Hello All-

Wow. It’s June. How did that happen? I hope you had a wonderful Memorial Day Weekend. This week we honor and remember all United States military members who have died in service of our country, protecting our freedoms. We salute our clients and their loved ones who are veterans or active military members. Thank you for your brave service.

I’m going to begin by sharing five questions we fielded in the past couple of weeks, and answers. After that, I’ll summarize our current market outlook in bullet point form, share some helpful ‘big picture’ thoughts on how to think about and better come to terms with volatility and overcome emotions/human nature in our quest to be successful long-term investors. Then, I’ll conclude by sharing a number of helpful articles I’ve compiled over the past month+.

A. By now, we all know the US Treasury is about to run out of ways to pay its bills, but we have seen this movie many times before. While, theoretically, there has been a threat of default, we certainly don’t recommend planning our lives around it. The script is very predictable: political posturing and grandstanding will go on until the 11th hour, and then a deal is hastily put together to avoid a default. And that’s exactly what has happened.

A. Short answer—in most cases, no. Especially if you’re still accumulating assets and several years away from retirement, and/or you can otherwise afford the monthly payment from your ongoing cashflow. Because of a beautiful thing called compound interest, dollars invested today/earlier on can have an exponential impact on asset growth over time. Because of the ‘concentrated leadership’ in the stock market this year (most gains being driven by ~20 companies), most of the stock market is still ‘on sale’ right now, so that’s an important factor (investing now could mean you get better than average returns—and the average annual return on the S&P 500 is 10%, for example). I ran some calculations below, based on a scenario in which a client is saving/investing $10k/month in their brokerage account, and wondering if they should, for the next 5 months, take that same $10k/month and pay down their $50k auto loan.

A: While bonds certainly play an important role as a ballast for any plan that requires current income and/or near-term liquidity, stocks are really our only hope as we seek to create an income stream we can’t outlive. I’ll first say as a disclaimer that stocks are too volatile over short periods, therefore you must only invest money in stocks that you won’t need for at least 5 years, and that is the approach we take when advising on how to weight stocks versus bonds for retirees and near-retirees. But 100 years of history have shown us that it has been far more profitable to be an ‘owner’ (of stocks) than a ‘loaner’ (when you invest in bonds, you lend money to a company or government). As a loaner, you get a fixed or floatable interest and/or your capital gets appreciated by a little if kept until maturity. Over the last 100 years, the real returns (net of inflation) to stock owners have been upwards of 3x what the loaner (bond investor) got. Lending money has limited upside, owning business has unlimited upside via dividends and appreciation of the business/stock value over time, but you have to accept the idea of unknowability of the future, and be very well diversified (as of course not all businesses ultimately succeed). People tend to overestimate the long-term risk of owning stocks and underestimate the long-term risk of NOT owning stocks. In our opinion, the greatest long-term financial risk we all face isn’t loss of principal, but rather, erosion of purchasing power (via inflation). Right now, for example, we can go out and buy bonds in the 5-7%+ realm, which initially seems like an attractive and more reliable alternative to stock investing, but what we need to keep in mind is that the reason we can get these higher rates on bonds is because the Fed is still battling inflation, which is @ 5% as of this writing. We may be able to lock in these rates for a while, and with any luck, inflation will continue to decline and make these rates more meaningful, but the reality is that eventually rates will fall and the real yields on bonds will struggle to even keep pace with the inflation rate. Similarly, with ‘high yield’ online savings banks, we have gotten so accustomed to near-zero rates for so long, that 4.5% is tantalizing—but due to the inflation rate (@ 5%), the real return is still negative. And basically the moment rates decline, so does the interest rate/yield you earn on your money in these types of accounts. Bottom line---we need to be very thoughtful about not holding too much cash or fixed income, too soon in retirement because this will ultimately impact portfolio longevity. And deciding to own more stocks doesn’t necessarily mean we’re looking to heavily pursue ‘aggressive’ growth (which can be extremely volatile). In fact, for retirees we LOVE what some might consider more ‘boring’ dividend-paying value stocks, because they tend to produce a reliable income stream, appreciate meaningfully, and in times of uncertainty, they can often be less volatile (2022 as example). And we can also strategically write covered calls on these stocks to generate additional portfolio income, at the right moments.

A. While our portfolios are customized to fit our clients risk tolerance and time horizon (and other individual preferences to exclude/include certain industries, sectors, etc.), you may not see all of these names in your specific portfolio, but here’s an outline of some of the stocks we have selected that are both direct and indirect beneficiaries to the artificial intelligence ‘wave’ that has been ‘brewing out at sea’ and is now landing on beaches across every industry.

