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.

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.

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?

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.
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.

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!

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.

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:

Feature	MYGA	Bank CD
Rate Guarantee	Guaranteed by insurer	FDIC/NCUA insured
Tax Treatment	Tax-deferred earnings	Interest taxed yearly
Income Options	Can convert to income	No lifetime income option
Liquidity	Limited, may have surrender charges	Early withdrawal penalty
Flexibility	Options at maturity	Less 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.

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!

Should I Add More Bonds?

Posted On November 3, 2023 By Scott Stratton, CFP(R), CFA In Portfolio Management /

Yields have risen on bonds this year and for many investors it may now make sense to increase their bond exposure. Eleven months ago, I wrote how bond yields had actually crossed above the expected return for stocks. At that time, we could find A-rated bonds with a 6 percent yield. And that compared favorably to the 5.7% expected return of stocks, as projected by Vanguard over the subsequent 10-years ahead.

This past month, we bought some new 10-year government agency bonds with a 7% yield. Now it looks even better to be adding bonds and maybe even reducing some of your stock market exposure. Last November, the Vanguard Capital Markets Model suggested a 5.7% expected return for US stocks over the next 10 years. As of mid-year 2023, they have reduced that to 4.7%.

Even though stock predictions are usually very inaccurate, I do think it is worthwhile to look at these projections. While the historical returns of US stocks may have been 9-10% over the long haul, returns can be above or below average for an extended period. There have been many 10 year periods which have done better or worse than the “average”. There are many factors which can help us estimate returns, including starting equity valuations (such as the Price/Earnings ratio), corporate earnings growth, or productivity gains. It should not come as a surprise that when stocks are expensive (like in 2000), the following 10 years are below average. Or when stocks are beaten down and cheap (like in 2009), the next 10 years are often above average in return.

Portfolio Models

We manage a series of investment portfolios for our clients with an approximate benchmark blend of stocks and bonds. Our Premiere Wealth Management Portfolio Models include:

Ultra Equity (100% stocks / 0% bonds)
Aggressive (85/15)
Growth (70/30)
Moderate (60/40)
Balanced (50/50)
Conservative (35/65)

In the 4th quarter of each year, we analyze our portfolio models and make tactical adjustments based on where we perceive relative value. We overweight the segments or categories which have better expected returns and we reduce the categories which have a lower expected return. In addition to our Core holdings of Index Funds and investment grade bonds, we consider satellite investments in alternative categories.

But this year is different. We are now looking at bond yields that are above the expected return of US stocks. I think it may make sense for a lot of my clients to consider a healthy increase in their bond holdings. For the last 15 years, since the 2008 global financial crisis, bond yields have been absurdly low. Today, we have a chance to lock-in longer yields at a time when the stock market looks potentially mediocre for the next several years of returns.

I have thought for a long time about how to increase bond holdings. If we move a 60/40 portfolio from 40% to 50% bonds, we probably shouldn’t still call it a 60/40 model. So, instead of making large changes on the model level, I will be discussing with each client if we now want to consider reallocating from the 60/40 to the 50/50 model, for example.

Pro / Con of Adding Bonds

The hope, by adding more bonds, is to reduce volatility and have a smoother, more consistent return each year. If the 4.7% expected return of stocks is correct, bonds could out-perform stocks and improve the return of the overall portfolio. For investors close to retirement, adding bonds could reduce the impact of a large drop in stocks, right before income was needed. And for retirees taking distributions, the now high income from bonds means we can better meet your need for cash flow versus selling shares of stocks.

Of course, there is no guarantee stocks will under-perform as projected. The 10 year projection from Vanguard is an annualized average – the stock market will undoubtedly have years with very different performance than the annual average. Investors with FOMO may be unhappy in bonds, even 7% coupons, if stocks are up 20% in one year. Young investors who are making monthly deposits may prefer dollar cost averaging and not worry as much about stock market fluctuations.

Understand Callable Bonds

Many of the Agency, Corporate, and Municipal bonds available today are “callable” bonds. That means that the issuer has the right to pay off the debt early. “Calls” happens when interest rates fall and the issuer can replace their 7% debt with a lower yield bond. It’s just like refinancing a mortgage to a lower rate.

