Good Life Wealth Management

Investment Themes for 2026

Posted On December 28, 2025 By Scott Stratton, CFP(R), CFA In Portfolio Management /   No Comments

Each year, we share our thoughts on the investment markets and where we see areas of opportunity for the year ahead. This letter is not intended as a short-term market forecast—no one knows what markets will do over the next few months. Instead, it outlines how we think about long-term expected returns and how that informs our portfolio positioning.

Our investment process is based on tactical asset allocation. We modestly overweight asset classes that appear to offer more attractive long-term expected returns and underweight those that appear more expensive and less attractive. Throughout this process, we remain fully invested in diversified, buy-and-hold portfolios. We do not try to time the market.

We continue to believe in the benefits of using low-cost, passive Exchange-Traded Funds (ETFs) and focusing on what we can control: saving consistently, keeping costs low, maintaining tax efficiency, and staying disciplined through market cycles.

(You can view last year’s investment themes here.)

Expected Returns for the Decade Ahead

We believe it is largely unproductive to try to predict where the stock market will be over the next 3–12 months. In the short run, markets move based on supply and demand—prices rise when there are more buyers than sellers and fall when the opposite occurs. Short-term price movements are often noisy and emotional, and prices do not always reflect underlying value.

What does matter to us is the outlook for long-term expected returns over the next 5–10 years. This longer time horizon helps tune out daily headlines and instead focuses on valuation—whether today’s prices are high or low relative to future growth expectations.

Today, U.S. growth stocks appear expensive by historical standards. The so-called “Magnificent 7” (Google, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla) have driven much of the U.S. market’s strong performance in 2024 and 2025. These companies now represent a very large share of the S&P 500, and their outsized gains have likely pulled forward many years of anticipated earnings growth.

We do not know whether this will result in a sharp correction or simply a period of more modest returns. What history consistently shows, however, is that high starting valuations tend to lead to below-average returns over the decade that follows.

Vanguard’s current estimates for annualized returns over the next decade are as follows:

  • U.S. Growth Stocks: 1.3% – 3.3%
  • U.S. Value Stocks: 5.3% – 7.3%
  • U.S. Small Cap Stocks: 4.3% – 6.3%
  • Developed Markets (ex-U.S.): 5.3% – 7.3%
  • Emerging Markets: 3.2% – 5.2%

How We Are Positioned for 2026

Our portfolios remain globally diversified, typically using approximately 10 ETFs. We have already been positioned toward areas of relative opportunity, so changes for 2026 are modest. Specifically, we are shifting a few percentage points from U.S. stocks toward international stocks.

We remain overweight U.S. value stocks and underweight U.S. growth stocks. Relative to global benchmarks, we are overweight international equities, including a meaningful allocation to emerging markets and a smaller allocation to international small-cap value stocks.

International stocks were our strongest performers in 2025, significantly outpacing U.S. stocks. We believe 2025 may have marked an important turning point after many years of U.S. outperformance relative to international markets.

On the fixed-income side, interest rates have declined at the short end of the yield curve as the Federal Reserve has begun cutting rates. With a new Fed Chair expected to be appointed this year, it appears likely that monetary policy may remain accommodative.

Credit spreads—the difference in yield between Treasury bonds and lower-quality corporate bonds—remain very tight. As a result, we see limited compensation today for taking additional credit risk in high-yield bonds.

Our bond portfolios are therefore unchanged for 2026. They consist primarily of a laddered portfolio of high-quality bonds with maturities ranging from one to five years, including Treasury, Agency, and A-rated corporate bonds. For investors seeking dependable income without liquidity needs, five-year fixed annuities continue to offer some of the most attractive “safe” yields available today.

Many portfolios also include smaller allocations to Treasury Inflation-Protected Securities (TIPS), emerging-market bonds, and preferred stocks. Overall, bonds continue to serve their intended purpose: providing stability and income, while equities remain the primary driver of long-term growth.

