The SD-PFS*Ticker
Vol 10, Issue 1
March 2019

Spring, we thought it would never arrive! And as of this writing, it really still hasn't, except on the calendar. Watching the change of seasons is one way to mark the passage of time. Watching the changes in the markets is another. In this letter, David Brinkman talks about the last 10 years in the U.S. large company market, along with a few examples of the importance of tax-efficient investing.

We also want to let you know that you should be receiving an email from us in early April asking for your input on the ways we communicate with our clients. This email will include a link to the survey, and it is safe to click. We want to provide the information you're looking for, in a format and on a schedule that meets your needs. Please take some time to give us your opinion in that survey.

As always, please feel free to call us with any questions or comments at 412-697-5331.
10-Year Bull Anniversary - Focus Areas Moving Forward
by: David C. Brinkman

On March 9, 2019, domestic capital markets celebrated the 10th anniversary of the bottoming of the U.S. stock market during the Great Financial Crisis. Between October 9, 2007, and March 9, 2009, U.S. Capital markets experienced a 17-month bear market in which the S&P 500 lost approximately 55% of its value.

Below we have illustrated the S&P 500's total return from March 9, 2009 to March 8, 2019. During this 10-year period, the S&P 500 is up approximately 400% in aggregate, or 17.5% per annum. This 400% cumulative return is the equivalent of investing $10,000 in the S&P 500 index in March 2009 and having it currently valued at roughly $50,000.

Despite setbacks in 2011 and 2015, the last 10 years have been a fairly smooth ride for investors. We have circled the most recent fourth quarter of 2018 as it was the first significant downside volatility experienced by investors for quite some time. Between October and December 2018, the S&P 500 was off 13.5%. This capital market selloff marked the worst quarterly return for the S&P 500 since the 3rd quarter of 2011 when fears about the European sovereign debt crisis in Portugal, Italy, Ireland, Greece, and, Spain (PIIGS) surfaced domestically.  

       Source: Ycharts, March 9, 2009 - March 8, 2019

Given the amount of time since investors last experienced such strong downside capital market volatility, we wanted to revisit a few key concepts for clients:
  • Tax Loss Harvesting - Staying Invested  - Tax loss harvesting is the selling of securities at a capital loss to offset other capital gains now or in the future (capital losses are able to be carried forward to future tax years) and/or to offset up to $3,000 of ordinary income in a given tax year.
    The fourth quarter market pullback was an ideal time for investors to be looking for opportunities to sell investments held at an unrealized loss. As illustrated below, it is important when tax loss harvesting to stay fully invested in capital markets while capturing losses.
    Tax Loss Harvesting Example:
    • You invest $100K into Large Cap Fund A
    • Fund A experiences a 13.5% pullback (like the S&P 500 did in the fourth quarter of 2018)
    • Fund A is sold for $86,500 with the investor capturing the $13,500 capital loss. Assuming a 15% capital gain tax rate, the implied tax savings of the captured capital loss is $2,025.
    • You then invest the proceeds of $86,500 into Large Cap Fund B and experience a 10% rebound, again similar to the S&P 500 returns thus far in 2019.
The key point is that by staying invested throughout capital markets (i.e. not letting the proceeds from Fund A sit in cash for the next 30 days) the investor captured the 10% rebound in S&P 500 while also harvesting the capital loss during the market selloff during the fourth quarter.
  • Tax Efficient Portfolio Construction  - Tax efficient portfolio construction requires an understanding of how various investments are taxed (i.e. ordinary income or qualified tax rates) and constructing a portfolio to maximize your after-tax rate of return. As a simple example of tax efficient investing, assume an investor can own a corporate fixed income investment with a 5% interest rate in either their individual brokerage account or a tax deferred account such an individual retirement account (IRA) or 401k. When analyzing the after-tax rate of return, the preference is to own this fixed income investment inside your tax deferred account given the higher after-tax rate of return as illustrated below. This is just one example of understanding the tax ramifications of your investments and structuring a portfolio accordingly to maximize your after-tax rate of return.
  • Understanding Your Investment Portfolio  - Your asset allocation, or how much you have invested in fixed income, equities, and alternatives, will largely dictate how your investment portfolio performs over the long run. In addition to your allocation, your ability to stay in control of your emotions and remain disciplined throughout capital market cycles will also significantly impact your long-term success.

    Understanding how you are invested, what a similarly constructed portfolio has done in the past during up and down capital market cycles, and having a realist long-term return target for your portfolio are always good starting points for investors to understand, and having this understanding leads to more disciplined investing. Recent capital market activity, such as the 2018 fourth-quarter pullback and the robust start to 2019, is just the most recent test of investor discipline and the ability to attempt to buy low and sell high.

    As we look back on the last 10 years, we celebrate the strong bull market returns. Looking forward, we will continue to advise clients to remain disciplined in up, down and sideways markets; stay the course for the long term; and, most importantly, always be realistic when re-evaluating your progress towards achieving your long-term financial goals.
Investors should be aware that there are risks inherent in all investments. These include fluctuations in investment principal and the knowledge that with any investment vehicle, past performance is not a guarantee of future results. The information discussed is meant for general illustration and/or informational purposes only and it is not to be construed as investment, tax or legal advice.  Individual situations can vary, and the information should be relied upon when coordinated with individual professional advice.
Be On The Lookout

We will be sending out a survey to our clients in early April asking for your input on our various methods of contact. We would appreciate it if you would take just a few minutes to respond and let us know your preferences for hearing from us.

Cyber Security Tip

We want to remind you that you should never email documents containing personal information (Social Security number, birthdays, etc.) without a strong password. This is especially true in the rush of tax season. Those documents can sit forever on a mail server tempting a potential hacker. 
What We're Reading
Bad Blood
By:  John Carreyrou  

This best seller is climbing the charts while telling the story of Elizabeth Holmes, the founder of mega biotech startup firm, Theranos. There's enough intrigue, fraud and suspense to keep you turning the pages. In today's culture of strict regulation and oversight, it's hard to believe Ms. Holmes and her company were able to fool so many, with so little.