We don’t necessarily have to hold a 10-year bond to maturity. Here is how past economic cycles worked: Eventually, the economy will slow and fall into recession. At some point, the Federal Reserve cuts interest rates and we often see both short and longer term interest rates drop. At that point, the issuer of the 7% bond may be able to refinance down to 6% or 5%. So, they will call their bonds early and redeem them at full value.

If we are in a recession, it’s also possible that the stock market could be down 20% or more in that period. And that may be a good time to rebalance – to take the proceeds from the called bond and invest it back into a stock market that is beaten up. That certainly worked well in March and April of 2020. If interest rates drop, we are likely to get called and might not be able to find another 7% bond. But that may be okay, if we are willing to rebalance the overall portfolio and buy other investments when they are on sale. And of course, regardless of when a bond is redeemed, we made 7% a year, since we bought these bonds at Par.

Reducing Call Risk

Why not just buy non-callable bonds? I would if they were more available and at the same yields. Most bonds today are callable, with the main exception being US Treasury bonds. But the yield on the 10-year Treasury is 4.7%, not 7%. So, I am willing to take some call risk for the extra 2% in return. Still, there are some things we are doing:

Buying discount bonds. Older bonds with a lower coupon often trade at a similar yield to maturity as new issue (and high coupon) bonds. These are less likely to be called. And if we buy a bond at 90 and they call it at 100, that is great.
Preferred Stocks are also now trading at sizable discounts, often 60-70 cents on the dollar. If we are comparing a bond from Wells Fargo versus their Preferred Stock, there may be advantages of the Preferred. While they may have similar current yields, the preferred has upside to its $25 price. The bonds, trading near Par, have no price appreciation potential.
Fixed annuities (multi-year guaranteed annuities or MYGAs) generally are not callable. And since there is no 1% management fee on the annuity, a 5.5% 5-year annuity may net the same return as a 6.5% 5-year corporate bond. Except the annuity is guaranteed, unlike a corporate bond. So, if you aren’t needing flexible liquidity, MYGAs can reduce your call risk and lock in today’s interest rates.

Your Bond Strategy

We’ve waited 15 years to have bonds with these juicy yields. I think now is not a time to be too defensive with a money market or short-term T-Bills. Those are fine for your immediate needs. But at some point in the future, rates could drop. The risk is that when today’s 5.5% T-Bills mature, the new T-Bills might only yield 3% or 2%. Then we will regret not locking in the longer duration yields available to us now at the end of 2023.

These last four years have been quite a roller coaster for investors. A huge crash in March of 2020, followed the fastest recovery of stocks ever. Then unprecedented inflation. A Bear Market in 2022 brought a 20% drop. A recovery in 2023 that was limited only to a handful of tech stocks. A lot of stock funds have little or almost no gains to show for all this commotion. Stocks have been disappointing.

Bonds today offer a higher yield than the 4.7% expected return of US stocks over the next decade. That’s quite a shift and investors should pay attention – yields will not stay at these levels forever! We are always cautious in making large changes, but would generally prefer bonds over stocks if they had the same return.

Stocks are supposed to have an Equity Risk Premium to compensate you for their added risk and volatility. Not today. Bonds offer lower volatility, a more predictable return of “yield to maturity”, and current income. For retirement planning, these are very desirable qualities that can improve the outcomes of our planning simulations both before and during retirement years. These are the reasons will are looking to add more bonds today.

Index Funds vs Mutual Funds

Posted On September 21, 2023 By Scott Stratton, CFP(R), CFA In Portfolio Management /

Twice a year, Standard and Poors updates their comparison of Index Funds vs Mutual Funds, called SPIVA (S&P Index versus Active report). I have written about SPIVA a number of times, and it is worth repeating, because the data is remarkably consistent.

The majority of actively managed funds do worse than a benchmark or index. The newest report was published today, covering all US Funds through June 30, 2023. When we look at long-term returns, here are the percentage of active mutual funds that performed worse than their benchmark:

Category	5-yr	10-yr	15-yr	20-yr
All Domestic Stock Funds	89.08%	90.19%	93.15%	93.12%
International Stock	81.84%	84.78%	85.33%	92.50%
Emerging Markets	70.70%	87.56%	89.58%	92.42%

Source: SPIVA US Mid Year 2023

The evidence comparing index funds versus mutual funds is clear: Index funds are the hands down winner. While past performance is no guarantee of future results, there continues to be overwhelming evidence that index funds do better than the vast majority of active funds over the long-term. And this finding is remarkably consistent, regardless of whether we are in a Bull or Bear market.

