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Thoughts in Charts: The Curve May Change the Strategy

I was talking with a mentor late last year, and she was telling me about this incredibly “reasonable” request from a client. He was asking for a very low risk 2% annual income from an investment that he was happy to hold for the next 15 years. I believe she said something like “I’ll take that request all day”.

This week’s chart illustrates why she felt very confident that she could deliver for this client.  She could go out the maturity ladder to around 10 years and buy US Treasury Note at the appropriate yield. She would get him a 2% annual payment with very low risk.

Had that client asked for a low risk 2% yield at the beginning of 2019, she would have had even less trouble designing a portfolio. In fact, if he had wanted to take periodic withdrawals, she could have built the portfolio with maturities that would accommodate shorter term cash flows without dipping below the 2% yield.

Even in December of 2008 when rates dropped during the Financial Crisis, she could have met his request. Short-term yield very nearly matched what it does today, but she still had options at the longer maturity dates to reach the desired 2% yield.

And then there’s today: his portfolio construction would be much more complex. No matter how far out she looks on the curve, US Treasuries are not offering a 2% annual income. To construct something now, she would be forced to ask the client to take on more risk or lower his annual income expectation to around 0.50%.

Just like my mentor, bond fund managers cannot go out and grab a low risk yield right now. At ThirtyNorth, we are staying vigilant – aware that managers may be digging into higher risk or asking us to accept lower returns. Those adjustments are likely market realities, but we want to be prepared to adjust your allocations in response.


Thoughts in Charts: Watching the Output Gap

Unprecedented amounts of stimulus are entering our economy. With large amounts of money flooding the economy, shouldn’t we be worried about inflation?

This week’s chart illustrates one of the reasons most economists presently consider inflation a low risk. The output gap is the difference between the value of all the goods and services produced within the U.S. currently (GDP) versus what a healthy U.S. economy is capable of producing at full employment (Potential GDP).

The output projections recently published by the Congressional Budget Office predict that it will be a long time before the U.S. economy recovers enough to close that output gap. Until then, there should not be enough sustained demand pressure to drive up general price levels.

While this is not at the top of our worry list, we are watching this gap carefully. If the recovery happens faster than expected, inflation becomes more of a possibility.

Sources: Congressional Budget Office; Bureau of Economic Analysis. “An Update on the Economic Outlook: 2020 to 2030”.  July 2020. https://www.cbo.gov/system/files/2020-07/56442-CBO-update-economic-outlook.pdf

The output gap is the difference between GDP and potential GDP, expressed as a percentage of potential GDP. A positive value indicates that GDP exceeds potential GDP; a negative value indicates that GDP falls short of potential GDP. Values for the output gap are for the fourth quarter of each year.

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Controlling What You Can


The need for long-term financial security is real, but sometimes financial choices are more heavily driven by pressing needs and wants along the way. If you find yourself falling short at retirement time, you may continue working in your current career (if you can), find employment in a different way, or adjust your future lifestyle plans.

In fact, people are working later in life. Almost 30% of those between 65-74 are still part of the civilian labor force.(1) Most are driven primarily by the desire to remain engaged and active, but a healthy percentage are also influenced by financial needs.(2)

Surveys aside, we all wonder about our financial security, especially when the stock market is as stressed as it was recently or as it will be in the future. What can we do to manage our concerns?

Take control of those things that can be controlled. Two simple but powerful questions to ask are:

  1. Am I saving enough? What can I do to increase my savings rate? COVID has caused some of us to realize that expenses can be reduced, and that it’s OK.  Before you return to your previous spending habits, consider ways to direct more into savings.
  2. How are my savings working for me? Do I really understand how my savings are allocated among cash, stocks, bonds or real estate? A cash reserve is very important, but too much cash may hinder our ability to meet future needs due to inflation risk. Does the allocation consider risk tolerance?  Are my investments broadly diversified, one of the most basic ways to minimize risk while enjoying the growth of the markets?  The allocation of investments is a major driver of their growth.

We cannot control the stock market, but we can control our savings rate and how we invest. We can bring together our money and its meaning for financial security in our lives.

Please stay well, and stay tuned…

For disclosures, please click here.

