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There’s been a lot of talk about recessions lately: Whether one is near, far, or perhaps already here. Whether we can or should try to avoid it. What it even means to be in a recession, and how it’s related to current market turmoil.

To put market and recessionary concerns in perspective, it might help to describe six ways a recession resembles a bad mood. There are some intriguing similarities!

  1. 1. There Is No Precise Definition.
  2. We all know what a bad mood feels like. But there is no clear definition for a nebulous mix of real and perceived setbacks, and how they’re going to affect us.

Likewise, there is no single measure to tell us exactly when a recession is underway or when it’s over. Instead, recessions can trigger, and/or be triggered by a number of interconnected economic signals. These usually include a declining Gross Domestic Product (GDP), along with rising unemployment, sinking consumer confidence, gloomy retail forecasts, disappointing corporate balance sheets, a bond yield curve inversion, stock market declines, and similar combinations of objective and subjective events.

In the U.S., the National Bureau of Economic Research (NBER) defines a recession as follows (emphasis ours):

“A recession is a significant decline in economic activity that is spread across the economy and that lasts for more than a few months.”

Rather vague, isn’t it? That’s intentionally done. Similarly, the World Bank Group has stated, “Despite the interest in global recessions, the term does not have a widely accepted definition.”

2. You Usually Can’t Spot One Except in Hindsight.

How do you know when you’re in a bad mood? Often, you don’t, until you’re looking back at it.

Recessions are similar. Since a widespread downturn must linger for a while before it even qualifies as a recession, the NBER only declares one after it’s underway. For example, in July 2020, the NBER announced we’d been in a recession for two months between February April 2020. This was triggered, of course, by the abrupt arrival of the global pandemic. It was the shortest U.S. recession to date, and already over by the time we officially acknowledged it.

3. Sometimes, We Get Stuck for a While.

Hopefully, your bad moods come and go, resulting in more good times than bad. But sometimes, one misfortune feeds another until you feel gridlocked. It may take a while before improved conditions, a more upbeat attitude, or a blend of both help you move forward.

Similarly, recessions can become a self-fulfilling prophecy. As Nobel Laureate and Yale economist Robert Shiller describes, “The fear can lead to the actuality,” in which economic conditions might feed inflation, which inverts the bond yield curve, which signals a recession, which shakes corporate and consumer confidence, which leads to unfortunate reactions that further aggravate the challenges. And so on. When this occurs, a recession and its related financial fallout may last longer than the underlying economics alone might suggest.

4. They’re Inevitable.

It’s never fun to be in a bad mood, but we can all agree they’re part of life. It would be unhealthy, exhausting even, if we were endlessly giddy every minute of every day.

Similarly, nobody celebrates a recession. But it helps to recognize they aren’t aberrations; they are part of natural economic cycles. Recessions can sometimes help rein in runaway spending, earning, and pricing for companies, consumers, and creditors alike.

For example, in our current climate, we may enter into a recession (or already be in one) as a byproduct of the interest rate increases, aimed at warding off rising inflation, amidst the backdrop of lingering supply side issues and global economic sanctions against Russia. If we can avoid a recession, all the better. But if it’s going to take a modest one to reduce inflation, it may be the preferred, if challenging choice at this time.

5. Experience Helps.

When we’re youngsters, we have little perspective to help us realize we won’t be miserable forever just because we’re unhappy in the moment. As we mature, we learn to temper our moods, and seek support if we do get stuck in a rut.

The same can be said about recessions, and similar challenges. It’s been more than a decade since the Great Recession; and more than 40 years since the U.S. last experienced steep inflation. As such, many investors have had little first-hand experience managing such turbulent times.

It may help to acknowledge we’ve been here before. The U.S. has endured nearly three dozen distinct recessions dating back to the 1850s, with an average length of 17 months. Some were considerably longer. Every recession eventually ends, with economies and markets thriving thereafter. Dimensional Fund Advisors research team shows us, one-, three- and five-year average cumulative returns after significant U.S. stock market declines dating back to July 1926 have all been positive, rewarding investors who placed their faith in future expected returns. Since markets are ultimately driven by the underlying growth in global commerce, we can expect similar aggregate performance moving forward in domestic and international markets alike. Consider these words of wisdom from one of the most experienced investors of all, Warren Buffett,:

“Periodic setbacks will occur, yes, but investors and business managers are in a game that is heavily stacked in their favor. … Since the basic game is so favorable, I believe it’s a terrible mistake to try to dance in and out of it based upon the ebb and flow of business activity. The risks of being out of the game are huge compared to the risks of being in it.”

