Hi All-

I hope you’re enjoying the remaining days of summer. Overall, it’s been a great (albeit hot!) one in terms of weather, so hopefully you’ve been able to get out and enjoy here and there.

Earlier this month, I spent just shy of a week in Provincetown, MA, and it was lovely. As many of you know, Ptown is my happy place and every year I have to fight the strong urge to buy a home there, especially as I’ve watched a good number of friends pull the trigger these last few years.

But unfortunately, most of the time, the financial math on second homes is well, not so great-- when you consider not only all costs, but also opportunity costs (what else you could’ve done/accumulated with those dollars alternatively, and how much more financial ‘breathing room’ you would have had to pursue part-time employment or perhaps more fulfilling employment doing something different, but earning less). Especially in this case where properties are only of seasonal use and over $1000/sq ft. So my personal mantra when confronted by the temptation to buy a vacation home has always been ‘Just rent your fun!’ And don’t get me wrong—I own rental apartments and generally believe residential real estate is a great investment--just not when you buy it primarily for your own use. 

However, when advising clients, I don’t approach the vacation home question with the same absolutist ‘Just rent your fun’ sentiment. This is because I firmly believe that not every financial decision one makes needs to make optimal economic sense. So I’m never going to categorically say ‘buying that beach house is a terrible idea.’ As a human being who once had a strong emotional attachment to vacation homes owned by grandparents on Cape Cod, I understand there’s often some emotional complexity to the question/objective. So as an advisor, instead of simply stating my personal, subjective (and mostly unhelpful) short-answer opinion on this topic, I first seek to vigorously uncover and elucidate all of the estimated fixed and variable financial variables of owning the property, reconcile the financial feasibility given a client’s assets/liabilities/income, and, perhaps most importantly, highlight the opportunity cost of the decision.

Why is talking about opportunity cost so important? Well, because if we simply looked at the financial feasibility (i.e. ‘Can we afford to do this?’), most of our clients can technically afford a vacation home. But what also needs to be illustrated and talked about (even if some of it obvious) is the extent to which the decision will necessitate the clients working/earning at a sustained higher level to support the added expenses. Or the extent to which the decision will impact the duration of work required until one reaches the point of ‘financial independence’. So in other words, let’s really examine how much you will need to earn to support this objective (and all of the other objectives you’re building towards), and for how long. Then, once I feel I’ve done an adequate job illustrating all of these variables and related considerations, it’s time for me to bow out and let clients come to their own conclusions. Like any other discretionary expense (not just vacation homes) I can help determine financial feasibility through data collection, analysis, and accounting for and highlighting all the financial pros/cons. But even if the objective is financially feasible, it is ultimately up to clients to decide whether or not the assumptions on how much they need to work/earn and for how long are truly sustainable.

When I sat down to write this, I was simply going to tell you I’d been to Ptown and then leave it at that. But it got me thinking about my own human impulses to buy property when I’m in my ‘happy place’, the weather is perfect, and I’m sipping a cocktail on the gorgeous new patio of a friend’s new digs, with just a smidge of envy 😉. Well, now that my summer is very much over, I guess I can safely say that I’ve successfully dodged another year of temptation to keep up with the proverbial Jones’. I like to think my future self will thank me when work becomes a choice, rather than a financial necessity, earlier in life. But, tomorrow is never promised, so I should probably conclude by saying, especially to those of you who already have a vacation home, or those who are still undaunted in their desire to own one—life is short and you work hard. If there’s a spot you consider to be ‘heaven on earth’ and it’s been an important priority for you to own a piece of it for yourself, then you should do it. If it makes you happy and you want it badly enough, you’ll learn to adjust your spending in other areas (that don’t make you as happy) to make it all work. And I can help you find a way.

And of course…don’t forget to invite me over… 😉!

With this year’s market turbulence, especially in early June, so much of my communications have been focused around the market and the importance of staying invested, seeing the big picture, etc. etc. So I’m not going to spend as much time on that in this installment. Really just going to talk briefly about what’s been rocking markets the last few days and reiterate why our outlook has not changed. Then I’d like to talk about cash. Yep, cash, as simple as it may seem. Because I know a lot of you are sitting on more cash than you need to be right now, with some feeling paralyzed as to whether or not it makes sense to put it to work in this market environment, and others anticipating the possibility of larger liquidity needs in the near term. So whether holding onto a lot of cash is an absolute necessity for you right now (which we understand!), or if you’re staying liquid mostly because you’re thinking this is a bad time to invest—I have some useful material for both camps.