Equal Weight Index

2023 has been a strange year in the market, with narrow breadth of performance. Looking at the S&P 500, performance has been concentrated in a small handful of names, with five large stocks up more than 100% in the first half of the year. So for strategies which didn’t own these high flyers, it was tough to keep up. Value, Small Cap, and other strategies have lagged the Large Caps this year.

But that is likely to reverse, as it has been quite extreme. I’ve written previously about Equal Weight funds, specifically the S&P 500 Equal Weight. It owns the same 500 or so stocks as the S&P 500, but in equal proportion. The standard S&P 500 which weights each stock on its size (“market capitalization”).

Over the very long-term, the Equal Weight strategy (EW) has outperformed. From 1991 through 6/30/2023, the EW S&P 500 index has a return of 11.82% a year, versus 10.55% for the regular S&P 500. That is a noteworthy, long-term improvement in performance, and is typically attributed to the idea that EW has less of the “over-valued” stocks and more of the “under-valued” stocks.

While EW has outperformed over 30+ years, it has not done so consistently or every year. But what is interesting is that when EW has underperformed to an extreme level, it has historically snapped back. And that is where we are today: EW lagged by 9.9% for the first half of 2023. In the chart below from S&P, previous 6-month periods of EW underperformance were followed by periods of strong EW outperformance. The returns have been mean reverting, with EW providing long-term returns in excess of the cap-weighted index

Mean Reversion Ahead?

This would suggest that the outperformance by the Mega-Cap names of the S&P 500 is unlikely to continue. We own some Value and Mid Cap funds which have not kept up with the S&P 500 this year. That can be frustrating and make investors want to pile into those high flying stocks. But the reality is that the outperformance of the biggest stocks versus EW may be overdone. In fact, it is in the 2nd percentile for the first half of the year, more extreme than 98% of previous 6-month periods. Generally, I believe mean reversion is more likely than an extreme trend continuing indefinitely.

We diversify our portfolios broadly and tilt towards areas of better relative value. This has us owning Value funds, multi-factor strategies, small and mid-cap, and Emerging Markets. Why? Our belief in the two topics we discussed today:

Passive, index strategies are better than active management over the long-term
We count on mean reversion rather than performance chasing

Both of these approaches are well-grounded in research, but require patience and discipline to stay the course. That’s where we are today. And the data reminds us that this still makes sense. The question of Index funds vs mutual funds is just the beginning. There will be ups and downs, which no one can predict or time, so our focus is on having a good investment process and understanding the fundamentals.

Growth, The Big Picture

Posted On September 18, 2023 By Scott Stratton, CFP(R), CFA In Financial Planning, Portfolio Management /

With all the noise in today’s markets, it is easy to miss the big picture about growth. 2022 and 2023 have been two of the strangest years in a generation for investors. As a result, it is easy to feel uncertain about investing right now. And that uncertainty often leads investors to make bad choices. So, we are going to step back and look at the 30,000 foot view of what really matters for investors.

In 2022, we saw inflation rise to 9% and the Federal Reserve start the process of slowing the economy. As the Fed raised interest rates, stocks dropped 20%, briefly entering Bear Market territory. In the bond market, rising interest rates snipped the price of bonds, sending the US Aggregate bond index down double digits. For diversified investors, 2022 was a perfect storm where diversification failed and both stocks and bonds were down an uncomfortable level.

Now in 2023, we have seen the Federal Reserve continue to raise rates up to the present moment. At the start of the year, I saw one report that said the probability of a recession in the next 12 months was 100%. 100%, a certainty! And while the full 12 months are not up yet, we have not had a recession. In fact, the S&P 500 Index is up 15.83% this year. While the yield curve remains inverted, a favorite predictor of recessions, it now appears that the likelihood of a 2023 recession is diminished and might not happen at all.

Don’t Time The Market

Comparing 2022 and 2023 doesn’t make sense. The market “should” not be up 15% this year. And yet here we are, with a very welcome gift of an amazing performance in the first seven and a half months of the year. The consensus economic forecasts at the start of 2023 were lousy. If we had listened to them, we would have sold our stocks and hid out in cash. We would have missed out on the gains that we have had for 2023!