Lessons from 2025

The past year was not what most experts predicted, and it serves as an important reminder of what truly matters for investors: staying diversified, sticking to the plan, and avoiding emotional decisions.

While 2025 is ending as a very strong year—with double-digit returns in both U.S. and international stocks—it is easy to forget how challenging it felt at times. In April, markets were nearly 20% below their highs, and many economists were forecasting severe economic damage from new tariffs. Investors who panicked and sold during that period missed out on substantial subsequent gains.

The lesson is clear: long-term investors have historically been rewarded for discipline, not for reacting to short-term fears. (This applies to diversified portfolios like the ones we use; individual stocks, of course, can and do fail.)

2025 also marked a resurgence of diversification. While the S&P 500 is up roughly 19% year-to-date, international stocks (EAFE Index) are up approximately 32%. Investors who assumed 2025 would simply repeat 2024 missed out on these gains. Diversification remains one of the most reliable tools we have—because no one can consistently predict which asset class will lead in any given year.

Often, the hardest part of investing is having the patience to do nothing. In 2025, buy-and-hold investing worked exactly as intended, despite constant negative headlines. While we never ignore economic or political risks, we allow those concerns to be reflected in valuations and expected returns rather than reacting emotionally to every news cycle.

Looking Ahead

2025 was an outsized year, and it would be unrealistic to expect markets to deliver 20–30% returns every year. While we would welcome another strong year in 2026, it is more prudent to expect more modest returns and an eventual reversion toward long-term averages. Investors can still be very successful with steady, market-level returns over time—the key is remaining invested through both good years and difficult ones.

We are grateful for the trust you place in us to manage your investment portfolio. I follow the markets closely so you don’t have to, and I am always happy to discuss our investment philosophy, portfolio positioning, or any questions you may have.

We will continue to monitor portfolios carefully throughout 2026 and make adjustments as conditions warrant. Thank you for your continued confidence and partnership.

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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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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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Bubble, Bubble Toil and Trouble

Bubble, Bubble Toil and Trouble

Posted On July 27, 2024 By Scott Stratton, CFP(R), CFA In Portfolio Management /  

A bubble is brewing. The price of US Tech stocks has grown much faster than their earnings, fueled by the hype of AI transforming productivity and life as we know it. The comparison with 1999 is uncanny, but it’s not that investors have forgotten about the Tech Bubble. I think many are just hoping to make additional gains while momentum is leading these stocks higher.

We are going to look at valuations to put current prices in perspective. Today’s tech stocks have massive profits, unlike the cash-burning dot-com’s that went bankrupt in 2000. It’s great that these tech companies are doing so well, but that doesn’t mean that the price of their stock can never be too high. While the prices have not yet reached absurd levels, they are elevated enough to raise concerns about their sustainability.

Too Big?

Just how big have tech stocks gotten? The three largest stocks in the world are Nvidia, Apple, and Microsoft, all recently with values over $3 trillion, each. Let’s compare these three stocks to countries. Nvidia is worth more than all the stocks in Germany. All 489 German companies put together are worth less than Nvidia. Apple is worth more than all the stocks in the UK. Microsoft is worth more than all the stocks in France. Is each of these companies really worth more than the entire stock market of a major European economy? Apparently the market thinks so, but it is a remarkable disparity.

Nvidia added $1 trillion in market cap, going from $2 trillion to $3 trillion, in just 30 days. Compare this to Warren Buffet at Berkshire Hathaway. He is considered by many to be the greatest investor ever, and it took him 60 years to grow his company to a value of $875 billion. Nvidia grew that much in value in 30 days. Did they do something in 30 days that is worth more than the company Warren Buffet has built over 60 years? We will have to wait and see, but I’m a skeptic.

Value Matters

Today, Nvidia is trading for a Price/Earnings ratio of 65 times earnings, and 43 times the expected earnings of the year ahead. That is double the PE of the S&P 500 Index at 22 times earnings. And today’s S&P 500 is in the top 10% most expensive, historically. These companies will have to really maintain investor excitement, if the stocks are priced at double the market PE. The growth of these tech stocks has come from expanding the multiple – the P part of the PE ratio. The earnings, the E part of the PE ratio, needs to catch up. That could take years. I pick on Nvidia, but the story is similar for Microsoft, Meta, Amazon, Apple, Alphabet, and Tesla. All these are richly valued even though they are incredibly profitable.

