Picking the right financial advisor is an important and personal decision.

In order to help you make an informed decision, we’ve listed a few situations when we would not be the right financial advisor.

Our goal with this post is to be respectful of your time and upfront about who we are. Thank you for your consideration.

You Are Not Interested In Working With A Newer Company
Think Different Financial Planning (TDFP) was founded in March of 2021. Since then we have been growing consistently, have a stable base of clients, are profitable, and have many established processes in place. If you’d prefer to work with a company that has been around longer, we are not the right fit.

You Are Seeking An Older Advisor
The founder of TDFP, Will Steinberger, was born in 1987. He’s been in the industry since 2014 and is a Certified Financial Planner. If you’d prefer to work with someone older, we are not the right fit.

You Are Seeking A Financial Advisor AND Accountant
Accounting and financial planning are two unique professions. We feel it’s best to try and do one well, as opposed to being spread thin by two. We do review your tax situation and advise on tax-minimization strategies, but we don’t file your return. If you need a referral for a good accountant, we’re happy to provide one. We are also happy to communicate and work with your existing accountant.

You Do Not Want Assistance With Your Investment Management
If you do not want assistance with the operational side of your investment management, we are not a good fit. This includes: trading, rebalancing, tax-loss harvesting, and dollar-cost averaging into or out of an investment. TDFP opens accounts for clients at Charles Schwab, and we have the ability to trade and implement client-approved portfolios. This also allows us to provide performance reports. We do not have an account minimum, but we require at least one of your investment accounts (e.g., IRA, Roth IRA, brokerage account, trust account, etc.) be under our advisement.

You Want To Beat The Market or Use an Active or Reactive Investment Approach
If you want an investment manager who aims to predict near-term macroeconomic results (e.g., company earnings, interest rate movements, etc.), and incorporate those predictions into their investment approach, we are not a good fit. We primarily invest in globally diversified, low-cost, tax-efficient portfolios using passive exchange-traded funds. We don’t believe that you can beat the market, but think you are entitled to get market rates of return. Learn more about our Investment Philosophy.

Q3 Highlights

Markets rallied during the first half of the third quarter. However, economic data continued to show that we are not out of the woods yet. The Federal Reserve and other central banks around the world remain focused on addressing high inflation amid geopolitical issues. This led to a decline in the second half of the third quarter that brought performance for stocks and bonds to new lows.

The major themes we’ve been experiencing throughout the year have continued to drive the markets: inflation, central bank policy, and the ongoing war in Ukraine. The Federal Reserve raised the Fed Funds rate by 0.75% at each of their two meetings during the quarter, aiming to rein in inflation.

On a positive note, corporate earnings have shown resilience and global stock valuations are now cheaper on a price-to-earnings basis than their 20-year average. In other words, this year’s stock market decline is due to a reduction in valuations, not a decline in earnings. Simply put, investors are less willing to pay high prices.

This is shown in the chart below, which compares the price-to-sales ratio of various sectors at the end of 2021 versus October, 2022. Note that the technology sector had the steepest decline:

During Q3, economic conditions showed modest growth while unemployment fell. Oddly, positive economic news is now seen by some as bad news. Many have been looking towards a slowing in activity as evidence that the Federal Reserve’s actions are having the intended outcome. When positive news emerges, it shows that the Fed’s actions are not yet having their intended effect, and that more interest rate rises (which may be painful) are ahead.

While volatility and drawdowns are never welcomed, they are an inevitable part of investing. Financial success requires that you ride out the bumpy periods in order to realize the rewards that markets have delivered over time.

With this year’s stock market decline of more than 20%, it is officially a “bear market.” The encouraging news is that after stocks have dropped 20% or more, the average 3- and 5-year return is 41% and 71%, respectively.

International Stocks

International markets have trailed the US over both the quarter and year, with emerging markets (considered a riskier area) seeing the largest declines.

While all areas of the market certainly faced pressure, international stocks in particular were hurt by the strengthening of the dollar, which lowers the value of investments denominated in other currencies.

Bonds

Unfortunately, bonds are on track for their worst year in history. The speed of Federal Reserve’s action and the magnitude of interest rates rises has been dramatic.

In Q3, bond prices fell and bond interest rates rose. The reflects the repricing of expectations for interest rates and inflation in the future.

It’s critical to remember that, barring any defaults or credit issues (which are rare in investment-grade bonds), bonds will return to their par values at maturity. While it will take time for recovery, over appropriate time horizons investors can benefit from higher interest rates over time as bonds mature and coupons are reinvested at now-higher rates.

