Lantern Wealth Advisors, LLC
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Melville, NY 11747
(631) 454-2000

Major Indexes For Week Ended 7/24/2020

Index Close Net Change % Change YTD YTD %
DJIA 26,469.86 -202.09 -0.76 -2,068.58 -7.25
NASDAQ 10,363.18 -140.01 -1.33 +1,390.58 15.50
S&P500 3,215.63 -9.10 -0.28 -15.15 -0.47
Russell 2000 1,467.55 -5.77 -0.39 -200.92 -12.04
International 1,859.81 +7.38 0.40 -177.13 -8.70
10-year bond 0.58% -0.04% -1.34%
30-year T-bond 1.23% -0.09% -1.13%
International index is MSCI EAFE index. Bond data reflect net change in yield, not price. Indices are unmanaged and you cannot directly invest in an index.

The Paradigm Shift In Valuing Stocks

(Friday, July 24, 2020, 8:15 p.m.) After the Covid-induced bear market, when the 500 largest stocks lost 34% of their value, share prices recovered swiftly. By late July 2020, America's largest public companies traded at nearly 20 times their previous 12-month reported profits, and suddenly fears grew that a stock bubble was about to burst.

While no one can predict the next stock-market move with certainty, what's clear is that the stock market's valuation metrics have changed with the financial times. Under the current regime of ultra-low-bond yields -- a condition not expected to change anytime soon -- a new stock valuation paradigm has taken root.

Low yields on bonds make stocks more attractive investments, altering the historical relationship in the respective valuations of the world's two most fundamental investments. A higher price-earnings multiple for stocks is therefore justified by low bond yields.

A price-earnings (P/E) multiple of 20 in a "permanently" low-inflation environment is different from periods of high P/E's in the past. This is precisely why financial ads always warn, "past performance is not indicative of future results." Current conditions make it seem obvious that the future will not look like the historical past.

To illustrate, during the tech stock bubble of 2000, when the Standard & Poor's 500 price spiked to nearly 30 times trailing 12-month earnings, the yield on a 10-year U.S. Treasury bond was 6%. Compare this to a recent 10-year bond yield of six-tenths of 1%. During the tech bubble, bonds yielded 10 times as much as they do now in the current environment! Furthermore, inflation during that period of sky-high stock valuations was more than 2%, versus one-half of 1% recently. And since inflation is not expected to spike higher any time soon, this keeps bond yields from rising.

In addition to this perceived shift in the stock valuation paradigm, modern financial markets differ from the past in another important way. In the U.S., since the 1980's expansion of individual retirement accounts and federally qualified retirement plans, American retirees and pre-retirees have grown into a permanent investor class. These individuals are incentivized by tax laws to stay invested for a lifetime. They are not so much concerned with the market's short-term gyrations. The hedge funds, Wall Street traders, and "hot money" investors are the proximate cause of much of the volatility, but their destabilizing behavior is widely ignored by the investor class as they recognize the slow, inexorable progress America's largest public-company investments represent.

The Standard & Poor's 500 stock index closed Friday at 3215.63, down a fraction from a week ago and 35.9% higher than its March 23rd bear market low.

Stock prices have swung wildly since the crisis started in March and volatility is to be expected in the months ahead.

Assets invested for life need not be influenced by the near-term risk of the virus crisis.

The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. It is a market-value weighted index with each stock's weight proportionate to its market value. Index returns do not include fees or expenses. Investing involves risk, including the loss of principal, and past performance is no guarantee of future results. The investment return and principal value of an investment will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance quoted.

Nothing contained herein is to be considered a solicitation, research material, an investment recommendation, or advice of any kind, and it is subject to change without notice. It does not take into account your investment objectives, financial situation, or particular needs. Product suitability must be independently determined for each individual investor.

This material represents an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete, and is not intended to be used as a primary basis for investment decisions.

Retirement Income Portfolio Survival

As financial professionals, we believe understanding the dynamics of retirement income portfolio risk can be crucial to investment success. The survivability of five hypothetical retirement portfolios over the 20-year period ended December 31st, 2018 shown in the accompanying table is not intended as investment advice but is intended to help clients better understand retirement portfolio risk and conquer perhaps the worst of all financial fears: running out of money in retirement. The data is based on a continuing professional education session by Professor Dr. Craig Israelsen, an independent economist whose research we license.

The results of the five portfolio risk levels illustrated a range from very conservative to aggressive. All five portfolios assume a retiree withdrew 5% of the portfolio value annually, and annually increased withdrawals by 3% to keep up with inflation. Pick whichever starting balance— $250,000, $500,000 or $1 million— best applies to your situation.

What stands out is that the most diversified of the five portfolios outperformed considerably— broad diversification worked! That diversification worked may come as no great surprise; conventional wisdom and academic research hold that diversifying is wise. Remarkably, diversification worked even though this was a 20-year period of low returns on stocks.

Stocks, a riskier investment in a retirement portfolio, showed an internal rate of return over the 20 years of just 2.69%— only six-tenths of 1% better than the least risky of the five portfolios, the one 100% invested in short-term Treasury Bills.

Why did stocks perform so poorly? The 20-year period started in 1999, at the peak of the dot-com bubble. The Standard Poor's 500 index did not recover until 2006, and then it dropped again in the bear market of 2008. A retiree picked a terrible 20 years to be an aggressive investor 100% invested in stocks.

Over the much longer 49-year period, stocks did outperform cash by a huge amount and they also outperformed a diversified portfolio.

The point is that even in this terrible period for stocks, the growth engine of a retirement portfolio, a broadly diversified portfolio outperformed. The next 20 years are likely to be as unpredictable as the last 20 years, but this illustrates how broad diversification helped a retirement portfolio survive through a period in which stocks performed unexpectedly poorly.

These are the indexes that represent the ETFs used in the Passive 7Twelve Portfolio.

The above referenced information was obtained from reliable sources, however Lantern Investments, Inc. and Lantern Wealth Advisors, LLC cannot guarantee its accuracy. Opinions expressed herein are subject to change. Past performance is no guarantee of future results. Asset allocation and diversification do not assure a profit or protect against losses in declining markets. Any information given on the site is informational and illustrative but does not recommend actions as the information may not be appropriate to all situations. It is important that you consider your tolerance for risk and investment goals when making investment decisions. Investing in securities does involve risk and the potential of losing money. Links to other sites are provided for your convenience. Lantern Wealth Advisors, LLC and Lantern Investments, Inc. do not endorse, verify or attest to the accuracy of the content of the web sites that are linked and accept no responsibility for their use or content. Lantern Wealth Advisors, LLC and Lantern Investments, Inc. do not provide tax, accounting or legal advice.