6. You Can’t Change Others, But You Can Change Yourself.

When you’re in a funk, it doesn’t matter whether it’s due to one or many unfortunate events, or “just because.” There’s ultimately only one person who can change your mood: yourself.

The same is true for your response to recessions, bear markets, and other external events standing between you and your financial wellbeing. Life is filled with causes and effects over which we have no control, especially with respect to our investments. And yet, there are many small, but mighty acts we can take to contribute to the positive outcomes we wish to see in our homes, our nation, and the world And, we can invest wisely. This means taking charge of your personal wealth by focusing on the drivers you can control, and ignoring the greater forces you can’t. For example:

  • We can’t avoid recessions. But we can channel our inner Warren Buffett to look past today’s risks, and retain an appropriate amount of market exposure in pursuit of our long-term financial goals.
  • We can’t avoid bear markets. But we can avoid generating unnecessary losses by panicking and selling low.
  • We can’t avoid inflation. But we can establish a thoughtful budget to track our income and spending, with a plan in place for making adjustments as warranted.

As always, we’re here to help. How can we be of service to you and your family? Don’t hesitate to be in touch.

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For investors, it can be easy to feel overwhelmed by the relentless stream of news about markets. Even if you are an experienced investor, you can hardly be blamed for feeling fear, when you are hearing the constant drumbeat of data and headlines that are designed to evoke an emotional response in you. The year 2022 has been a challenging one, whether you’re invested in bonds or global stocks. This article focuses on 9 considerations to help you navigate today’s volatile markets.

  1. 1. Don’t panic (or pretend not to). It’s easy to believe you’re immune from panic when the financial sun is shining, but it’s hard to avoid succumbing to it during a crisis. If you’re entertaining excuses to bail out during a steep or sustained market downturn, remember: It’s highly likely your emotions are doing the talking. Even if you only pretend to be calm, that’s fine, as long as it prevents you from acting on your fears.

“We’d never buy a shirt for full price then be O.K. returning it in exchange for the sale price. ‘Scary’ markets convince people this unequal exchange makes sense.” – Carl Richards, Behavior Gap

2. Redirect your energy. No matter how logical it may be to sit on your hands during market downturns, your “fight or flight” instincts can trick you into acting anyway. Fortunately, there are productive moves you \ can make instead – such as the nine actions laid out here – to satisfy the itch to act without overhauling your investments at potentially the worst possible time.

“My advice to a prospective active do-it-yourself investor is to learn to golf. You’ll get a little exercise, some fresh air and time with your friends. Sure, green fees can be steep, but not as steep as the hit your portfolio will take if you become an active do-it-yourself investor.” – Terrance Odean, behavioral finance professor

3. Remember the evidence. One way to ignore your self-doubts during market crises is to heed what decades of practical and academic evidence have taught us about investing: Capital markets’ long-term trajectories have been upward. Thus, if you sell when markets are down, you’re far more likely to lock in permanent losses than come out ahead.

“Do the math. Expect catastrophes. Whatever happens, stay the course.” – William Bernstein, MD, PhD, financial theorist and neurologist

4. Manage your exposure to breaking news. There’s a difference between following current events versus fixating on them. In today’s multitasking, multimedia world, it’s easier than ever to be inundated by late-breaking news. When you become mired in the minutiae, it’s hard to retain your long-term perspective.

“Choosing what to ignore – turning off constant market updates, tuning out pundits purveying the latest Armageddon – is critical to maintaining a long-term focus.” – Jason Zweig, The Wall Street Journal

5. Revisit your carefully crafted investment plans (or make some). Even if you yearn to “follow your gut” during a financial crisis, remember: You promised yourself you wouldn’t do that. When did you promise? When you planned your personalized investment portfolio, carefully allocated to various sources of expected returns, globally diversified to dampen the risks involved, and sensibly executed with low-cost funds managed with a long-term perspective. What if you’ve not yet made these sorts of plans or established this kind of portfolio? Then these are actions we encourage you to take now.