There are often compelling historical precedents to entice investors to think we can predict what is going to happen over the next 12 months. Making changes to your investments feels obvious, a smart choice, and low-risk. Unfortunately, history shows us that it is hubris to try to time the market and more often detrimental than beneficial.

It is a challenge to actually stay the course and maintain your discipline. It is difficult to ignore the forecasters and not think that there is an opportunity for you to either protect your principal or rotate into a better performing investment.

Timing the market continues to be a bad idea. I didn’t hear any forecasters in January predict that stocks would be up 15% by August. If we had listened to their predictions, although well-intentioned, we would have made a mistake. Thankfully, we didn’t try to time the market this year. Here is how we manage a portfolio:

Establish a target asset allocation for each client’s individual needs and risk tolerance.
Rebalance portfolios when they drift from the targets.
Adjust our portfolio models annually based on the valuation and expected returns of each category.
Use Index Funds and manage each client’s portfolio to keep costs down and minimize taxes.

Rebalancing

The funny thing about rebalancing is that it often means doing the opposite of what you might expect. When stocks were down 20% last year or in 2020, we were buying stocks. Now, when stocks are up 15-20% and there is a lot of optimism for a soft landing, we are trimming stocks and buying bonds. In hindsight, this looks pretty logical. However, in real time, rebalancing often feels like not such a good idea. And sometimes it isn’t – there’s no guarantee that rebalancing will improve returns. But, what it does offer is a disciplined process to managing an investment portfolio, versus the behavioral traps of trying to time the market. The bizarre markets of 2022-2023 certainly reinforce the potential benefits of rebalancing.

Average Versus Median

Do you remember from high school algebra the difference between Average and Median? Average is the total sum divided by the number of items. Median is the data point in the middle. And there can be a big difference between Average and Median. Stock markets are cap weighted, so the larger stocks move the index more than the smaller stocks. Still, let’s consider how the “average” return of an index can be quite different from the median returns of its component stocks.

The year to date return of the S&P 500 Index ETF (SPY) is 15.83% as of August 16. But that is not the median return of the stocks. Of 504 components of the S&P 500, only 135 have done better than 15.83% YTD and 369 have done worse than the overall index. If you had picked a random stock from the S&P, there was a 73% chance that you would have done worse than “average” this year.

And what is the Median performance of the S&P 500 this year? Only 3.36%, an under-performance of more than 12% than the overall index. Even worse, 212 stocks in the S&P 500 are down, negative for the year.

What is the big picture of growth in stocks? Trying to pick individual stocks is extremely difficult. Don’t think that using an index fund means “settling for average”, the reality is that over time, the index return has done much better than the median stock.

This year has been such a frustrating year for investors because stocks are all over the place. If you don’t own a few of the top performers, you are likely lagging the benchmark by a wide margin. What is a way to make sure you own the winners today and tomorrow? Own the whole market with an Index Fund. Realize that if you pick a stock from the S&P 500, it is not a 50/50 coin toss that you will beat the market average. The chance is lower than 50% because the market average typically does better than the median stock. The stocks which do outperform will move the index disproportionately and they will be fewer in number.

There is a lot of noise and confusion in the markets today, and that’s okay. We are in uncharted waters and seem to be going from one “unprecedented” event to another. Thankfully, I don’t think we need to have a crystal ball to be successful as long-term investors. What I believe can help is stepping back to remember the big picture: don’t time the market, stick to an allocation and rebalance, and use index funds. That’s our roadmap. When in doubt, we can recheck our directions and keep going.

What You Can Control

In the short-term, stock markets can be very volatile. As a result, I believe a lot of inexperienced investors mistakenly think that their success depends on their ability to game the markets. They think that growth is achieved through trading or superior returns.

Unfortunately, trying to outsmart the market often makes your performance worse, rather than better. Active management doesn’t work, at least not consistently over 10 or more years. We stick to passive, low-cost index funds or ETFs for our stock market exposure. And we remain invested in a long-term asset allocation.

Once that investment decision is out of the way, the main determinant of success is your savings rate. How much are you investing each month? That is what you can control. If you want to be more successful in accumulating your wealth, you don’t need to worry about the Jobs Report this week, or what was in the Federal Reserve meeting notes. You need to focus on how can you can save an extra $100, $500, or $1000 a month and make that a habit.