After the 2000 tech bubble, many of the survivors took a decade to get back to their value at the peak. You may recall, this was called “the lost decade” in the stock market. I certainly hope this doesn’t happen again. But, today’s most expensive stocks could risk having disappointing returns for years to come. In the past, a PE of 23 often was a bull market peak valuation.

There are other categories which are not as overvalued as Tech. Consider the comparison of Growth Stocks (NASDAQ) versus Value Stocks (Small Cap Russell 2000), with this chart from DoubleLine. Today, the growth/value divide has actually exceeded the levels of 1999. To me this suggests there could be a reversion to the mean in the next couple of years, where growth lags and value finally does well.

Looking Ahead

Investors spend too much time looking at the rear view mirror rather than forward through the windshield. Past performance is not indicative of future returns. And when a bubble occurs, it can take years to deflate. The stocks with the best past returns can do poorly, while the stocks with the worst recent returns may do better going forward. Consider the projected annual returns, for the next 10 years, from the Vanguard Capital Markets Model:

  • US Growth Stocks: 0.4% – 2.4%
  • US Value Stocks: 4.1% – 6.1%
  • US Small Cap: 4.3% – 6.3%
  • Foreign Developed Stocks: 6.7% – 8.7%
  • Emerging Markets: 6.0% – 8.0%

According to their calculation, you would be better off buying a 10-year US Treasury Bond (at 4.25% today), rather than owning US growth stocks over the next decade. Investors have been enjoying Tech growing at 20% a year, and now we are looking at an expected return of 1.4%. This is why we own value stocks, small cap, foreign stocks, and emerging markets in our portfolios. We are looking forward, not backward at past returns, when creating our models. We are diversifying into what we believe might be tomorrow’s winners rather than looking to concentrate into what has worked most recently.

Evidence Based Investing

We will see if today’s tech stocks have become an unsustainable bubble. These are really good companies which have enormous profits and are still growing at attractive rates. Even if there is not an abrupt bursting of the tech bubble, it is possible that growth segments will under-perform other categories over the years ahead. There is a strong rationale to be cautious about investing in stocks which have become very expensive.

Over the next month or year, growth stocks could continue to go up. Still, tech stocks could prove to be in a bubble which we see correct later. There might be an outside catalyst (think COVID, geopolitical event, debt crisis, recession, or something which no one had even considered), which causes a drop in the market. If this occurs, the most expensive stocks often sell off the most.

Tech stocks have become very large, quite expensive, and have a lower expected return than other stocks and many bonds. Our diversification allows us to both play defense today and also to own the categories with the highest expected return going forward. Don’t give up on Diversification!

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Stocks, Bonds, and Risk

Stocks, Bonds, and Risk

Posted On May 27, 2024 By Scott Stratton, CFP(R), CFA In Portfolio Management /  

I enjoy watching history documentaries, especially about the WWII era. One film shared this quote from a US Army manual:

“…commanders need to balance the tension between protecting the force, and accepting and managing risks that must be taken to accomplish their mission…”

While I am neither soldier nor general, as a portfolio manager, my challenge is to protect client’s assets while accepting and managing the risks that must be taken to achieve their goals, such as retirement. Stocks have been doing very well. In the past week, the S&P 500, NASDAQ, and the Dow have all made new highs. The S&P is up 11 percent, year to date, a fantastic run on top of last year’s great performance. Where are the risks today, and how can we manage the risks to accomplish our mission?

Performance Chasing

Some investors are frustrated that their diversified portfolio is not up as much as the S&P. There is an increasing feeling that stocks are invincible right now and everyone wants to ride the gravy train for as long as they can. Caution is being thrown to the wind as investors seem to be willing to pay any price for certain tech stocks – even if the company is trading for 100 times what they will make this year. The Bull Market appears to be alive and well and so is investors’ performance chasing.