Real Estate

Mortgage rates have more than doubled from their low in 2021, and are nearing 7%. This has led to a decline in purchasing power of about 30%.

For example, if a prospective home buyer could afford a monthly payment of $2,500, they can currently afford a home worth $379,000. Last year, when mortgage rates were 2.65%, they could have afforded a $534,000 home.

Parting Thoughts

While we know past performance is no guarantee of results looking forward, as a popular quote often attributed to Mark Twain says: “History never repeats itself, but it does often rhyme.” As such, evaluating historical periods with similarities to the current environment can help provide investors some context and perspective.

This first illustration looks at the performance of stocks and bonds following previous peaks in inflation. While the peak of the current inflation cycle will only be clear in hindsight, it’s interesting that both stock and bond prices have reacted strongly and favorably in many instances in the one-year period following prior peaks.

This second illustration provides a higher-level perspective on the market. It plots several important data points, going back in history to 1947. On the top section, US real GDP (which adjusts for inflation) and the Growth of $1 invested in the stock market are overlaid on gray bars that indicate recessionary periods.

These two lines appear fairly smooth and consistent over this long perspective. However, the bottom section helps us see the reality. The bottom section represents market drawdowns (measuring market declines from a peak to the trough, and back again). From this view, we see many periods of significant declines that are embedded in the long-term upward trajectory of GDP and market returns, highlighting the actual volatility and challenging periods along the way.

Accompanying the illustration is an important metaphor: 

No one likes a market decline, but like traffic, it’s inevitable from time to time. Think of it as a temporary setback on a long haul, and (to hammer the analogy home) do your best to avoid road rage!

If you have any questions or concerns, please reach out.

Disclaimer: Investments are not guaranteed and are subject to investment risk, including possible loss of the principal amount invested. Past performance is no guarantee of future results. All allocations and opinions expressed are as of the date of this presentation and subject to change. The information contained herein does not constitute investment advice or a solicitation. Information obtained from 3rd parties is believed to be accurate, but has not been independently verified.

The opinions expressed in this article are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security. The material is presented solely for information purposes and has been gathered from sources believed to be reliable, however Think Different Financial Planning cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. Think Different Financial Planning does not provide tax or legal advice, and nothing contained in these materials should be taken as such. As always please remember investing involves risk and possible loss of principal capital. Advisory services are only offered to clients or prospective clients where Think Different Financial Planning and its representatives are properly licensed or exempt from licensure. No advice may be rendered by Think Different Financial Planning unless a client service agreement is in place.Your content goes here. Edit or remove this text inline or in the module Content settings. You can also style every aspect of this content in the module Design settings and even apply custom CSS to this text in the module Advanced settings.

I hope you had a wonderful Summer and are looking forward to Fall

If you’ve been preoccupied with the investment world (which I hope you haven’t!), you may have noticed that volatility is back.

Given that, I wanted to showcase some of the good news, some of the bad news, and provide my take on the current investment environment.

The Good News

• Social Security payments may rise by 8-9% in 2023. This would be a meaningful increase to everyone who is receiving Social Security now or will in the future.
• Bonds and bank accounts are starting to pay meaningful interest.
• Gas prices have declined for 89 consecutive days (as of Sept. 12th).
• The job market remains very strong.
• The revenue (i.e., sales) of companies in the S&P 500 Index – perhaps the most important metric for a company – are the highest they’ve ever been.

The Bad News

The majority of this year’s bad news stems from the rise in interest rates. The increase, which is a policy response to high inflation, has effected almost everything in finance:

Real Estate

• Mortgage rates have doubled over the past year and are now above 6%.
• High mortgage rates are starting to impact the housing market. Demand for new homes seems to be cooling, as mortgage purchase applications are down 23% from a year ago.
• Prices recently declined in the following 7 cities: San Francisco, San Diego, Los Angeles, Seattle, Portland, Denver, and Washington D.C.

 Inflation

• Inflation remains high in many areas: In the US it’s 8.3%, in the Eurozone it’s 9.1%, and in the UK it’s 9.9%. The inflation in Europe is largely driven by energy prices, which may be the catalyst for a European recession.

Stocks

• The global stock market is down approximately 20% from its high in January.

Bonds

• Bonds have not declined as much as stocks, but they’re still down around 13% for the year, a much bigger decline than bond investors are used to.

