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Resetting Expectations

Resetting Expectations

November 02, 2023

The last three years have been interesting, to say the least.  Particularly if you are a financial planner managing client portfolios.  As much as we test, backtest, and sweat detailed financial information to assist you in achieving your goals, we don't control the outside world.  And lately, it hasn't been a simple matter.  Who would have guessed that the world would suffer through a pandemic approaching historic proportions, with almost 7 million people globally dying from the illness.  It is my belief that this singular event created an interesting mix of economic challenges and opportunities.

The S&P 500 closed 2020 with a 16.3% gain after dropping -34% in the spring, led largely by "stay-at-home," technology, and consumer staples stocks.  2020 is also memorable for the largest one-day decline of the index of -12%, the largest one-day drop since 1940.  This was followed by an almost 27% increase in 2021 and a nauseating -19% drop in 2022.  As of the end of September 2023, the S&P 500 is up 11.7%, and this increase is largely due to the "magnificent seven" technology stocks: Microsoft, Apple, Amazon, Nvidia, Alphabet, Meta, and Tesla.

Meanwhile, interest rates have increased significantly in the last 12 months, thanks to actions by the Fed to curb post-pandemic inflation and now the bond market itself.

So 2022 and 2023 have become even more interesting as the rise in interest rates hurt bond prices at the same time stocks declined last year, and bond holdings have not recovered this year, although it is now possible to get decent interest rates on money market and short-term cash.

Needless to say, all of this has some investors heads spinning.  Here are some common questions and answers:

Q.  The market is up 12%, so why isn't my portfolio? 

A. First of all, most client portfolios are balanced to some degree between cash, bonds, alternatives, and stocks.  It's unusual for an investor to have a 100% stock portfolio.  But beyond that, we take great pains to custom-fit your investment strategy to your comfort level and what is required by your financial plan.  So we may not use funds or individual stock models that mirror the S&P 500 index. Speaking of which, the S&P 500 index is very overweight in technology, and the seven stocks mentioned above make up around 26% of the index.  Does that mean that all of the other investable stocks in the U.S. are unsuitable?  Absolutely not; there are many tried-and-true, steady, and well-managed companies (and funds) that make our list.  We have always focused on the steady growth of assets with more limited downsides than the major indexes.

Q.  What's wrong with my dividend stock portfolio? 

A.  Chances are, nothing.  One of our model portfolios that we use is mainly comprised of individual stocks, like AbbVie, Prudential, Cisco, Exxon, Emerson Electric, JP Morgan Chase, Accenture, and other quality names.  I've managed this model since April 2009, and it has averaged an annual return of 11.9% before fees since then.  This year, through September, it is down -.33%, compared to a benchmark like the SPDR S&P Dividend ETF (SDY), which is down -6.29% for the same time period.  There are possibly many reasons why quality names of stable companies may be down this year, but it all boils down to an overall stock market that is impacted by higher interest rates, the worry of a slowing economy, and overall investor caution. 

Q. Are you including artificial intelligence stocks in my portfolio?   

A. To a degree, yes, and our mutual fund / ETF managers will as well.  One of our models, a concentrated technology model that I've managed since January of 2010, has averaged 17% per year since inception.  This year, it is up over 34%.  However, it was down -30% in 2022.  That's a 68% swing in two years.  Not for everyone, but many of our clients do have a portion of their stocks with some exposure to tech or this portfolio specifically.  We think AI has a big future, but, similar to the dot-com era, we will have to be careful as not every early success will survive.

Q. What about bonds? 

A. We believe that interest rates will start to moderate next year.  The Fed's latest pause may be an indication of this.  Currently, we have been favoring the Schwab Money Market Fund as a bond fund substitute as it pays 5%+ interest on very short-term holdings.  Once we feel that we can get similar or better returns in bond funds, we'll get back to using them.

In conclusion, know that I spend a significant portion of my time thinking about all of this and reviewing potential solutions to enhance your portfolio over time.  We make changes carefully, and after much research and due diligence.  I've seen firsthand how sticking to an overall strategy and being patient pays big rewards down the road.  

Please reach out if I can answer any questions for you.

Best regards,

Doug Kinsey, CFP®, CIMA®

Partner and CIO