It’s remarkable that we’ve had such high interest rates, and an inverted yield curve, and the economy continues to grow. Maybe the Fed will finally engineer the soft landing that they have been unable to achieve in the past. I hope that happens, but hope is not a good investment rationale.

We remain invested in the stock market, but I hardly think this is the time to become more aggressive. At some point, the high valuations will matter. In the past, when the S&P has traded for 21 times forward earnings (like now), the subsequent years of returns were below average. That should make sense to everyone, just as when the market is cheap, the subsequent returns are usually above average. Both reflect a reversion to the mean.

Bonds Can Get The Job Done

What do today’s stock valuations suggest about forward returns? As of May 15, 2024, the Vanguard Capital Markets Model suggests a 10-year return of US stocks of 4.3%, plus or minus one percent. That is less than half of historical returns, and would be quite a disappointing performance.

And where are bond yields today? The 10-year US Treasury has a yield of 4.5% and we can find 10-year Agency bonds near 6%. Remarkably, the expected return from bonds is now higher than stocks for the next decade. Investors are having a hard time getting their head around this new reality because over the past decade, the S&P 500 (SPY) is up 12% annually, while the Aggregate bond index (AGG) is up only 1.25% a year.

At no point in the last 15 years have bonds looked this good compared to stocks, on a forward looking basis. To investors, bonds look boring and stocks are exciting. However, if you are focused on how to achieve your goals over the next decade, while minimizing the risk of losses to your portfolio, you may benefit from adding more bonds.

What Is Your Mission?

Many of my clients are within five years of retirement or have already retired. For many, our mission is to provide steady growth, spin off some income, and not blow up the portfolio. We are concerned about sequence of returns risk and longevity risk. For clients needing income and withdrawals, bonds and fixed annuities are an excellent choice.

For investors who are in growth mode, there is still a good case for bonds. We should focus on the long-term returns available, with the least amount of volatility. In portfolio management terms, we aim to provide a strong risk-adjusted return, measured by a higher Sharpe Ratio. And for these growth investors, bonds still play a role. Bonds can improve our risk profile and also provide an opportunity for flexibility in the future.

With bonds, you can consolidate your gains while you wait for the stock market to have a correction at some point in the years ahead. With stocks, we may have some years of growth and then the next Bear Market could bring us right back to today’s levels (or maybe even lower). The investor who has bonds (growing by 5%), has a future opportunity to rebalance. We can trim the bonds and buy back stocks when they trade at a lower Price to Earnings ratio (PE). We can be defensive today, while waiting for a better opportunity to be more aggressive.

Don’t Be A Hero

You don’t have to be fully invested in stocks. If you have done a financial plan, you should have an idea of what required return is necessary to accomplish your goals. In many cases, today, bonds can provide the return needed to achieve your objectives. And that reduces the uncertainty of stocks not performing as hoped or as they have historically.

Ideally, investing should be boring. We don’t want to have exciting investments. Our Wealth Management process is focused on protecting your wealth and accepting and managing the risks that must be taken to accomplish your goals. If we can take a path with less risk and more certainty, that is often what we should choose. We look at future expected returns as our guide, rather than recent past performance.

Stocks have had a strong performance and we will continue to invest in a diversified portfolio. We should also point out that while the expected return of US stocks is only 4.3%, Ex-US stocks have an expected return of 7.7%. Opportunities still exist. But for now, bonds offer a compelling return versus an expensive US stock market.

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What is a MYGA Annuity

What is a MYGA Annuity?

Posted On March 7, 2024 By Scott Stratton, CFP(R), CFA In Portfolio Management, Retirement Planning /  

How a fixed income annuity can provide guaranteed returns and predictable retirement income — especially for retirees in Texas, Arkansas, and nationwide.