My Take

I can’t say it any better than financial blogger Ben Carlson:

“If you’re an accumulator of financial assets, this volatility should  be viewed as an opportunity to buy at lower prices, not a risk. If you’ve already accumulated financial assets, this volatility is on the other side of a decade-plus of extraordinary gains in the U.S. stock  market. Either way, it’s important to remember that volatility — to both the upside and the downside — is a feature of bear markets.”

As for the “what to do” now question, I’m reminded of another quote from famed investor Peter Lynch:

“Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.”

The investment approach utilized by Think Different Financial Planning is long term-oriented and emphasizes controlling what you can: your fees, the taxes related to your investments, and your portfolio risk. We’re extremely diversified and know that declines are a part of investing.

While there is a lot of bad news, in order to be a successful investor you have to invest like an optimist. We’ve persevered through worse before, and I believe we will again.

Disclaimer: Investments are not guaranteed and are subject to investment risk, including possible loss of the principal amount invested. Past performance is no guarantee of future results. All allocations and opinions expressed are as of the date of this presentation and subject to change. The information contained herein does not constitute investment advice or a solicitation. Information obtained from 3rd parties is believed to be accurate, but has not been independently verified.

The opinions expressed in this article are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security. The material is presented solely for information purposes and has been gathered from sources believed to be reliable, however Think Different Financial Planning cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. Think Different Financial Planning does not provide tax or legal advice, and nothing contained in these materials should be taken as such. As always please remember investing involves risk and possible loss of principal capital. Advisory services are only offered to clients or prospective clients where Think Different Financial Planning and its representatives are properly licensed or exempt from licensure. No advice may be rendered by Think Different Financial Planning unless a client service agreement is in place.

There has been a lot of news lately about the possibility of a recession. The economic data has been evolving over the past few months, so I wanted to help break it down.

I’ll start by sharing some of the good news, followed by some of the bad news, and then my take.

The Good News

• Inflation may be declining: Recent data shows inflation growing at 8.5% per year. It was previously growing at 9.1% per year.
• Gas prices are down about $1 per gallon, or 20%, from their high in June.
• The unemployment rate is at a 50-year low of 3.5%.
• We’ve recovered all the jobs lost during the pandemic.
• Home prices hit a record high for the 40th month in a row. They are up 20% over the last year and 40% over the past two years (through May, the most recent data available).
• Company Earnings are strong: Over half the S&P 500 has now reported second-quarter earnings. Three in four have beaten earnings estimates.
• Savings accounts are finally paying meaningful interest. You can earn over 1.50% at a number of banks. Plus, Inflation Bonds are still paying 9.62%. 

The Bad News

• America’s inflation-adjusted Gross Domestic Product has declined for two straight quarters.
• Only 10% of people feel positive about the economy.
• Inflation is still near a four-decade high.
• Housing activity may be declining. Prices in San Francisco are down 8% from a year ago. Mortgage applications to purchase a home dropped 19% compared to a year ago.
• The war in Ukraine is ongoing, and tensions with China are rising.
• Despite a good start to this quarter, stocks and bonds remain negative year-to-date. Unprofitable technology companies, in particular, are down 61%.

My Take

There is a saying that stocks “climb a wall of worry.”  When it comes to investing, there is always something to worry about. Yet in the face of these persistent and ever-present risks, stocks (and bonds) have provided positive long-term returns. If there was no risk, there would be no return.

I think The New York Times summarized our current situation well: “If the United States is headed into a recession, it is taking an unusual route, with many markers of a boom.” While a recession could occur later this year, or next year, or even the following year, for now the positive news outweighs the negative.

Disclaimer: Investments are not guaranteed and are subject to investment risk, including possible loss of the principal amount invested. Past performance is no guarantee of future results. All allocations and opinions expressed are as of the date of this presentation and subject to change. The information contained herein does not constitute investment advice or a solicitation. Information obtained from 3rd parties is believed to be accurate, but has not been independently verified.

The opinions expressed in this article are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security. The material is presented solely for information purposes and has been gathered from sources believed to be reliable, however Think Different Financial Planning cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. Think Different Financial Planning does not provide tax or legal advice, and nothing contained in these materials should be taken as such. As always please remember investing involves risk and possible loss of principal capital. Advisory services are only offered to clients or prospective clients where Think Different Financial Planning and its representatives are properly licensed or exempt from licensure. No advice may be rendered by Think Different Financial Planning unless a client service agreement is in place.