Instead of worrying about your YTD performance, calculate how much wealth you will have in 10 or 20 years, with an average rate of return. Because in the long-run, an average rate of return is excellent. And then what you can control – your savings – is what actually matters more. Growing your wealth is largely a factor of savings and time. Chasing investment performance is a distraction.

Develop Your Saving Habits

Make savings automatic. Put your investing on autopilot with monthly contributions to your 401K, IRA, and investment accounts.
Save More. Don’t just do the 401(k) match, try to put in the maximum to each account. And then ask where else can you invest? Do the math of how much money you want to accumulate. (I can help with that.)
Keep the big expenses down. Living beneath your means is easy if you are smart about your housing costs and your cars. Many Americans who are not frugal in those areas do not have anything leftover to invest.
Develop your career. If you can expand your income without increasing your expenditures, your savings can increase dramatically. If you ever have a chance to work for a company with stock options, go there. I have seen over the years, tremendous wealth accumulated from stock options.
Be an Entrepreneur. This can be high risk, but when they are successful, entrepreneurs earn and save much more than employees. Besides a salary, an entrepreneur is growing a business that has value.

As a financial planner over the past 19 years, I’ve gotten to look at a lot of families’ finances. The difference between those who were struggling and those who were wealthy was seldom just income. I’ve seen a lot of high income folks who were living hand to mouth. Other families who had similar incomes were millionaires or well on their way. The difference was their saving rate. You can’t grow what you don’t save.

There is no substitute for saving. We have to make savings automatic and increase our savings whenever possible. It may help to work backwards: start with your goal and determine how much you need to save and for how long. Then you can see saving as the solution and beneficial process rather than as a sacrifice. Some Americans are saving very well. But the Big Picture is that the average American isn’t saving enough. We need to be talking more about saving, because for too many families, it is the step that they cannot get past.

Our recipe for Growth is simple. Save monthly and dollar cost average into Index funds. You can do this in your 401(k), IRA, or taxable account. The account is less important than the process. The more you save, the more wealth you can accumulate. The younger you start, the better. The faster you increase your saving, the sooner you can reach your goals. Saving is growth and investing is secondary.

Investment Taxes Eat Your Growth

Taxes matter. We work hard to establish a good portfolio and get a respectable rate of return. And then the government wants their cut. How about 37% for Federal Income Taxes (increasing to 39.6% in two years). And another 5% for state taxes. Don’t forget 15.3% for self employment taxes for Social Security and Medicare (or half that number if you’re an employee). Then, if you do well, how about an extra 3.8% in Medicare surtax (“Net Investment Income Tax”).

Once you have your “after-tax” money, it’s all yours, right? Well, not quite. You get to give the government another $5,000, $10,000, or more in property taxes. And when you want to buy something with your after-tax money, you get to pay 8% in sales tax.

The point is that it doesn’t matter how much you make, it matters how much you keep. That is why tax planning is such a big part of our wealth management process. As your portfolio grows, the tax implications can become a significant annual expense and a drag on returns.

What continues to shock me is how many Advisors are making huge mistakes with client portfolios and creating tens of thousands of dollars in unnecessary taxes. Taxes which could have been avoided or reduced substantially through better planning. Sometimes this is because they use a model portfolio that doesn’t attempt to have any tax efficiency. But other times, it is laziness and having too many clients to manage individual portfolios in a tax-efficient way. It’s easier to stick people into a model and let the computer automatically rebalance the portfolio.

This is the big picture for wealthy Americans: Your after tax-return matters more than your pre-tax returns. You have very little control over taxes on a monthly basis, but a great deal of control over taxes in the long run. Here are the mistakes we often see and how we can do better:

Portfolio Tax Efficiency

Mistake 1: Mutual Funds in Taxable Accounts. Mutual Funds have to distribute capital gains annually. Each December, many investors get a surprise tax bill from their funds. BETTER: hold Exchange Traded Funds (ETFs) in taxable accounts. ETFs rarely, if ever, have capital gains distributions.

Mistake 2: Short-Term Capital Gains. Short-Term Capital Gains (less than 1 year) are taxed as Ordinary Income, up to 37%. BETTER: Hold for Long-Term Capital Gains (more than 1 year), which are taxed at lower rates (0, 15 , or 20 percent). Trading which creates ST Gains should be avoided in a taxable account. We are very careful about the tax implications of our rebalancing trades, as well.