A Multi-Year Guaranteed Annuity (MYGA) is a fixed-rate annuity that offers a guaranteed interest rate for a defined period — typically 1 to 10 years — making it a useful tool for retirees seeking predictable income or a safe place to grow cash. MYGAs are popular with conservative investors because they provide certainty in an uncertain market and can complement traditional retirement income sources.

How MYGAs Work (Straightforward Explanation)

A MYGA is an insurance contract in which you pay a lump sum upfront and the insurance company credits a fixed interest rate for a set term. Unlike market-linked investments, a MYGA offers stability — you know the rate and return ahead of time.

Here’s what this means:

  • You deposit a lump sum (often $5,000+; many competitive products start closer to $20,000+).
  • The annuity earns a guaranteed fixed rate for the term you choose (e.g., 3, 5, or 7 years).
  • Earnings grow tax-deferred until you withdraw them.
  • Upon maturity, you can take the money, renew into a new contract, or elect income payout options.

This makes MYGAs similar to CDs in principle — but with tax deferral and often higher rates.

Why Retirees Like MYGAs (Guaranteed Return and Safety)

MYGAs are especially appealing if you want:

  • Predictable, guaranteed interest income
  • Tax-deferred growth
  • A conservative portion of your retirement portfolio
  • Stability in a low-volatility product
  • Competitive Interest Rates: currently we offer a 5-year MYGA at 5.75%, a full 2% more than a 5-year Treasury Bond

Because returns are fixed, you don’t have to worry about market ups and downs affecting your principal during the contract term. For some retirees, guaranteed income products like MYGAs can complement laddered bonds and cash reserves within a well-structured retirement income planning strategy.

MYGA vs. CDs and Traditional Fixed Accounts

MYGAs are often compared to bank CDs, but there are important differences:

FeatureMYGABank CD
Rate GuaranteeGuaranteed by insurerFDIC/NCUA insured
Tax TreatmentTax-deferred earningsInterest taxed yearly
Income OptionsCan convert to incomeNo lifetime income option
LiquidityLimited, may have surrender chargesEarly withdrawal penalty
FlexibilityOptions at maturityLess flexible
Based on typical product characteristics

MYGAs are backed by insurance companies and state guaranty associations — not FDIC insurance — so the financial strength of the issuer matters.

How MYGAs Can Fit Into Retirement

MYGAs can provide predictable income or serve as a safe allocation within a broader retirement income plan. This can include:

🔹 Income Planning

If you want a fixed stream of interest income during early or established retirement, a MYGA can fill the gap between Social Security, pensions, or RMDs.

🔹 Laddering for Predictable Cash Flow

Buying MYGAs with staggered maturities ensures you can take money or reinvest at regular intervals — similar to a bond ladder.

🔹 Risk Reduction

Because returns are fixed, they provide stability in an otherwise volatile market.

For a deeper look at how MYGAs compare with other retirement tools, see our article on fixed annuities and retirement income strategy.

What You Should Know Before You Buy

MYGAs aren’t right for everyone. Key considerations include:

🔸 Liquidity and Surrender Charges

MYGAs typically have surrender periods during which withdrawals beyond a penalty-free amount may incur charges. Read the contract carefully.

🔸 Tax Considerations

Growth is tax deferred, but withdrawals are taxed as ordinary income. If you withdraw before age 59½, you may face a 10% IRS penalty on earnings.

🔸 Insurer Strength

Check the insurer’s ratings and the state guaranty association coverage limits.

These features underscore why it’s smart to work with a fiduciary who can match product features to your personal situation.

Why Consider a MYGA With Us (Texas, Arkansas & Nationwide)

If you’re a retiree seeking income — even if you’re not looking for full wealth management — MYGAs can provide competitive fixed income options with market-leading interest rates. Our access to top annuity carriers means clients in Texas, Arkansas, and across the U.S. can secure highly competitive rates and terms that align with their income goals.

We help you:

  • Evaluate options across multiple products and terms
  • Compare surrender periods, riders, and features
  • Make decisions aligned with your risk tolerance and income timeline

MYGAs can be a standalone retirement income solution or a component of a broader plan. Whether you want a safe place for excess cash or a predictable income stream, we can help you explore whether a MYGA fits your needs.