“Thus, the prudent strategy for investors is to act like a postage stamp. The lowly postage stamp does only one thing, but it does it exceedingly well – it adheres to its letter until it reaches its destination. Similarly, investors should adhere to their investment plan – asset allocation.” – Larry Swedroe, financial author

6. Reconsider your risk tolerance (but don’t act on it just yet). When you craft a personalized investment portfolio, you also commit to accepting a measure of market risk in exchange for those expected market returns. Unfortunately, during quiet times, it’s easy to overestimate how much risk you can stomach. If you discover you’re miserable during even modest market declines, you may need to re-think your investment plans. Start planning for prudent portfolio adjustments, preferably working with an objective advisor to help you implement them judiciously over time.

“Our aversion to leverage has dampened our returns over the years. But Charlie [Munger] and I sleep well. Both of us believe it is insane to risk what you have and need in order to obtain what you don’t need.” – Warren Buffett, Berkshire Hathaway

7. Double down on your risk exposure – if you’re able. If, on the other hand, you’ve got nerves of steel, market downturns can be opportunities to buy more of the depressed (low-price) holdings that fit into your investment plans. You can do this with new money, or by rebalancing what you’ve got (selling appreciated assets to buy the underdogs). This is not for the timid. You’re buying holdings other investors are selling. But if can do this and hold tight, you’re especially well-positioned to make the most of the expected recovery.

“Pick your risk exposure, and then diversify like crazy” – Eugene Fama, Nobel laureate economist

8. Tax-loss harvest. Depending on market conditions and your own circumstances, you may be able to use tax-loss harvesting during market downturns. A successful tax-loss harvest lowers your tax bill without substantially altering or impacting your long-term investment outcomes. This action is not without its tricks and traps, however, so it’s best done with help from a financial professional who is well-versed in navigating the challenges involved.

“In investing, you get what you don’t pay for.” – John C. Bogle, Vanguard founder

9. Talk to us. We didn’t know when. We still don’t know how severe it will be, or how long it will last. But we do know markets inevitably tank now and then; we also fully expect they’ll eventually recover and continue upward. Since there’s never a bad time to receive good advice, we hope you’ll be in touch if we can help.

“In the old legend the wise men finally boiled down the history of mortal affairs into the single phrase, ‘This too will pass.’” – Benjamin Graham, economist, “father of value investing”

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In recent columns we have explored interest rates, and inflation – now we come to the heart of the matter: When interest rates, inflation, or both are on the rise, what’s an investor to do?

Let’s start with the big picture. We remain committed to the same core principles we use to help people invest across time and through various market conditions. These include:

  • Building and maintaining personalized investment portfolios of stocks, bonds, and cash
  • Minimizing exposure to concentrated investment risks through global diversification
  • Low cost, tax efficient investments
  • Long-term focus

If anything, adhering to these timeless tenets becomes even more important during periods of increased economic stress, market volatility, and geopolitical uncertainty.

Future Uncertainty
With so much going on, there’s been no lack of analyses of what to expect across various markets, and what investment actions you should take based on these forecasts.

The trouble is, it’s as difficult as ever to predict the future. No one can accurately predict exactly how Putin’s war is going to play out or the future level of inflation – let alone how these factors will converge with myriad others to drive future market pricing.

Moreover, the media plays an outsized role in the content that is published, and it often targets human emotion. Investors who are tempted to act on these media messages should remember the media is selling entertainment, not real financial advice. “People who generate better sound bites generate better media ratings, and that is what gets people promoted in the media business” (Wharton Professor Phil Tetlock). News from the front lines may seem tremendous or trivial, awful or inspiring, or even everything at once. But avoid letting any of it heavily influence your investment portfolio; the world is just too complex for that.

