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Thoughts in Charts: Recession Vs. Returns

Officially, a “recession” is defined as two consecutive quarters of negative Gross Domestic Product (GDP). GDP attempts to measure consumer spending, business investment, government spending, and net exports. Usually, we think of strong GDP as passing through to strong stock market conditions, but GDP and the equity market don’t always move in the same direction. In a few weeks, we will get official numbers on a massive quarter-over-quarter GDP drop; however, the U.S. stock market is looking past the current situation in anticipation of higher economic output in the second half of the year and beyond.

For disclosures, please click here.

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Thoughts in Charts: The Price of Food

Do you feel like your grocery bill is increasing? Your inflation intuition is correct. The Consumer Price Index (CPI-U) is the measurement of prices on a “cart” of general goods that most people use in their daily lives – think the cost of milk, meat, gas, and rent. While the price of this overall cart has not changed much in the last 12 months, the low percentage change is mainly because of the price dip in the energy portion of the metric. The price of food, on the other hand, has increased more than the 2% we expect in a normal year. As you hear more about inflation in the next few months, keep an ear out for the phrase “core inflation” as it excludes these more volatile food and energy prices.

For disclosures, please click here.

Thoughts in Charts: A Growing ESG Universe

The universe of funds that are significantly influenced by environmental, social, and/or governance themes has accelerated over the last 5 years. These “sustainable funds” are also accumulating a track record, allowing us to evaluate the ability of managers to bring together money and meaning without sacrificing returns.

For disclosures, please click here.

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Thoughts in Charts: What’s Your Style?

Not all segments of the market are created equal. The Russell 3000 Index, which represents most of the investible equity market in the United States, is down over 10% since mid-February; however, dissecting this larger index into smaller segments illustrates a much wider range of returns. As we navigate market allocation for our clients, the index returns in these catty-corner style boxes demonstrate the importance of evaluating style tilts within our portfolios.

For disclosures, please click here.

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Today’s Marathon: What a Marathon Taught me about a Pandemic

COVID-19 Map

It’s been over 10 years since I ran the Chicago Marathon, but I vividly remember mile-marker 13. Because of the feeling in that exact moment, I’ve run almost a dozen half-marathons, but never another marathon. I wasn’t close enough to the end to see the finish; in fact, I wasn’t even half-way. Despite having run 13 miles, I felt like absolutely nothing had been accomplished. That mile-marker has been on my mind a lot the last few days – reminding me of the mental strength of the marathon.

The thing is, before you run a marathon, you plan out the route. It really matters where you are in the race. Where do you refuel? Where are the hills? Where are the water stations? Where are the moments that you know you’ll need a little extra mental toughness? This plan helps carry you through, and so yesterday, I sat down and mapped out this COVID-19 marathon with the events of the last few months and the types of things that I think lie ahead.

As I filled in the items that have already happened in dark red and green, it became clear why mile 13 has been on my mind. Life has been shifted, disrupted, and stressed. Despite expending a ton of energy, it feels like very little has been gained. The green, the good news, has been pretty minimal while the bad news has been overwhelming. It’s mile 13 of the toughest race I’ve ever run. It feels defeating because, frankly, I can’t see the end.

As I continue graphing, I remember exactly why I needed to lay out the rest of the race. There are some remaining bright red challenges – huge and painful challenges that we will have to endure. When these events arrive, I’ll remind myself that “this is the hill you knew was coming.” I will stick with the plan I made before I was exhausted. I may tweak my pace, but I won’t change course.

Slowly there will begin to be more bright green moments than bright red – more good news than bad. Schools will re-open, science will catch up with the virus, government stimulus will deliver support, markets will stabilize, sporting events will restart. I’ll sit in my favorite restaurant, drinking my favorite cocktail after hugging my best friend.

There is one other moment from the marathon that stands out just as vividly as mile 13. A bit further into the race, a spectator yelled out “just a few more miles and you will be a marathoner.” I had never considered that I would be a “marathoner.” Of course, it had been my goal to finish the race, but it never occurred to me that this victory would add to my identity. This stranger brought things sharply into focus. I was a lot closer to the end than when I started. I had already overcome more than I realized. If I followed my plan and kept putting one foot in front of the other, I would finish this race – forever changed for the better.

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Gazing into the Crystal Ball

I love the “crystal ball” predictions at the start of every year. Please hear me, I’m a risk analyst and thus a skeptic by training, so I expect very few of these predictions to be correct. What I love about them, is that they bring up top topics of concern and of opportunity. These forecasts provide such a fertile starting spot to dig into the work by which we have been entrusted: managing the long-term balance between risk and return.