For broader retirement planning that addresses sequence of withdrawals, taxes, and longevity risk, check out our Retirement Income Strategy and our Who We Help pages.

Frequently Asked Questions

What rate can I expect on a MYGA in 2026?

Current competitive MYGA rates are about 5.75% for a 5-year and depend on term and issuer. These rates can be materially higher than traditional CDs or short-term bonds. They also vary quite a bit from insurer to insurer, so it can pay to have an independent agent who can shop around for the best rates and features.

Are MYGAs safe?

MYGAs are backed by insurance companies and state guaranty associations, not the FDIC. It’s important to review the issuer’s rating and the contract terms.

Can I use a MYGA for retirement income?

Yes. MYGAs can provide predictable income or supplement your other retirement income sources when structured appropriately.

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Performance Chasing Versus Diversification

Performance Chasing Versus Diversification – A Retiree-Focused Perspective

Posted On January 25, 2024 By Scott Stratton, CFP(R), CFA In Behavioral Finance, Portfolio Management, Retirement Planning /  

Updated for 2026 — Planning-first language for retirees and pre-retirees

Many retirees and those approaching retirement find themselves checking account statements after a strong year in certain market segments — especially when one area (like large growth stocks) outperforms nearly everything else. The chart below, sourced from J.P. Morgan, vividly illustrates how the top-performing investment categories change from year to year (2008–2023), including U.S. stocks, developed and emerging markets, bonds, real estate, commodities, and cash.

Why Performance Chasing Is Especially Dangerous for Retirement Investors

When a particular category outperforms one year — and especially in hindsight when it “looks obvious” — it can be tempting to shift away from a broadly diversified portfolio into what just worked best. This behavior is known as performance chasing:

  • It treats recent winners as future winners, even though history shows that last year’s top performer often underperforms in subsequent years.
  • It increases the risk of selling diversified holdings after declines and buying into areas that have already risen substantially.

For retirees and pre-retirees, the stakes are higher than for many accumulators. Changing allocations based on recent performance can increase the risk of sequence-of-returns losses — when poor returns early in retirement can have an outsized impact on long-term spending sustainability.

Contrast this with diversification, where owning multiple asset categories — even ones that lag in the short term — tends to smooth returns and lower overall risk over the long run.

Past Performance Is Not Predictive — Especially Near Retirement

It’s common for investors to see a chart like the one above and think:

“I should sell my diversified portfolio and buy the top performer from last year.”

This is performance chasing — abandoning a long-term, diversified strategy because of recency bias. Over short spans, certain assets may shine, but over time, no single category consistently outperforms.

Diversified portfolios are structured so that gains in some areas weathers declines in others. While this means you won’t always be in the leading category each year, it also reduces the risk that you are overly concentrated in one bucket — particularly important when you are drawing down assets in retirement.

Valuations Matter — But Timing the Market Doesn’t Work

Behavioral biases often cause investors to equate strong recent results with future prospects. But valuation-based approaches focus on expected future returns rather than trailing returns — recognizing that:

  • Stocks or sectors that have outperformed may trade at higher valuations and offer lower expected future returns;
  • Investments that have lagged may be cheaper and offer relatively better expected returns.

For retirees, valuation focus ≠ market timing; it means aligning your portfolio with a disciplined, cost-effective, diversified strategy that doesn’t shift based on the latest hot sectors.

Reversion to the Mean — A Long-Term Reality

Over the long run, markets tend to drift back toward average performance levels. The original Vanguard projected return chart (unchanged here) shows this principle: asset classes with higher valuations often have lower expected future returns, while those with lower valuations may have higher expected returns.

Short-term leadership does not reliably predict long-term outcomes. A diversified portfolio owns multiple asset classes so that you benefit from broad market growth without betting on a single segment.