Mistake 3: Bonds and REITs in Taxable Accounts. Bond income is taxed as ordinary income (up to 37%). BETTER: Hold bonds in IRAs, which are tax-deferred. Also, IRA distributions will be taxed as ordinary income, so bond income isn’t treated worse in an IRA, unlike capital gains. When you have a LTCG on a stock ETF in an IRA, all that growth will be taxed as Ordinary Income. Traditional IRAs will have the highest tax rate, so it is better to allocate the low growth bonds to IRAs and high growth stocks to Roths and taxable accounts. This process is called Asset Location.

Mistake 4: Not harvesting losses. BETTER: Harvest losses annually in taxable accounts. Losses can be used to offset gains that year, and $3,000 of losses can be applied against ordinary income. Unused losses will be carried forward without expiration.

Mistake 5: Not asking about charitable giving. 90% of Americans are not itemizing and not getting any tax benefit from charitable donations. BETTER: We can get a tax benefit two ways, without itemizing: A) make donations of appreciated securities from a taxable account. Or B), if over age 70 1/2, make Qualified Charitable Distributions (QCDs) from your IRA.

Mistake 6: No Plan for Managing IRA Distributions. BETTER: Do Roth Conversions in low income years before RMDs start at age 73.

Mistake 7: Not understanding Taxes that will be owed by Beneficiaries. BETTER: Working with your Advisor to consider inter-generational taxes in your Estate Plan. For example, taxation of trusts, step-up in cost basis, charitable giving, and Beneficiary IRAs.

Mistake 8: Not doing a Backdoor Roth IRA. I’ve had advisors tell me it’s not worth their time to move $13,000 to $15,000 into a TAX-FREE account each year for a married couple. Not worth it for the advisor, I guess (no additional revenue). BETTER: Although the numbers are small annually, we have been doing back-door contributions for clients for many years, and it does add up.

The Changing Retirement Picture

Did your parents retire with a Pension? Maybe they worked for 30-40 years for the big company in town, or for a municipality, school district, military branch, or government agency. When they retired, they had a pension and Social Security which fully covered their expenses. They might have also had retirement health benefits which paid for deductibles and co-pays which were not covered by Medicare.

You probably don’t have the same benefits. How much is a Pension worth? Well, we can easily compare a Pension to the cost of a Single Premium Immediate Annuity, or SPIA. A SPIA works the same way as a Pension – it is a guaranteed monthly payment for life. For example, let’s consider a 65 year old female who has a pension which guarantees her $2500 a month for the rest of her life. We could buy a SPIA with the same guaranteed $2,500 a month for life, for a cost $437,063. So, a $2,500/month pension is worth $437,063.

To have the same retirement funding as your parents, you may need $400,000 or more in assets than they had. And that is just to replace one modest pension. If your parents had two pensions or had a bigger pension, you might need much more than $400,000 to get the same retirement income.

And you probably won’t buy a SPIA and would prefer to keep your money in an IRA. At a 4% withdrawal rate, you would need $750,000 in your IRA to get $2,500 a month. So maybe you need $750,000 more than your parents, not $437,000, to replace their pension! These pensions were worth a lot. It will take a worker 30 years of saving to build up their 401(k) to $750,000. It’s not impossible, but the big picture is that most Americans aren’t doing a good job of saving. The average 401(k) balance for workers age 55-64 is $207,874. The median balance at 55-64 is only $71,168, meaning that half of all 401(k) accounts are less than $71,168.

I’m afraid the promise of becoming wealthy through your 401(k)s has proved elusive for the average American. It’s a wedge that is driving wealth inequality in our country. But I don’t think Pensions are coming back – retirement preparation rests squarely on the individual’s shoulders. You certainly can get to $500,000 to $1 million in a retirement account, but you have to aim to put in the maximum, not just get the company match. Then you have to not withdraw it and let it compound for 30 to 40 years. That recipe will work, but it’s not easy, it requires some sacrifice and a lot of discipline.

Counting on Social Security

The Social Security Trust Fund will be depleted by 2033. After that, revenues will only cover about 70% of promised benefits. After kicking the can down the road for 20 years, Washington needs to get its act together soon. We can either reduce benefits or increase taxes. It may be a combination of both, but one thing is for sure: keeping the status quo is not going to be an option. The Social Security budget for 2023 is $1.30 Trillion. The Department of Health and Human Services (Medicare, Medicaid, and other health agencies) have a budget of $2.10 Trillion for this year. These two programs, largely for Retirees, have become the biggest portion of government spending.