I’d like to share the types of conversations that these fortune tellers have sparked here at ThirtyNorth:

  • Can we expect market volatility in this election year? Our perspective here at ThirtyNorth is long-term, so short-term volatility in a period running up to an election is unlikely to change our investment strategy; however, elections create a period of uncertainty that deserves attention as we attempt to hold steady on our long-term objectives. In an incumbent election year, these volatility predictions remind us to keep our focus on policy shifts that may have long-term economic impact.
  • What are the risks and rewards within the growing BBB debt space? Although bonds with BBB ratings from Standard & Poor’s are viewed as investment grade, they have been assigned the lowest credit quality of this grade. Many are wondering if a large portion of BBB debt is at greater risk of default than implied by their ranking. As noted in a recent Barron’s article, some expect up to 20% of BBB, which equates to about $660 billion in debt, to be downgraded from investment to non-investment grade during 2020.1 This is not a new conversation at ThirtyNorth, as we have been working to minimize BBB debt in our investment grade fund selection for a while now. As these cards are still being read, we are examining who wins and loses with (and without) a large downgrade scenario.
  • Are Environmental, Social, and Governance (ESG) themed funds as advertised? With the expectation of large demand for ESG products, the marketplace is beginning to see a flood of products claiming to make investment decisions that promote ESG themes. As a firm with a mission to bring together money and meaning, we are excited for the opportunities to invest in products that are actively engaging companies on issues that our clients value; however, we are finding that fund ESG claims aren’t always reflected in their decision making. We are analyzing investment options, looking to engage with fund companies, and working on curating a list of funds that we find live out their stated mission.

You’ll hear more from us on these topics and others over the next few months, but as always, we would love to hear from you about the issues that make you feel encouraged or worried about your investments. Fortune tellers are always welcome here.

Sarah Bomhoff

1Jasinski, Nicholas. “A ‘Ponzi Market’ Is Developing in Corporate Bonds. Here’s What That Means.” Barron’s, Dow Jones & Company, Inc., 22 January 2020, https://www.barrons.com/amp/articles/bonds-corporate-high-yield-investment-ponzi-easing-central-banks-yield-squeeze-treasuries-51579641764

 

Disclosures:

  • All expressions of opinion reflect the judgment of the authors as of the date of publication and are subject to change. It should not be regarded as a complete analysis of the subjects discussed.
  • Information presented does not involve the rendering of personalized investment advice and should not be construed as an offer to buy or sell, or a solicitation of any offer to buy or sell the securities mentioned herein. Tax information is general in nature and should not be viewed as legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation.
  • Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment or strategy will be suitable or profitable for a client’s portfolio. All investment strategies have the potential for profit or loss. There are no guarantees that an investor’s portfolio will match or outperform any particular benchmark. Index returns do not represent the performance of ThirtyNorth Investments, LLC, or its advisory clients.
  • ThirtyNorth Investments, LLC, is registered as an investment advisor with the SEC and only transacts business in states where it is properly registered, or is excluded or exempted from registration requirements. SEC registration does not constitute an endorsement of the firm by the Commission nor does it indicate that the advisor has attained a particular level of skill or ability.
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Feeling More SECURE in Retirement

If you think that concerns over one’s ability to retire are limited to the young, think again.

Sure, younger generations are saddled with unprecedented student loan debt, and they can no longer count on Social Security as a guaranteed source of income in their later years, as their parents and grandparents could. But a 2019 Northwestern Mutual survey also found that nearly one in five Baby Boomers has less than $5,000 saved for retirement. 1

Read that again: one in five Baby Boomers has less than $5,000 saved for retirement. And 15% of Americans have no retirement savings at all.Similarly, a recent study of all Vanguard retirement plans revealed that the median retirement balance is just $22,000.2

Simply put, many Americans now expect to outlive their retirement savings. Is there anything we, as a system, could have done—or more importantly, can do—to help curtail this looming retirement crisis?

In our many years assisting clients as they plan for, approach, and navigate retirement, we have seen time and again that one of the most valuable tools for adequate retirement investment is an employer-sponsored retirement plan. And yet, about half of U.S. businesses do not offer their employees a company-sponsored 401k retirement plan.

Beyond limited access to employer-sponsored plans, individuals today face a host of challenges when it comes to regulations around retirement planning. To name just a few: people are limited as to how long they can contribute to their retirement plans, penalized for early withdrawals (which may defer younger employees worried about near-term liquidity), and may be forced to distribute funds (i.e. terminate the benefit of tax-deferred growth) before they’re ready.