Why Diversification Matters for Retirees

For retirees and those preparing for retirement:

  • Diversification reduces portfolio volatility, which matters when you’re making regular withdrawals.
  • Diversification helps manage sequence-of-returns risk, the risk that early poor returns deplete your portfolio faster.
  • A diversified approach is more likely to deliver smooth, reliable outcomes that align with spending needs, not headlines.

If you want a primer on how diversified income flows and drawdown strategies interact in retirement, see our Retirement Income Planning Hub.

For a deeper look at the role diversification plays alongside tax planning and income sequencing, see our Retirement Tax Planning articles.

Related Retiree-Focused Content

If you’re nearing retirement or already retired, chasing last year’s top performer can undermine your long-term financial security. Staying diversified and disciplined helps align your investment approach with your income needs and risk tolerance. If you’d like a planning-first discussion about how diversification fits with your broader retirement strategy, you’re welcome to Request an Introductory Conversation.

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Investment Themes for 2024

Investment Themes for 2024

Posted On January 1, 2024 By Scott Stratton, CFP(R), CFA In Portfolio Management /  

Each year, I rethink our portfolio allocations and today I am sharing our Investment Themes for 2024. We don’t time the market, nor do we try to predict how the market will perform. I think this is not only impossible, but also likely to cause more harm than good. We remain globally diversified, use index funds, and maintain a buy and hold philosophy. We have a target asset allocation for each investor and rebalance positions when they drift from our targets.

But that doesn’t mean we are completely passive. No, each year we slightly adjust our portfolio models in two ways. First, we look at current valuations and expected long-term returns (typically 10 years). With this information we add weight to the Core categories which have better valuations and expected returns. And we reduce categories which might be overvalued and have lower expected returns. This is forward looking, rather than looking back at past performance.

The second adjustment we make to portfolios is to annually evaluate Alternative holdings for inclusion in our models. Alternative, or satellite, positions are smaller, more niche investments, which I don’t think merit permanent inclusion as a Core position, but may be appropriate at certain times. We will describe our alternative positions more below.

2023, Better Than Expected

2023 ended up being a great year in the stock market, with the S&P 500 up 24%. This was a shocker. A year ago, 85% of economists were predicting a recession in 2023. But it never happened and the consensus was wrong. A year ago, I wrote that in spite of the calls for recession, the bad news may have already been priced into stocks and that we would remain invested. You can read my Investment Themes for 2023 here. And here are links for my 2022 Themes and 2021 Themes.

Although the S&P 500 and NASDAQ had a great year in 2023, it was aften a frustrating year for investors. Market breadth was poor and performance was concentrated in a fairly small number of Growth and Technology stocks. 2/3 of stocks did worse than the S&P 500 average. And other categories, such as International, Small Cap, or Value, lagged the Mega-Cap names.

It was also a strange year for bond investors. Rising interest rates pushed down the prices of bonds, and detracted from their performance. So, unfortunately, bonds did not add much to the bottom line in 2023. But the flip side of rising rates is that we have purchased very attractive yields which we will hold and profit from for years to come.

Economic Expectations and Stocks

Markets had a great 2023 and the US avoided a recession. But I am afraid this is no guarantee that the economy is in the clear now. The Federal Reserve raised interest rates and has managed to bring inflation down to 3% without damaging the economy or causing higher unemployment – yet. In the past, such aggressive tightening by the Fed has led to a recession. Will they finally be able to engineer a “soft landing” and not cause a recession? The strength and resilience of the US economy in 2023 is truly the envy of the world.

Unfortunately, I think we need to remain cautious and recognize that it is possible that 2023 only postponed a slowdown rather than avoided one altogether. Today the consensus is that the Fed is done raising rates and will start cutting interest rates later in 2024 once inflation is closer to their 2% target. But none of this is a guarantee that a recession is off the table. 2024 could be another volatile year.

And where are we in terms of valuations? US stock earnings grew by 3% in 2023, but stock prices went up 24%. That means that now US stocks are even more overpriced and the expected returns going forward are lower. The returns of 2023 are surprising because they are unwarranted. US growth stocks have become more expensive, not better.

