Whether we know it or not, our lives are acts of imagination
and the world is continually re-imagined through us.
~ Michael Meade
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New Year Greetings to you, our clients, family, and friends. Readers of these letters know I write to inform and entertain. When others do it as well or better, I am delighted to share. What follows is a brief and eloquent perspective as shared by long-time industry colleague, current DFA Vice President and one time LPL founding contributor Weston Wellington.
Investors are often conflicted about record-high stock prices. They are pleased to see their existing equity holdings gain in value but apprehensive that higher prices somehow foreshadow a dramatic downturn in the future.
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Investors should treat record high prices with neither excitement nor alarm, but rather indifference. If stocks have a positive expected return, reaching record highs with some frequency is exactly the outcome we would expect.
Using month-end data over the 94-year period ending in 2020, the S&P 500 Index produced a new high more than 30% of the time. Moreover, purchasing shares at all-time records has, on average, generated similar returns over subsequent one-, three-, and five-year periods to those of a strategy that purchases stocks following a sharp decline, as Exhibit 1 shows.
Exhibit 1: All Rise
Average annualized returns for S&P 500 index after market highs and declines
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Past performance is no guarantee of future results. For illustrative purposes only. Index is not available for direct investment. Performance does not reflect the expenses associated with the management of an actual portfolio. S&P data © 2021 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. |
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Humans are conditioned to think that after the rise must come the fall, tempting us to fiddle with our portfolios. But the data suggest such signals only exist in our imagination and that our efforts to improve results will just as likely penalize them.
Investors should take comfort knowing that share prices are not fighting the forces of gravity when they move higher and have confidence that record highs only tell us the system is working just as we would expect—nothing more.
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Inflation-linked Savings Bonds - High Yield, Low Risk!
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Like many of our clients, you may have a dusty pile of paper savings bonds squirreled away. These bonds, likely the EE variety, may belong to you or were gifted to your children by well-intentioned family members. While they have probably yielded better than cash at the bank, if issued more than thirty years ago, they no longer earn interest (see the EE footnote below) and should be redeemed. |
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Lesser known and far more interesting today are Treasury I-bonds, that is “I” as in inflation which has surprised to the upside in recent quarters.
The variable inflation rate you earn on I bonds is reset every 6 months during May and November (based upon inflation as measured by the Consumer Price Index).
What makes I-bonds so appealing right now?
- They are inflation-protected so your principal won’t lose purchasing power.
- The current composite rate (consisting of the inflation rate plus a fixed rate) is 7.12%, many times more than alternative savings vehicles such as money markets and certificates of deposit.
- The next reset rate to be announced in May 2022 won’t likely stray far from the current composite rate since inflationary pressures may be with us for a while.
- I-bonds are principal-protected and backed by the full faith and credit of the U.S. Treasury AND the composite rate cannot be less than zero (despite what may eventually be periods of deflation).
- I-bonds are federal income tax-deferred; no tax is due until you exchange it for value.
- I-bonds are state and local income tax-free.
- I-bonds have an education exclusion. In other words, if you fall within income limits, your bond proceeds may be used tax-free to meet qualified education expenses.
Do I-bonds have limitations? Yes!
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Liquidity. You cannot cash the I-bond for at least one year after purchase. And if you cash them within five years of purchase, you forfeit the last three months of interest.
- There is a $10,000 per person per year investment limit ($20,000 per couple/year).
While not ideal for everyone, building a position in I-bonds over time as part of a broadly diversified portfolio is a strategy you may want to consider for adding inflation protection to your investment mix.
(EE Footnote…..If you wish to determine the current value of your legacy EE savings bonds, you can find out using the following Savings Bond Calculator at treasurydirect.gov
Note: Portions of this essay were excerpted with permission from Michelle Morris at Brio Financial.
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We delight in numbers and digest more than most each week. We share a select group that guides us towards rational investment behavior (LPL Research except where noted). |
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The S&P 500 returned 28.7% in 2021. The last nine times the index was up over 20% in a year it was higher the following year all nine times, with an average gain of 11.5%. |
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The stock market’s largest pullback during 2021 was an unusually low 5.2% - amazing given some scary headlines. |
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Too few? The U.S. recorded only 3.6 million births in 2020, the sixth consecutive year of decline and the smallest number recorded nationally since 1979 (National Vital Statistics System). |
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Too much? An estimated $3.3 trillion of additional cash has been accumulated in bank accounts by U.S. households since the beginning of the pandemic (Longview Economics). |
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Inflation and stock prices? Inflation as measured by the Consumer Price Index (CPI) has been up at least 5% for twelve of the last seventy years. The average gain for the S&P 500 during those twelve years was 3.2% with six years up and six years down (BTN Research). |
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Save more! Contribution limits are growing in 2022. Individuals may now contribute up to $20,500 to their 401(k)’s or 403(b)’s OR up to $14,000 to a SIMPLE IRA. And persons over 50 can still contribute an extra $1,000 to IRA’s, $3,000 to SIMPLE’s and $6,500 to 401(k) plans. |
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Seeking to Help our Clients Make Better Decisions
ALENA Wealth remains grateful for your partnership and trust. We understand you have other sources for guidance and so we strive to help you make better decisions.
The last two years have been remarkable in many respects and humbling for all. We will continue to question the prevailing wisdom while welcoming new ideas. We look forward to our next conversation with you.
Alan, Lena, Joe, Kathryn and Cathy
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The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. Investing involves risk including the potential loss of principal. No strategy can assure success or protects against loss".
Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
ALENA Wealth LLC is a Registered Investment Advisor
Securities offered through LPL Financial, Member FINRA/SIPC
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