Q2 Investment Commentary Highlights
Stocks and bonds, both in the US and abroad, experienced further volatility and declines during the second quarter of 2022. It is times like these that test us as investors. Look at a long-term chart of the stock market and you’ll see that it moves up and to the right. But in order to get those long-term results, you have to be able to survive the short- and medium-term declines like we’re in now.

The major factors driving the markets centered around inflation, strong policy responses from the Federal Reserve and other central banks, and the ongoing war in Ukraine. While stocks and bonds are often influenced by different factors and exhibit a low correlation to each other, the macro trends this year have presented headwinds for nearly all asset classes.

A variety of issues have contributed to inflation: the aforementioned war in Ukraine, COVID lockdowns in China, and continued supply chain challenges around the world. The Federal Reserve raised the Fed Funds rate 1.25% during Q2. Markets have also priced in expectations for further increases at the Fed’s next several meetings. The Federal Reserve remains committed to bringing inflation under control, which has led investors to also consider the probability of an increased risk of recession. However, on the positive side, the employment and job opening data remain very strong.

A little historical context on the current environment might be useful. While stocks and bonds are broadly considered to offer correlation and diversification benefits for investors over time, the first six months of 2022 have clearly highlighted, especially over the short-term, that it does not always hold true. The following illustration highlights that historically stocks and bonds have both fallen in about 15% of months (roughly 1 in 7 months). While not unprecedented, having stocks and bonds both down over a 6-month period is certainly a rarer event:

Over longer periods, the historical probability of negative outcomes for both stocks and bonds becomes significantly lower. In fact, Vanguard notes that since 1976, stocks and bonds have never both been negative over a 3-year time period.

International Stocks
International developed markets finished the quarter down slightly less than US markets (-14.5%), while emerging market stocks held up relatively better than either (-11.5%).

While the current environment has provided very few places for shelter, after a strong sell-off earlier, one area of positive returns during the quarter came from China as many lockdowns were lifted and increased economic activity resumed. International stocks have trailed the US markets over the last year, with developed markets returning -17.8% and emerging markets declining -25.4%.

Bonds
Bonds fell during the quarter, reflecting the repricing of expectations for interest rates and inflation. In addition to the impact of higher rates, credit spreads widened as investors demanded more compensation for the higher risk of corporate bonds relative to Treasuries. The result was that corporate bonds were among the weakest performers for the quarter and the last year.

One silver lining of the rise in interest rates is that going forward, fixed income investments offer a much more attractive return opportunity than has been available for quite some time. As bonds mature and coupon payments are received, they can be reinvested at higher rates. While challenging currently, over the longer term investors have the opportunity to benefit from higher returns than if rates had not moved at all and simply stayed at pre-2022 levels.

Disclaimer: Investments are not guaranteed and are subject to investment risk, including possible loss of the principal amount invested. Past performance is no guarantee of future results. All allocations and opinions expressed are as of the date of this presentation and subject to change. The information contained herein does not constitute investment advice or a solicitation. Information obtained from 3rd parties is believed to be accurate, but has not been independently verified.

The opinions expressed in this article are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security. The material is presented solely for information purposes and has been gathered from sources believed to be reliable, however Think Different Financial Planning cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. Think Different Financial Planning does not provide tax or legal advice, and nothing contained in these materials should be taken as such. As always please remember investing involves risk and possible loss of principal capital. Advisory services are only offered to clients or prospective clients where Think Different Financial Planning and its representatives are properly licensed or exempt from licensure. No advice may be rendered by Think Different Financial Planning unless a client service agreement is in place.Your content goes here. Edit or remove this text inline or in the module Content settings. You can also style every aspect of this content in the module Design settings and even apply custom CSS to this text in the module Advanced settings.

Overview

The US stock market is down 23% since the start of the year. Almost every investment around the world is negative: international stocks (-22%), US bonds (-15%), and international bonds (-12%). Less diversified investments, such as the technology-heavy NASDAQ index (-30%), are down even more (source). 

You may be wondering if these declines should cause you to rethink your investment approach. For a properly diversified investor with a long time horizon, the answer is no. Let me explain why through the following topics: the stock market, the bond market, investing during a potential recession, and the pitfalls of market timing. 

But first, a tweet that summarizes the good and the bad:

The Stock Market

As highlighted above, there are many worrying developments around the world: inflation, supply chain issues, the Russia-Ukraine war, gas prices, rising interest rates, and a potential recession. 

The chart below helps put things in perspective. It summarizes some of the worst headlines over the past 50 years as compared to the return of a global stock index. 