Looking at our core stock categories today, we have the same themes, but only more so. US Value is cheaper than Growth and has a higher expected return. International has a higher expected return than US. Small Cap is attractive relative to large cap. Emerging Markets have strong growth potential. We were already tilted towards Value and International at the start of the year, and this was early. US Growth outperformed in 2023, but the case for Value and International has only grown stronger and more compelling. Our outlook is for more than one year at a time, and sometimes that means we have to remain patient to see a reversion to the mean.

For 2024, we will make a small addition to our International funds, from our US Midcap funds. We use Index exchange traded funds (ETFs) for our Core positions.

Source: Vanguard Economic and Market Outlook for 2024, published December 2023

Interest Rates and Bonds

Interest rates rose steadily through October of 2023. We continued to buy individual Investment Grade bonds. Our core bond holdings are laddered from 1-5 years and we generally hold to maturity and reinvest. 2023 offered the best yields available in the past 15 years. We wanted to lock in some of these yields for longer, and so we had extended duration in 2023, adding some longer term 10-15 year bonds.

Interest rates peaked in October with the 10-year Treasury briefly touching 5%. Since then, the 10-year has fallen to 3.9%, a massive move in a very short period of time. (This high demand for bonds, and inverted yield curve, is a red flag for stocks and the economy.) We’ve seen a lot of Agency bonds getting called and refinanced to lower rates. And so it is possible we have seen the peak interest rates for this cycle already.

I am glad we were buying when we did and that we extended duration. Today, it is less attractive to buy longer bonds, and our purchases in 2024 will return to being on the shorter end of the yield curve. We will not be adding to bond holdings in 2024, just aiming to maintain our 1-5 year ladder as bonds mature or are called. But there is a good rationale for holding bonds. Real yields (after inflation) are attractive. We have purchased yields which are comparable to the expected 10-year return of US stocks. And so, the 60/40 portfolio at the start of 2024 looks better than it has in years. And if we have a Bear Market in stocks in the next couple of years, the bonds will be defensive and give us the opportunity to rebalance and buy stocks when (not if) they drop.

Alternatives

Bond yields have been so good in 2023 that the appeal of alternatives is less. Why take on a volatile, complex investment if T-Bills are yielding over 5%? We will not be adding to any alternative or satellite categories in our 2024 models. We have several existing positions, which we will continue to hold.

TIPS (Treasury Inflation Protected Securities) were added in 2022 and they have given us a good inflation hedge. Our largest TIPS holding will mature in 2027 and at this point the plan is to hold to maturity. Inflation is less of a concern now, but our TIPS are still paying a decent yield.

Last year, we trimmed our holdings in Preferred Stocks, which sold off as interest rates rose. Today, they have started to bounce back and offer yields over 6% while often trading at a 30% discount to their Par value. The current 6-8% cash dividends we receive from Preferreds is above the expected return of common stocks. I’m happy to have that cash flow for retirees or to have cash to reinvest throughout the year. There is some potential for price appreciation in the next rate cutting cycle, but I am happy to hold these for the dividends and ignore any price volatility.

Our third satellite holding is a small position in Emerging Markets bonds. We use a Vanguard fund and ETF, which offer low cost diversified access to this high yield sector. I’ve seen that this category often bounces back well after a difficult year. And after being down in 2022, our fund was up nearly 14% in 2023. The fund begins 2024 with a 7% yield.

Staying On Course

We look each year to make some minor changes in our allocations, and communicate these ideas in our “Themes” letter. But, I think the real key for investors is to think long-term and be willing and able to stick with the process. There will inevitably be ups and downs and the markets often surprise us and don’t do what we expect. We have done well to stick to the basics: Don’t try to outsmart the market. Buy and Hold index funds. Keeps costs and taxes to a minimum.

If you have questions about our Investment Themes for 2024, please reach out. Even with these themes, we still have different investment models for our clients’ individual needs, risk tolerance, and time horizon. 2023 was a year full of surprises, and we will have to see what is in store for 2024!

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