There will have to be a reckoning in the years ahead about these programs. Something has to change, they are unsustainable in their present form. I think there will be changes in inflation adjustments, a gradual increase in the full retirement age, and probably some means testing which will reduce benefits for high net worth families. Or there could be a whole new system. As difficult as it is to imagine, the system is so broken that starting over from scratch might be better than continuing to try to put new band-aids on this fiscal cancer.

The big picture for the future of government retirement programs is very uncertain. These are not the only issues facing the government. Our debt is growing. This year, the interest payments alone on US Treasury Debt will be $964 Billion. We may top $1 Trillion in interest payments next year. And there is no plan to ever repay this debt, only to grow it every single year. When you look at debt projections, it only reinforces the need to reign in the expenses which are growing the fastest.

In our planning process, we include Social Security projections. But we had better be prepared for benefits to potentially be a bit less than promised. So, once again, it may be that more of your retirement income needs to be self-funded. If you don’t have a pension, the burden of funding your retirement has been shifted to you. Have you calculated what that will cost? That’s what we do with our retirement planning software, MoneyGuidePro. We create an ongoing plan for your retirement needs, which adjusts over time, and where we can continue to refine assumptions and expectations.

I hate to be such a downer, it’s really not my nature. But a lot of Americans are going to have worse retirements than their parents, because they don’t have a pension. The burden of saving for retirement has shifted from the employer to the employee. Now instead of everyone getting a good outcome, many Americans are under-prepared for retirement. And then we have to look ahead at the uncertainty that is facing Social Security and Medicare. It looks like we will have more individual responsibility for our outcomes and less universal assistance.

The Forest For The Trees

The Big Picture for Growth can be hard to see because the fog of current events makes it hard to see the long-term horizon. Here are our four pillars of The Big Picture:

Don’t time the market. Stick to your asset allocation and rebalance. Use index funds.
Once you’ve made the shift away from performance chasing, focus on what really matters: how much you save.
Taxes hurt returns. Tax planning helps.
You are responsible for your own retirement savings and financial security.

I’m sure things are going to change. We don’t really know how, when, or why they will change. While some may find uncertainty to be paralyzing, it doesn’t have to be. Even if the future is a moving target, planning is not a waste of time. Not at all! Being well prepared also includes the flexibility to adapt and evolve.

A lot of my day to day work is focused on the small details of implementing our plans. But the growth is created when we step back and take a long, hard look at The Big Picture. We should all be having more of those conversations, with our spouses and children, our bosses and colleagues, and especially with your financial professional.

Expected Returns for the Decade Ahead

How We Are Positioned for 2026

Lessons from 2025

Looking Ahead

Strategies For Market Corrections

A. Diversification

B. Create Income

C. Index Funds

Interesting Times

Stock Market 1926 through 2023

Idiosyncratic Risk

Fund Shenanigans

Keeping It Simple

Too Big?

Value Matters

Looking Ahead

Evidence Based Investing

Performance Chasing

Bonds Can Get The Job Done

What Is Your Mission?

Don’t Be A Hero

How MYGAs Work (Straightforward Explanation)

Why Retirees Like MYGAs (Guaranteed Return and Safety)

MYGA vs. CDs and Traditional Fixed Accounts

How MYGAs Can Fit Into Retirement

🔹 Income Planning

🔹 Laddering for Predictable Cash Flow

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What You Should Know Before You Buy

🔸 Liquidity and Surrender Charges

🔸 Tax Considerations

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Frequently Asked Questions

What rate can I expect on a MYGA in 2026?

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Can I use a MYGA for retirement income?

2023, Better Than Expected

Economic Expectations and Stocks

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Understand Callable Bonds

Reducing Call Risk

Your Bond Strategy

Equal Weight Index

Mean Reversion Ahead?

Don’t Time The Market

Rebalancing

Average Versus Median

What You Can Control

Develop Your Saving Habits

Investment Taxes Eat Your Growth

Portfolio Tax Efficiency

The Changing Retirement Picture

Counting on Social Security

The Forest For The Trees

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