Since 1970 there have been seven recessions. As you’d expect, there was lots of awful news: 9/11, Black Monday (in which the Dow dropped 23% in one day), the Great Financial Crisis of 2008-09 (stocks dropped ~50%), and the Arab oil embargo of the 1970s, just to name a few. However, during these 50 years the stock market increased 80-fold, or about 9% per year:

“We will never be without problems, and some of them will be extremely serious problems. The point that this chart cries out to us – this endless chain of permanent advance punctuated by temporary decline – is that we bend, but we never break. And when we recover, we are more flexible, more resilient, more transparent, and more entrepreneurial than ever. The world does not end; it only appears to be ending from time to time…all previous crises – many far worse than today’s – have been successfully resolved.” 

– Nick Murray 

Unfortunately, the ride for investors isn’t smooth. If there was no risk to investing there’d be no return. With a “buy and hold” investment strategy, holding is the hardest part. That’s why an asset allocation that matches your risk tolerance is so important. 

There will continue to be ups and downs, but over time the market should be expected to rise, as it has in the past. 

This also highlights the importance of having a long timeframe. The chart below shows how the range of investment returns shrinks over time, and becomes increasingly more positive, as time extends:

It’s cliche but true: investing for the long term is the key to success. The longer you hold any investment, the higher the likelihood of a positive return. 

The Bond Market

Since the start of the year interest rates have risen dramatically: 

The Federal Reserve is raising rates in order to increase the cost of borrowing. For example, mortgage rates have doubled since the start of the year. These higher borrowing costs tend to slow economic activity. Over time, the Federal Reserve hopes lower demand will bring down inflation. 

The bad news is that when interest rates rise, bond prices fall. As shown in the chart below, this has resulted in the bond market declining quite substantially: 

The good news is that higher interest rates increase the expected returns of bonds going forward. Here’s a look at the average yield of various bonds:

The question now is: what to do? When the bond market has losses, does it make sense to get out? 

The data shows that rising interest rates and falling bond prices have little predictive value. The fact that rates are rising and bond prices falling in one period tells you nothing about how those bonds will perform in the future. 

The graphic below shows what happened in other periods where bond performance had been particularly bad. It shows that when bonds had their worst 2-year performance, the subsequent 2 years have usually produced very good returns.

If this pattern holds, we could see a similar pattern emerge in the near future. 

Recession?

There’s a lot of discussion and articles about whether or not we’re in a recession. Morgan Housel says it well: “We’re always heading toward a recession, we just have no idea when it’ll begin.” 

While it’s unclear whether or not we’re in a recession right now, what is clear is that the stock market is down. 

Below is a very informative chart. It shows the average 1-, 3-, and 5-year returns after the stock market declines 10%, 20%, and 30%. After a 20% decline (like we’re in now), the average 1-year return is 22%. And again, the longer the time frame the higher the return:

Market Timing

“The idea that a bell rings to signal when investors should get into or out of the market is simply not credible. After nearly 50 years in this business, I do not know of anybody who has done it successfully and consistently. I don’t even know anybody who knows anybody who has done it successfully and consistently.”

– John Bogle, Founder, Vanguard

Some investors may be tempted to cash in their chips and head to the sidelines until things look brighter. Or they may want to reduce exposure to a particular investment that isn’t doing well, then jump back in when the performance improves.

This is known as market timing, and it doesn’t always work. The graphic below shows just how damaging it can be. It shows the returns of various asset classes from 2001 through 2020. It also shows the return for the average investor (in orange):

The average investor generated 2.9% per year during a period when almost every asset class, including stocks (+7.5%) and bonds (+4.8%), were up much more. How? It’s because many investors try to time the market, and they almost always get it wrong.

You don’t have to predict the future to be a successful investor. Look at the two blue bars representing the 60% stock and 40% bond portfolio and the 40% stock 60% bond portfolio. If you had invested in one of those and simply stayed put, you would have done over twice as well as the average investor.

Summary

Successful investors have patience, discipline, and conviction in their portfolios. While it’s not comfortable or easy to sit tight during difficult periods, better times have always come. 

The information, analysis, and opinions expressed herein are for general and educational purposes only. Nothing contained in this commentary is intended to constitute legal, tax, accounting, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. The material has been gathered from sources believed to be reliable, however Think Different Financial Planning cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. All opinions and views constitute our judgments as of the date of writing and are subject to change at any time without notice. Past market performance does not indicate future results.