Which brings us to the SECURE (or Setting Every Community Up for Retirement Enhancement) Act, which recently passed in the House in a whopping 417-3 vote and is currently under consideration in the Senate. This bill will meaningfully enhance employees’ ability to better prepare for retirement. Among its nearly 30 provisions, the SECURE Act:

  • Makes it easier and more affordable for small employers to sponsor retirement plans by joining together with other small businesses.
  • Provides incentives for smaller employers to add automatic enrollment.
  • Increases the age at which a participant is required to take distributions from 70.5 years currently to 72 years. This extended tax deferred growth could yield meaningful extra savings.
  • Repeals the maximum age for IRA contributions. With many people working later in life, repeal of the current age limit (70.5 years) extends the benefit of tax deferred savings for as long as an employee chooses to keep working and contributing.
  • Exempts individuals from the 10% penalty tax for up to $5,000 in early distributions following the qualified birth or adoption of a child. This type of flexibility encourages young plan participants to save more, with the security of knowing they can withdraw funds for this purpose penalty-free.

As debate continues in the Senate, some focus is now being put on an additional provision of the SECURE Act, which eliminates the “Stretch IRA”. Today, you can leave your retirement account to your spouse, child, grandchild, or other beneficiary, who can then parcel out distributions over the course of their lifetime; in the case of a child or grandchild, this could significantly extend (or “stretch”) the lifetime of the IRA’s tax-deferred compounding and result in a sizeable inheritance. The SECURE Act, however, requires any non-spouse beneficiary to distribute the entire IRA within 10 years, which could curtail the tax-deferred benefits to the inheritor.

However, retirement plans were designed to enable retirement, not inheritance. We should be more concerned with the SECURE Act’s retirement planning benefits than its estate planning implications. Our priority must be to address a retirement system in dire need of improvement, a system that is not preparing our nation’s workers for a comfortable and timely retirement. By encouraging greater savings in a myriad of ways, the SECURE Act would represent much needed progress.

Keep your eyes and ears open for news on the bill’s progress in the Senate, and—as always—if you have any questions about your own retirement planning or how new regulations might impact your investment strategy, please do not hesitate to reach out to our experienced team of advisors.

 

Suzanne T. Mestayer

 

1https://news.northwesternmutual.com/planning-and-progress-2019

2 https://pressroom.vanguard.com/nonindexed/Research-How-America-Saves-2019-Report.pdf

 

Disclosures:

  • All expressions of opinion reflect the judgment of the authors as of the date of publication and are subject to change. It should not be regarded as a complete analysis of the subjects discussed.
  • Information presented does not involve the rendering of personalized investment advice and should not be construed as an offer to buy or sell, or a solicitation of any offer to buy or sell the securities mentioned herein. Tax information is general in nature and should not be viewed as legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation.
  • Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment or strategy will be suitable or profitable for a client’s portfolio. All investment strategies have the potential for profit or loss. There are no guarantees that an investor’s portfolio will match or outperform any particular benchmark. Index returns do not represent the performance of ThirtyNorth Investments, LLC, or its advisory clients.
  • ThirtyNorth Investments, LLC, is registered as an investment advisor with the SEC and only transacts business in states where it is properly registered, or is excluded or exempted from registration requirements. SEC registration does not constitute an endorsement of the firm by the Commission nor does it indicate that the advisor has attained a particular level of skill or ability.
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When to Crack Your Nest Egg: Part II

In our January blog post, we explored the question of when to retire—more specifically, the portfolio implications of retiring at what could be the beginning of a bear market. In light of recent volatility in public markets and anticipation of a long overdue downturn, sequencing risk is of particular interest to clients approaching or considering retirement—and understandably so.

For those who cannot or don’t want to wait to retire under more favorable market conditions, there are specific strategies we recommend for mitigating sequencing risk. These contingency plans help us to focus on those things we can control and to feel more confident in our preparation. Before cracking that nest egg, we suggest you consider:

Retirement Buckets

A distribution or “bucket” strategy provides short-term certainty without sacrificing long-term security by divvying up your retirement funds into buckets that differ in asset type, purpose, and time frame. For example, you might create three buckets as follows:

  • Cash (or cash equivalents) to be used for the upcoming year or two of expenses. This provides a regular source of cash without feeling pressured to liquidate other investments at an inopportune time; instead, those assets can stay invested while waiting for the market to rally.
  • Bonds and fixed-income investments, which are less prone than stocks to suffer significant market downturn. A properly structured bond portfolio can serve as a well-defined annual source of investment income to help replenish Bucket 1 if needed.
  • Stocks (or other equity investments) to sustain the nest egg for the long term. When market performance exceeds expectations, the excess appreciation can be used to replenish Buckets 1 and 2 if needed. On the other hand, when performance disappoints, Buckets 1 and 2 carry you through without having to sell stocks at a point of lower (or no) returns, providing critical peace of mind to stay the course and ride out market volatility.