Layers of Protection
Over the years, we hope we’ve communicated what NOT to do in response to current events: Across stock and bond assets alike, it remains as ill-advised as ever to chase or flee individual positions, markets, or economic cycles.

If your investment portfolio is already well-structured, you should be well-positioned to capture appropriate measures of expected investment performance over time, while defending against inflation and other risk/reward tradeoffs. It may not feel like it right now, while we’re enduring the rising risks. And unfortunately, even a best-laid plan doesn’t guarantee success. But if you weigh the odds, your best course by far is probably the one you’re already following.

Outperforming Inflation
In order to meet your longer-term financial goals, a portion of your portfolio will need to outperform inflation over the long haul. Dimensional Funds research team members Wei Dai, PhD and Mamdouh Medhat, PhD recently concluded that “simply staying invested helps outpace inflation over the long term for a wide range of asset classes.” The analysis covered 1927 to 2020, and considered a total of 23 US assets spanning bonds, stocks, industries, and equity premiums. Over this period, inflation averaged 5.5% per year in the study’s high-inflation years. While average real returns were mostly lower in years with high inflation compared to years with low inflation, all assets, except one-month T-bills had positive average real returns in high-inflation years. “Overall, outpacing inflation over the long term has been the rule rather than the exception among the assets in the study.”

  • Stocks: Equities in general, and especially stock factors such as the value premium, have handily outpaced inflation over time.
  • Bonds: Investing in bonds that offer the highest yield for the least amount of term, credit, and call risk is also expected to help a portfolio stay ahead of inflation over time.

Additional defenses against inflation can include: (1) using relatively realistic inflation estimates in your financial and retirement planning; and (2) delaying taking Social Security when possible, to maximize the power of the COLA (cost of living adjustments) on higher monthly payments.

United We Stand
This brings us to an end on our three-part series on inflation, interest rates, and your investments. We included a lot of information during that time, so please think of these columns as more of a conversation starter than a comprehensive guide. Most important, the decisions you make moving forward should be grounded in your own circumstances rather than general rules of thumb. For that, the best way to move forward is together. Please be in touch if we can assist.

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Has rising inflation got you down? In our last newsletter we explored how rising interest rates can impact a healthy economy. Today, let’s explore inflation in more detail.

How Do We Measure Inflation?
Inflation is the rate at which money loses its purchasing power over time. As you might guess, there are many ways to measure it; and there are various economic sectors, such as energy, food, housing, and healthcare, which can complicate the equation by exhibiting wildly different inflation rates at different times.

There also is today’s inflation rate, versus the rate at which inflation is expected to change over time. For example:

  • Measured by the U.S. Consumer Price Index, inflation stood at a March 2022 annual rate of 8.5%, fueled significantly by increased energy prices.
  • Measured by the Intercontinental Exchange (ICE) U.S. Dollar Inflation Expectations, 1 Year Expected Inflation was at 5.27% on April 11, 2022.

While that’s a wide range of numbers for seemingly the same figure, they all share one point in common: By nearly any measure, inflation is higher than it’s been in quite a while, and $1 doesn’t buy what it used to.

But what should we make of that information? As usual, it helps to consider current events in historical context to discover informative insights.

Inflationary Times: Past and Present
Unless you’re at least in your 60s, you’ve probably never experienced steep inflation in your lifetime—at least not in the U.S., where the last time inflation was as high (and higher) was in the early 1980s. After years of high inflation that began in the late 1960s and peaked at a feverish 14.8% in 1980, Americans were literally marching in the streets over the price of groceries, waving protest signs such as, “50¢ worth of chuck shouldn’t cost us a buck.”

During his 1979–1987 tenure, Federal Reserve chair Paul Volcker is credited with routing the runaway inflation by ratcheting up the Federal funds target rate to a peak of 20% by 1980 (compare that to the recent increase to 0.25%). Volker’s Fed wanted to reduce the feverish spending and lending that had become the status quo. These strategies apparently effected a cure to high inflation, or at least contributed to one. By 1983, inflation had dropped considerably closer to its target rate of 2%, around which it has mostly hovered ever since. Until now.