So first, the market. Things were going pretty well in July and most of August and it appeared that inflation was starting to cool (giving markets a big boost). What caused it to turn on us late last week?

In short, Jay Powell (Fed Chair) made some much anticipated remarks at Jackson Hole. This is essentially what he said:

Powell came right out and said that while rate increases will slow inflation, ‘they will also bring pain to households and business.’ He was indeed forceful and brief in relaying the Fed’s commitment to achieving their goals. Nothing new here, but his intentionally brief comments seemed to be aimed at avoiding any wiggle room for dovish interpretations. The truth is, Powell has every incentive to remain hawkish (aggressive w/rates) until the last minute—any backing off is de facto easing in the market’s eyes—exactly what they don’t want.

It appears that the Fed is exclusively focused on the inflation side of the mandate and is prepared for pain and a sustained period of below-trend growth to achieve that goal. In other words, seems they would rather overdeliver and trigger a policy-induced recession than underdeliver and risk inflation becoming entrenched.

That said, it’s easy for them to remain hawkish when payrolls have grown at a nearly 500k monthly pace all year. We’ll see what their commitment is should labor markets begin to soften. But the bottom line is that the Fed is saying that while a downshift in the pace of tightening is coming, rates could still go up a bit from here, and could actually stay there for some time—perhaps into 2023.

Inflation will likely be two-tiered from here: cyclical and structural. And the cyclical component will be the easy one to get done. Cyclical improvements in inflation will likely persist in the months ahead as inventories continue to get liquidated, supply chain pressures ease, rate-sensitive sectors like housing slow—these are easy gains. So structural inflation is the key risk—this is stickier inflation driven by a robust and tight labor market. Combatting that comes with some unfortunate but necessary costs from the Fed’s perspective---they are the lesser evil:

There are signs that labor demand is slowing and wage growth may be moderating from a one-time level step higher, which suggests we may be able to achieve a slowdown in labor demand without leading to broad softening in labor markets. Underlying momentum in the economy remains strong even if we are seeing signs of moderation—but moderation back towards more sustainable and balanced growth is exactly what we need to see. Recession may not be in the cards for 2022, but the inflation scare may finally be giving way to a ‘growth scare’ once and for all.

But we’re still hanging in there. Given the challenges corporate America has faced, we consider the nearly-complete Q2 earnings season a resounding success:

Earnings expectations for the remainder of 2022 are still positive. While there’s always a chance we could see more downside in the near term, there are still many positive signs that an improved macroeconomic environment may set the stage for higher stock valuations, further earnings growth, and solid gains for stocks over the rest of the year, even after Fridays 3.4% decline. Despite an increasingly hawkish Fed, and a seasonally weak month of September around the corner, we still see more upside for stocks. Some inflation relief is likely coming. Corporate America continues to show its resilience. And using history as a guide, seasonal forces and midterm elections could provide a fourth quarter tailwind.

To quote Nick Murray, "If the economic outlook is indeed so fraught, why aren’t the earnings estimates coming down? You would think the companies themselves—not to mention the analysts, fearful of looking foolishly bullish—would long since have been guiding expectations meaningfully lower. So far, they haven’t…The refusal of earnings estimates in the aggregate to come down when the world is almost universally held to be crashing is thus—to the undersigned incurable optimist—the dog who did nothing in the night-time in the Sherlock Holmes story: a most curious incident. Either the estimates are stubbornly and even egregiously wrong, or there is too much—and possibly far too much—bearishness around.”

Now let’s talk about cash. Starting, of course, with an obligatory warning for anyone holding onto cash that they accept would/should otherwise be invested if it weren’t for the current market volatility.

Sooner or later, cash has to be invested, or financial plans fail. The decision to invest cash in stocks is always a ‘when’ not ‘if’. The clock is ticking; every day we get one day closer to retirement, with cash losing ground to inflation. This has never been more true. We also need to understand that the risk right now is not buying into the next 25% (or whatever!) decline. The risk to any of us is being out of the next 100% advance, which—though it can’t be timed—is inevitable. There are numberless investors out there who, at 3,900 on the S&P 500, are waiting for, say, 3,200. They may or may not ever see 3,200. But they will, sooner or later, certainly see 6,200. At the risk of sounding like a broken record, I’m going to keep driving this point home on a regular basis!