Flexible Budgets

Spending needs change over time, and the same is true during retirement. Perhaps you hope to enjoy lower budgetary needs now that the kids are grown; perhaps your medical costs will unexpectedly rise in the years to come; or perhaps you hope to celebrate your freedom with an extravagant trip abroad.

We strongly encourage all our clients – not just those facing possible sequencing risk – to take a hard look at how they currently spend their money, set honest expectations around how those budgetary needs might change (for better or worse) during retirement, and quantify the cash flow realistically needed to retire. During this exercise, build in flexibility by identifying any items which might be postponed or eliminated should the market turn (for example, that trip abroad can probably wait, while medical expenses probably can’t).

Additionally, withdrawing a percentage of your retirement funds each year – rather than a fixed amount – further mitigates sequencing risk by reducing the impact of your withdrawals on top of the impact of lower returns. However, this strategy requires that you be able to live within a spending range that might fluctuate from one year to the next based on market performance, rather than adhering to a fixed annual budget.

Withdrawal Sequencing

Be thoughtful when prioritizing accounts for withdrawals. While fulfilling your Required Minimum Distribution amounts from your IRA or 401(k) comes first, consider following with more tax efficient non-taxable withdrawals from an HSA or Roth account.  Individual situations may vary, so be sure to work with a tax advisor to optimize the impact on your tax liabilities.

Buffer Asset Inventory

Take stock of any assets you may have that can be used, if necessary, to buffer cashflow shortfalls during a market downturn. Consider the cash surrender value of a life insurance policy, or selling that rarely used lake house. Despite the negative reputation of reverse mortgages, there are situations in which even these can be effective tools for supplementing retirement income.

Of course, you may choose to employ one, two, or all of these mitigating strategies to best prepare yourself for retirement, even if the market’s timeline doesn’t seem to align with yours. When in doubt, always seek the advice of a professional who can help you weigh your options and develop a thoughtful, well-rounded retirement plan that ensures you spend those golden years focused on filling the soul, not the coffers.

 

Suzanne T. Mestayer

 

For disclosures, please click here.

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When to Crack Your Nest Egg

Retirement: it’s a phase of life many look forward to, but it’s also one of the hardest to plan.  Sure, there’s the question of how much, often referred to as your “number”—the amount of savings you’d need to be able to comfortably retire. Conventional wisdom has long relied on the “4% Rule” to help hopeful retirees calculate this number: the annual income you want or need throughout retirement (not including Social Security income) should represent 4% of your total savings upon retirement. So, if you’re targeting $150,000 in annual retirement income, you’ll need $3.75 million saved the day you retire.

While this rule of thumb may be helpful in its simplicity, that simplicity can leave many ill-prepared for the financial realities of retirement.

While the 4% Rule asks how much, it doesn’t ask how long. The 4% Rule assumes a 30-year retirement. If you don’t expect to live that long, perhaps you don’t need the full $3.75 million. Then again, if you midjudge your longevity, you could deplete your savings years too soon.

The 4% also doesn’t ask how you expect to live during retirement. In our experience, clients often underestimate how much their current lifestyle really costs, while they overestimate their ability to remain healthy and independent as they age.

Perhaps most importantly in our current market, the 4% Rule fails to ask when.

And when it comes to retirement, it’s not just a question of how big your nest egg is. It’s also a question of when you crack it.

Let’s suppose for a moment that you’ve worked to accurately quantify your retirement needs. You’ve even built in some you wiggle-room for unexpected expenditures. You feel confident in your $3.75 million nest egg number, and you plan to withdraw $150,000 a year. So long as the market is able to return 5% on your investments, your calculations tell you you’re headed for a long, financially secure retirement.

However, in your second year of retirement, the market takes a significant downturn. Suddenly, instead of the 5% return on your investment you’d planned for, your portfolio is now yielding a -12% return rate, as you continue to make withdrawals. After several years, the market rallies, and over the course of your entire retirement, your portfolio still manages to average 5% returns over time. However, averages can be deceiving.