The Inflationary Past Is Not Always Prelude
Why not just ratchet up the Fed’s target rates as Volcker did? Unfortunately, it’s not that simple. First, there are several broad categories—such as supply and demand, rising labor and production costs, and a nation’s monetary policies—each of which can contribute to inflation individually or in combination. This means each inflationary period is born of unique circumstances. Just because sharply higher rates worked in the past, doesn’t mean the economy will respond the same way in the present.

Second, even if an inflation-busting action does work, there can be secondary and tertiary effects that could be worse than high inflation alone.

Volcker’s actions are a case in point. The higher target rates not only tamed inflation, they weakened the economy significantly, leading to an early 1980s “double dip” recession and high unemployment. Overall unemployment hovered above 7% for several years. Even if the outcome was worth the pain involved, it’s not a course one embraces with enthusiasm.

What’s Next for Inflation
Are we doomed to reach double-digit levels of inflation this time, face another painful recession, or both? As always, time will tell. However, in the face of today’s challenges, we choose cautious optimism over fear. This is not because we’re naïve or blind to the facts, but because we are guided by the dynamic nature of our economy.

In thinking about current inflation, we can accept that, yes, inflation has become uncomfortably high. Labor costs, supply constraints, low interest rates, and high spending have all likely contributed to inflated costs, and these same factors can feed on one another – which can then cause inflation to rise even higher.

But then what will happen? In reality, next-step responses are already starting to take place. The Fed has raised interest rates once, and plans to continue raising them throughout 2022. They will also be reducing their nearly $9 trillion balance sheet, further reducing the money supply. Likewise, businesses are revisiting their growth plans, and consumers are thinking twice about their purchases, especially in markets where inflation is having its greatest impact.

It probably won’t happen overnight, but these next steps should chip away at inflation. True, this could lead to a recession … or not. We hope not. Either way, then what will happen? Once again, governments, businesses, and individuals will likely adjust their behaviors and expectations in response. And so on. Even if the odds are heavily stacked in favor of our taming inflation over time, this is not to suggest it will be easy. And even if we “win” in the end, it’s unlikely it will be obvious until we are able to look back at the events with the benefit of hindsight.

As always, please reach out to us with any questions or concerns.

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At the conclusion of its March 15–16 Federal Open Market Committee (FOMC) meeting, the Federal Reserve raised its federal target funds rate by a quarter point. It was the first increase since December 2018, but it wasn’t a huge surprise. Fed Chair Jerome Powell had already said we should expect this move, and the market has priced-in several future hikes this year.

Along with interest rates, inflation remains a related topic of conversation … not to mention the economic toll and humanitarian tragedy being wrought by Russia’s horrific warmongering.

To our distress, there is only so much we can do to alleviate the heartbreaking news coming out of Ukraine. But as your investment consultant, we at Conrad Siegel can at least help you put these interrelated influences into thoughtful context. In this column we will focus on interest rates and inflation.

Our core investment philosophy remains unchanged, we help people navigate their financial interests across time and through various market conditions. The news may be new, but the timeless tenets driving our patient and personalized advice are enduring and, if anything, even more relevant during periods of increased uncertainty.

What’s Up With the Fed Rate?
Almost everyone is familiar with interest rates. That said, far fewer know what to make of the Fed’s target funds rate in particular. Everyone from economists, to politicians, to the financial press talks about the Fed’s target rate. As the central bank for the United States, the Federal Reserve is tasked with setting monetary policy to promote “maximum employment, stable prices, and moderate long-term interest rates … thereby supporting conditions for long-term economic growth.” In this supporting role, the Fed uses its target funds rate as one of many “levers” to achieve its aims.

When the Fed increases the target funds rate—such as the recent 0.25% increase—it’s actually establishing a range of rates. Current rates are thus 0.25%–0.50%, up a quarter-point from 0.00%–0.25%. Banks and similar institutions then target this range when they lend overnight money to one another. They use these hyper-short-term loans to collectively maintain their required cash reserves, or to otherwise raise immediate operational cash.

When the Fed increases the target funds rate it is hoping to reduce the flow of excess cash or stimulus in the economy. The FOMC also indicated that it will be reducing its Treasury and Agency debt holdings, further restricting the money supply. These moves are expected to help temper inflation and excessive consumer demand.