In short, we think A.I. could be one of the most influential innovations since the internet or the iPhone, and we will continue to look for opportunities as it develops.

A. First, some quick basic points. You will absolutely need supplemental insurance to go with Medicare. The choice is between 1) original Medicare + Medigap + Part D plan, and 2) Medicare Advantage. You should shop supplemental insurance 5 months before enrolling in Medicare, and we can refer you to a licensed agent or State Health Insurance Program (SHIP). Some other helpful websites are BOOMERBENEFITS.COM & MEDICARE.GOV/FIND-A-PLAN. If you do not buy a Medigap policy within 6 months of enrolling in Part B (guaranteed issue period), you may be denied a policy based on health status in the future (although, some states, like MA, have an override). You can always get a Medicare Advantage plan, but Medigap tends to be more stable (benefits stay the same from year-to-year).

In the early years of being enrolled in Medicare, it might cost more due to the Income-Related Monthly Adjustment Amount (IRMAA), as the monthly payment for each year is calculated by your income from the two years prior, which can often be at or near peak as they reach the ‘home stretch’ before retiring. However, once retired, you can appeal the IRMAA. To do so, wait until you get the Medicare premium notice. Then use Form SSA-44, and show income for this year and next year due to life changing event (which includes simply reducing or stopping work). Chart below shows premiums—ex. If you’re married and earned $375k in 2021, but then retire in 2023, your total premiums would be $597.50/month/spouse. Whereas, if your income needs are lower in retirement, and AGI is only, say, $175k/year, you could appeal IRMAA and potentially get premiums reduced to $164.90/month/spouse.

Drug plans and Medicare Advantage plans change every year. Review during annual enrollment period, Oct. 15-Dec. 7. At that time:

Now here’s a summary of our latest take on market outlook. In a sentence, the vast majority of the key data we see continues to look quite positive and we expect more solid gains from stocks the rest of this year. Here are bullet points:

While we still feel a recession is far from inevitable, the great lesson of the last 3+ years since the onset of the COVID plague is that, in the short run, anything is possible. Events that might have previously been considered unthinkable—or extreme outliers, at the very least—have become the norm. Consider:

The list goes on. We long-term owners of mainstream American and global businesses are safeguarded, to the greatest extent possible, by the rationality of our managements. When a global pandemic strikes, Marriott will close its hotels and furlough their staffs. When Russia invades Ukraine, McDonald’s will abandon that country. This speaks to the comforting reality that rational business enterprises will always move to preserve their owners’ capital for the long run. That’s the only thing our managers have any real control over, and it’s the only thing we should care about. But it isn’t, is it? Being only human—and subject 24/7 to the depredations of catastrophist financial journalism- it’s all too easy for our focus to get lost to the utterly random ‘stock market’. We start to experience ‘stock market’ declines as ‘losses’ instead of temporary setbacks in the long upward march of shareholder capitalism.

These ‘losses’ can too easily cause us human beings to feel totally self-generated ‘pain’ that feels twice as bad as advances feel good. Finally—and most weirdly—we tend to think the more the market declines, the greater becomes the risk of even worse decline.

Though this is the diametric opposite of all history and logic, it often prompts liquidation of stockholdings at panic prices, which dooms those investors to substandard returns for the rest of their lives. But people who manage to stay strapped in at -20% are gone at -30%. And damn near everybody is gone at -50%--which, has happened three times in the life of an American 50-year-old. But my primary purpose is to help break this vicious psychological cycle once and for all, for those precious few who will allow me to do so! While I am most certainly NOT forecasting a 50% market decline (nor that the sun will come up tomorrow, nor that either you or I will be here to see it even if it does)—as a financial planner, I don’t forecast anything- I prepare for everything. The question is never ‘Is such a decline coming?’ It isn’t even ‘Is such a decline still possible?’ It’s ‘If such a decline were to happen-in response to whatever ‘crisis’—is my client totally prepared to ride it out, as we go through it together?’

As always, please don’t hesitate to reach out with questions. Have a great weekend.

Charlie

Jacob Foley | Chief Operating Officer | jfoley@meetmarathon.com

John Bay, CFA | Chief Market Strategist | jbay@meetmarathon.com

Indrani Namilikonda | Client Services Coordinator | inamilikonda@meetmarathon.com