Thanks to that drop in the market early in your retirement, you ate into your nest egg at a faster rate than anticipated, meaning any future market gains were made on a smaller egg. The earlier in your retirement you face a bear market – or worse, a recession – the more magnified is its negative impact and the harder it is for your savings to rebound. This is known as sequencing risk, and it’s of particular concern to those looking to retire just as the market prepares for a downturn.

The fourth quarter of 2018 was certainly such a downturn, and there continue to be predictions of a deeper bear market and possibly a recession.  And while it’s unclear if or when these predictions will come true, those approaching retirement must consider if, when, and how to do so in the face of such uncertainty. Some may decide to continue working to provide extra cushion for their nest egg.   For those who cannot or don’t want to wait, there are specific strategies we recommend for mitigating sequencing risk, including asset allocation strategies, distribution or “bucket” strategies, and flexible spending strategies. These contingency plans will be explored in subsequent blog posts; please stay tuned.

 

Suzanne T. Mestayer

 

For disclosures, please click here.

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So You’re Interested in Sustainable Investing? Consider This…

As discussed in my last blog post, sustainable investing may be one of the most important investment trends of the next decade. It offers investors positive social impact alongside financial returns, and it is catching the eye of individual and institutional investors alike. Globally, more than $1 out of every $4 under professional management is invested sustainably1, as investors—especially women and Millennials—increasingly strive to align their investments with their values. Opportunities for investing sustainably now exist across all asset classes, from private to public, from real estate to fixed income to hedge funds.

However, as with anything new—from a self-driving car to a new job offer to a smartphone software update—we must consider both the benefits and the shortcomings of sustainable investing` before we go all-in. We must proceed with a healthy dose of caution as the market irons out the kinks.

The sustainable investing “movement” is still under development, with much work still to be done to clarify and standardize what it is, how it works, and what success looks like. Even the language used in this space is inconsistent, causing confusion around the various sustainable investment strategies and their nuances. Consider the following terms, often (erroneously) used interchangeably:

  • Socially Responsible Investing (SRI) uses a negative screen for companies believed to offer socially undesirable products or services, like tobacco.
  • Impact Investing focuses on using financial investment to address societal and/or environmental challenges, though many believe this occurs primarily through private markets.
  • ESG Investing evaluates a company’s environmental, social, and governance practices as part of an integrated investment selection process.
  • Thematic Investing (like ThirtyNorth’s Women Impact Strategy) is a more targeted method of addressing specific issues (in our case, a gender lens) in the investment selection process to address gender gaps and disparities. It is often a subcategory of Impact or ESG investing.

Next, consider the lack of standardization around performance evaluation. For starters, it’s not clear what “success” looks like in sustainable investing. Traditionally, higher financial returns have defined higher performance. When it comes to sustainable investing, however, the equation isn’t quite as simple. For some investors, positive social impact may be the end game, even if it means lower financial reward. Others believe a social impact screen is in fact the best path to greater financial outcomes. And other investors live everywhere along the spectrum.

Making matters even more challenging, there are no established and broadly accepted performance metrics, standards, or rating systems in this space. The companies being evaluated for ESG typically self-report these behaviors, introducing ample opportunity for bias. Asset managers and financial advisors offering sustainable investment products often must rely on a limited track record and hypothetical back-testing to demonstrate results. It appears that some companies are even rebranding existing funds as sustainable investment products, regardless of how marginal the ESG or social impact may be.2 These issues make it hard for investors to assess how a particular investment option aligns (or doesn’t) with their goals and nearly impossible for them to make apples-to-apples comparisons across companies, funds, and products. It is no surprise, then, that 70% of institutional asset owners surveyed by Morgan Stanley said that the lack of quality ESG data is one of their biggest challenges when investing sustainably.3

Finally, though numerous sustainable investment products are already on the market or under development—including offerings from virtually every major fund company—many financial advisors have not yet turned their attention to these offerings and may be uninterested in learning about them and/or ill-prepared to discuss them.

So, before diving in…

 

  • Think carefully about who you choose as a partner to guide you through this new terrain,
  • Be sure you and your financial advisor are speaking the same language and are aligned on how you will measure the success of your sustainable investment strategy, and
  • Before accepting the promise of something new at face value, push yourself to dig beyond the hype and review a fund or product for both quality and methodology.

 

Suzanne T. Mestayer

 

1 Global Sustainable Investment Alliance 2016 Report

2 It is Difficult to be an Ethical Investor, Wall Street Journal, September 4, 2018

3 Understanding ESG Ratings: A Brief Primer from Celent, ThinkAdvisor, August 6, 2018