However, we must emphasize: No single entity can just flip a switch to power off the economy or slow inflation, but the Fed is in a relatively strong position to encourage long-term desirable economic outcomes. Often, its actions will trickle down to other types of loans and move them in a similar direction, for the same purpose. But not always, and rarely across the board. As in any complex system, any given move interacts with countless others, with varied results. This is especially so globally, as most countries have central banks of their own.

The Fed Target Rate Isn’t Every Rate
Rising rates are meant to help unwind earlier stimulus programs, and manage rising inflation by tinkering with the cash flow in our banking systems. But as an admittedly blunt tool, there is an even more tenuous connection between the Fed’s rates and the interest rates you personally pay or receive.

For example, existing fixed-rate debt such as home and student loans may not be immediately affected by rising rates, while free-floating credit card debt is more likely to creep quickly upward in tandem with the Fed’s rates. Similarly, you may or may not receive higher rates on interest-bearing instruments such as bonds, CDs, bank accounts, etc. That’s because it’s the banks and similar entities, not the Fed, who set these rates. Savers shouldn’t get their hopes up too much as banks have little incentive to raise the interest they pay on deposits because they simply don’t need to attract additional money.

Time will tell whether this or future Fed rate increases contribute to lower inflation and a healthy economy. Similar actions have been known to help in the past. But of course, each era comes with its own challenges and opportunities. Current events are certainly no exception to this rule. In particular, current global strife and sanctions on Russia may well have a much larger influence on inflationary risk than what the Fed can and cannot do about interest rates. As always, please reach out to us with any questions or concerns.

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Marketing execs have often tried to slant products toward women using an outdated strategy known as “Shrink It and Pink It”. This strategy involves taking a known product and making it smaller and coating it in pink or other pastel colors believed to be more appealing to a female market.

The athletic wear industry used to engage in the “Shrink It and Pink It” methodology of marketing to women until it realized something that should have been obvious from the beginning: women’s bodies differ from men’s. Therefore products should be designed for those differences; not just painted pink. So they opted to engage in designing products for women based on their specific needs.

Just like the design of athletic wear, designing a financial plan for a woman has to be done with an eye towards those specific challenges that women face with investing and planning. Of course, every woman is different, but research shows certain issues tend to be ubiquitous.

When it comes to personal finance, women face an uphill battle. It wasn’t that long ago that the handling of household finances was seen as a man’s domain. In fact, women couldn’t even apply for credit cards in the United States until 19741. Homemakers, a historically female-only role, only became eligible to make full IRA contributions in 19972. Many women feel a cultural stigma surrounding financial conversations. In fact, one recent study found that a majority of women polled would rather talk about their own death than about personal finances3.

But these conversations are extremely important, especially considering the conundrum facing most women when planning for retirement. In a cruel irony there exists two inescapable factors that greatly affect women’s retirement planning.

The first is the wage gap. It’s no secret that there exists a pervasive wage gap between what women earn and what men with similar education and experience earn. This is a serious problem that needs to be addressed on a societal level. However, when planning for retirement, a woman is focused on solving her own individual problem. And if she’s earning less than her male counterparts, she is already at a disadvantage, having less disposable income to allocate towards retirement savings.

The second part of this conundrum is the fact that women live longer, and therefore tend to have longer retirement periods. Consider the difference in the assets needed to fund a retirement from age 65-80 versus from age 65-95. Longer life requires much more in the way of retirement savings to fund income needs.

And living expenses over a longer time period aren’t the only concern -women spend more on healthcare. On average, out-of-pocket healthcare costs through retirement trend 39% more for women than those for men4.

So when it comes to financial planning, women actually do have unique needs, making it important to acknowledge and explore with both close family and a trusted financial professional. Determining the right strategies for your unique situation is the key to ensuring you have an effective long-term solution to pursue a comfortable, secure retirement.

At Conrad Siegel, all of our consultants understand the unique planning needs of women and incorporate them into your financial plan. No shrinking or pinking needed!