(1) Bureau of Labor Statistics, Employment Projections, JP Morgan Asset Management

(2) Employee Benefit Research Institute, Mathew Greenwald & Associates, Inc. 2019 Retirement Confidence Survey, JP Morgan Asset Management

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Thoughts in Charts: Withdrawal Timing

The timing of your cash withdrawals matter. The U.S. Stock market has persisted upward for the last 150 years; however, this has not been without periods of dramatic downturns. Some of these downturns lasted a significant amount of time.

Over a long period of time, the investor is likely to be compensated for risk. But this graph illustrates that there are periods of time where it’s very unprofitable to withdraw from a stock investment. A key part of your portfolio construction should be to avoid “needing” to withdraw more volatile stocks during those downturns.

While anticipated cash needs within the next year or two are often easier to identify, don’t forget to talk to your advisor about potential cash needs within the next 10 years as well. The goal is to create a portfolio with the appropriate level of risk for your shorter-term requirements and the ability to let your longer-term assets ride out the storms.

For disclosures, please click here.

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Money and Meaning: Measuring ESG

While “Sustainable” is a broad term, we are beginning to see established standards and metrics that help us quantify our value sets within companies and funds.

For disclosures, please click here.

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Thoughts in Charts: Retirement as a Third Act


Retirement is a beginning, not an end.  In 1935, when Social Security established a retirement age of 65, the average American man was not expected to live past 58 years old. Now, age 65 marks the beginning of an expected 20-year life stage for 90% of American households.

Increasingly, our “retirement” conversations with clients are focused on investment goals that allow clients an increased freedom to dictate their own terms of life’s “Third Act”.

For disclosures, please click here.

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Thin(k) About Your 401(k) Plan: To Roth Or Not To Roth

This recently released XpertHR’s 2020 Employee Benefits Survey caught my eye. The survey indicates that while two-thirds of respondents offer traditional 401(k) plans allowing participants to save pre-tax, only approximately 38% of these same employers offer the Roth feature allowing participants to save after tax.

Makes me wonder if Plan Sponsors who are not offering the Roth option understand they are potentially leaving some value on the table when it comes to their employee benefit?

See the full survey results here. 

For disclosures, please click here.


Thoughts in Charts: The Large 5 vs. the Other 495

A few large companies are making a big impact during the “stay at home economy.” Investors are flocking to Facebook, Amazon, Apple, Microsoft and Google: these names collectively make up 20% of the S&P 5001. Goldman Sachs reported that, as of mid-June, these 5 names were up about 23% year to date2.

Part of the reason that their large weight and outperformance matters is because the S&P 500 is an asset weighted index where the larger company returns contribute more to the index overall return than smaller companies. As you can see, the S&P 500 index return would be 5% lower if you removed these 5 large companies from the composite.

1 Langley, Karen. “The Big U.S. Stock Indexes Are Telling Different Stories.” The Wall Street Journal, 23 June 2020. WSJ.com, https://www.wsj.com/articles/the-big-u-s-stock-indexes-are-telling-different-stories-11592904600?mod=searchresults&page=1&pos=19.

2 Borodovsky, Lev. “The Daily Shot.” The Wall Street Journal, 24 June 2020. Blogs.WSJ.com, https://blogs.wsj.com/dailyshot/2020/06/24/the-daily-shot-new-starter-homes-made-a-comeback-in-may/?guid=BL-278B-2189&mod=searchresults&page=1&pos=4&dsk=y

For disclosures, please click here.


Thoughts in Charts: Pay Attention & Tread Carefully

The S&P 500 index is made-up of the largest 500 publicly traded companies in the United States. Typically, each quarter, about 50 percent of these companies provide “guidance” or insight into their expectations for the coming year. In Q1 of 2020, however, only about 20% of companies reported guidance, leaving the market flying a bit blind.

Keep in mind, if the stock price is a “great deal”, there are some very large unknowns built into that low price. We are encouraging our clients to tread carefully and stay diversified.

For disclosures, please click here.

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Money and Meaning: Investing with a Purpose

For more and more people, investing isn’t just about making money; it’s doing it with a purpose. In this first of a series, we discuss the broader subject and then drill down in subsequent videos. Join us!

For disclosures, please click here.