. Times like these will challenge investors to have the perseverance to stay the course. Rising rates and a possible recession in the months ahead may pose additional losses to our investment portfolios. If I thought we could successfully avoid the losses and step away from the market, I’d do that in a heartbeat. But all the evidence I have seen on market timing suggest it is unlikely to add any value, and would probably make things worse. We will stay invested, continue to rebalance, tax loss harvest, and carefully consider our options and best course of action.

With higher inflation, the cost of living in retirement increases, and so we have to aim for equity-like returns to make plans work. For our clients who are in retirement or close to retirement, we typically have a bucket with 5-years of expenses set aside in short-term bonds. And that bucket is still there and we won’t need to touch their equities for five years. In many cases, we have bonds which will mature in 2023, 2024, etc. in place to fund your spending or RMD needs. So, I am happy we have the bucket strategy in place, it is working as we had planned.

We have shared some inflation investment ideas, but I think the risks to investors may be greater from the Fed. Rising rates and recession are likely in the cards as they look to slow the economy. In spite of the headlines, this will undoubtedly be different than 1981, so I’m not sure we have an exact road map of what will happen. But, I will be your guide to continue to monitor, evaluate, and recommend what steps we want to take with our investments.

Bear Market Has Arrived

Posted On May 22, 2022 By Admin In Portfolio Management /

Stocks continued their slide for an eighth week. Friday’s drop now brings the S&P 500 Index down 20% from its recent peak. We are officially in a Bear Market. Tech stocks, in the Nasdaq Index, are down over 30% and have already been in a Bear Market.

Investors have questions and want to know what to do next. I’m going to share five thoughts.

One. Predictions are a waste of time. I’ve spent too much time this past week, reading, listening, and watching “experts” suggest what will happen next. No one knows. Some say the bottom is in, others call for another 20% drop. Some say inflation is here to stay, some say we are already in a recession, other say stagflation. The challenge is Confirmation Bias. Are we really evaluating evidence with an open mind? Or are we only looking for evidence which confirms our point of view? Unfortunately, certainty is one thing which we do not get to have as investors. Luckily, we don’t need a crystal ball to be successful. We know what has worked over time: diversification, index strategies, and focusing on keeping costs and taxes low.

Two. Our Investment Themes for 2022 have been helpful. Year to Date: Value stocks are doing better than growth stocks. International stocks are doing better than US Stocks. Short-Term bonds and Floating Rate bonds have held up better than the Aggregate Bond Index. We are still down an uncomfortable amount, and that is to be expected. However, we are down less than our benchmarks across all our portfolio models. I am not ever happy about Bear Markets, but our asset allocation has been a positive factor.

Three. We are at a 52-week low in many stocks and indices. Look back over the last 10, 20, or 30 years of stock market history and find those 52-week low points. Going forward, were you better off selling those lows or buying those lows? Obviously, you would have done very well by buying historic 52-week lows and selling would have been a mistake eventually. Could the market go lower from here? Of course. We don’t know what will happen next, but market timing via selling 52-week lows has been a poor strategy historically.

Read more: Are We Headed For a Bear Market? (2015)

Four. We have made a few moves in our portfolio that I wanted to share. We sold some of our convertible bonds and replaced them with a Vanguard Commodities fund. This should help us reduce equity-like exposure and add an inflation hedge. We sold one emerging markets bond fund and replaced it with a newer fund (also from Vanguard) with a much lower expense ratio. We sold bond funds and replaced them with individual bonds, laddered from 1-5 years. Although interest rates may rise, we can hold bonds to maturity and receive back our par value. Overall, these trades do not drastically change our asset allocation. But we are always looking for ways to improve our holdings, even in modest, incremental ways. We are not ignoring the market, portfolios, or clients at this time.

Five. Patience. If you are a ways off from retirement, this is a great time to dollar cost average and be buying shares in your IRA, 401(k), or brokerage account. You make money in Bear Markets, you just don’t realize it until later. For those who are close to retirement, or in retirement, we are already diversified and have a withdrawal strategy that anticipates market volatility such as this. We are planning for the next 20-30 years. There will be multiple Bear Markets over your retirement. Although each Bear Market feels like a surprise, they are bound to happen. And like in 2020, we are using the current drop as an opportunity to rebalance portfolios and do tax loss harvesting.

Read more: Stock Crash Pattern (March 2020)

We’ve seen this before. We’ve been here before. Bear Markets are an unfortunate reality of being an investor. They stink and we would all prefer if markets only went up. When times are good, we need to invest with the knowledge that Bear Markets are inevitable. And then when Bear Markets do arrive, like Winter, we need to wait out the storms knowing that Spring will eventually return.

Ignore predictions. Our investment themes are on the right track. Don’t sell a 52-week low. Look for opportunities to make small improvements. Be patient and persevere. That is how we are responding to the Bear.