Cash tends to exist at the forefront of individuals’ day-to-day lives for many reasons: as a stable savings vehicle for near-term goals, a safety net for unforeseen emergency expenses, etc. And this nearness to daily life means that cash—and how it is used—is also often at the forefront of individuals’ minds. In general, this means that people are more likely to be more aware of how much cash they’re holding than the other numbers in their financial life, like the balances on their retirement accounts (which, being less ‘immediate’ in their intended purpose, are not often at the forefront of most people’s minds to the same extent cash is).

However, despite the impact that cash may have on a person's mindset, advisors have traditionally spent little time advising clients on what to do with their cash - except simply to tell them not to hold too much for risk of losing value to inflation. With the Fed keeping the Fed funds rate (which influences just about all other interest rates) at near zero for close to a decade and a half, there simply hasn’t been much extra value that we advisors could provide in recommending one type of cash vehicle over another.

With recent economic changes, though, I feel it’s important to start talking about ways you can manage your cash more effectively. Since the Fed has recently raised key interest rates, this has resulted in higher yields on bank accounts, CDs, and other cash-like assets. Which means that, for the first time in years, we might start earning non-trivial yields on cash.

Let’s start with what everyone’s been talking about lately. I-bonds. I should first mention the key disclaimer around I-bonds is that you can’t cash in the bond for a year, so I would be careful tying up ‘safety net’ funds in this. The other thing to note is that you can only invest $10k/person. But otherwise, what’s great about I-bonds right now is they are currently paying a record 9.62% yield through October 2022. It’s backed by the U.S. government and doesn’t lose value.

I-bonds have a variable interest rate based on inflation, which means the asset currently has a high yield. The variable rate is set every May and November, and based on the Consumer Price Index (CPI) inflation rate at that time. So while the 9.62% rate will be reset in November, inflation is likely to remain elevated for the foreseeable future—which means the yields are at least likely to be better than a high-yield savings account or CD for a while.

I’ll note that there are two components to the rate—a fixed rate and a variable rate. The fixed rate is currently 0.00%. So the only yield is the variable component, which is essentially the inflation rate. Eventually, the inflation rate will fall and given that we’re not locked in with the current 9.62% yield, yields will eventually decline as they are reset each May and November.

While you need to hold I-bonds for at least a year (and if you cash them in before 5 years, you’ll lose the prior three months of interest), this is a solid place to park $10k for the next year or two. Given that inflation is probably here to stay for some time, even with a three-month interest penalty in years two through five, it’s still worth it. You can find more information on I-bonds, and purchase them directly from US Treasury by going here

Lastly, I want to be clear that I-bonds should not be seen as a long-term investing alternative (to stocks). If you’re putting away $10k right now and you know you won’t need it anytime soon, you should be invested in the stock market, which has historically delivered an average of ~10% return/year. With I-bond yields currently at 9.62%, it might be tempting to think ‘Hmm, should I keep this $10k that’s otherwise part of my long-term investment strategy hanging out in I-bonds until the stock market recovers? Seems like a safe and prudent thing to do, no?’ No. Because the I-bond rates will continue to be reset and likely lowered every 6 months. In the meantime, the stock market will likely be going back up, and you don’t want to be out the of the market when that happens.

Beyond I-bonds as an intriguing cash vehicle du jour, we’re really just looking at high-yield savings accounts and CDs with online banks. We are currently working on establishing a partnership with a platform that would allow our clients access to multiple partner banks with a single online dashboard. The platform’s distinguishing feature is its large network of partner banks, totaling over 900 banks around the country. This allows for more stability in interest rates, as yields may not fluctuate as quickly when there are more banks to choose from (sometimes even when you’ve identified the most competitive yield and move your money to that bank, over time their rates might actually become less competitive, but their hope is you stay with them anyway because of the hassle of opening new accounts and moving money around). Working with 900+ banks also enables them to offer a whopping $25 Million in FDIC coverage per person—10 times its closest competitor and 100 times what a single savings account would provide.

The platform also has a feature that allows clients to direct their deposits specifically towards community banks and credit unions that primarily serve minorities and other underserved populations, which is likely appealing to our clients for whom social impact is a strong diver of their financial decisions.

In the meantime, here are some resources with current top-ranking high yield online savings banks

And then, here are the current top-ranking banks for CDs

Note the FDIC limits: $250k per depositer, per insured bank, for each account ownership.

I know this is getting long, so I’ll just quickly bullet out the other items I wanted to mention, and you can let me know if you have follow up questions.

Look forward to catching up in the fall. Scheduling emails will be going out shortly. Let us know if you need anything in the meantime.

Charlie