1 Time.com, https://time.com/nextadvisor/credit-cards/ruth-bader-ginsburg-credit-card-legacy/, November 13, 2020
2 Chicago Tribune, https://www.chicagotribune.com/news/ct-xpm-1998-03-03-9803030185-story.html, March 3, 1998
3 Age Wave and Merrill Lynch, Women & financial wellness, 2019
4 Age Wave estimate, based off Yamanoto, D.H., Health Care Costs – From Birth to Death, Health Care Cost Institute Report, 2013; HealthView, Retirement Healthcare Costs Data Report, 2016-2017

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Looking for an investment that aims to keep pace with inflation? I bonds might be for you. They are sold exclusively by the U.S. government through the www.TreasuryDirect.gov website.

Investors in these inflation-protected U.S. savings bonds are guaranteed to recover their principal plus inflation over a maximum of 30 years. I bonds offer a fixed rate, plus an inflation rate that adjusts semiannually. The inflation rate is linked to the Labor Department’s CPI-U, a measure of urban inflation. I bonds allow you to defer federal taxes until the bonds are redeemed, at which point you will receive a 1099. Additionally, I bonds are exempt from state and local taxes. There is also an interest rate floor of 0.0%, meaning your principal is protected in the unlikely event of deflation.

Today, the yield on a regular U.S. 30-year Treasury bond is about 2.25%. I bonds now offer an initial annualized yield of 7.12% (this is made up of a fixed rate at 0% and the semiannual inflation adjustment of 7.12%). At this rate, investors are keeping pace with the most recent inflation reading of 7.5% over the last 12 months. Meanwhile, yields on conventional Treasury bonds are now negative when inflation is taken into account. This demonstrates an advantage of I bonds.

A downside to I bonds is that each individual investor can purchase a maximum of $10,000 per year and would need to establish an account via the Treasury Direct website. If you opt to receive your Federal tax refund in I bonds, you could add an additional $5,000 annually. Holders of I bonds are barred from cashing them in for the first 12 months and you will lose three months’ of interest if the bonds are redeemed within the first five years. Lastly, the annualized inflation rate is variable, resetting every 6 months (keep in mind that the Federal Reserve’s stated goal seeks to achieve inflation that averages 2 percent over time).

While Conrad Siegel cannot purchase I bonds for our clients, I bonds could be an attractive alternative to low yielding bank savings account balances that are embarked for longer-term retirement or education funding goals. If you would like to learn more, reach out to our team.

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Clearly, there is a lot to think about when planning for retirement. While we have a degree of control over many of the choices involved, there’s one big wild card called sequence of return risk.

Sequence of return risk is the risk that you’ll encounter negative investment returns in early retirement. This is an important consideration, because the sequence – or order – in which you earn your returns early in retirement can have a significant impact on your lasting wealth. Simply put, a retirement portfolio that happens to experience positive returns early in retirement will outlast an identical portfolio that must endure negative returns early in retirement. This is true even if the long-term rate of return for both portfolios are identical.

Since nobody can predict which return sequence they’ll experience early in their retirement, every family should prepare for a range of possibilities in their retirement planning.

The Significance of Sequence of Return Risk

It’s no secret that global stock markets are volatile. While long-term average annual returns may be in the range of 7% for a diversified portfolio of global stocks and bonds, markets rarely deliver average returns in any given year. Rising one year, falling the next; we never know for sure how far above or below the average each year will be.

During your career, you’re mostly spending earned income, while adding to your retirement portfolio. As long as you stay the course benefiting from the upswings and enduring the downturns – tolerating market volatility is just part of the plan.

In fact, when you’re still accumulating wealth, market downturns give you the opportunity to buy more shares than you otherwise could when prices are higher. When the market recovers, you then have more shares to recover with, which ultimately strengthens your portfolio.

But then, you stop working, and start spending your reserves. This has the opposite effect. Now, when the stock markets decline, you may need to make a withdrawal from a portfolio that has declined in value. This underscores the need for a broadly diversified asset allocation of stocks and bonds. When stocks are down, we want to source withdrawals from the part of the portfolio that has maintained its value. Selling an asset when it is down, means you will have fewer shares with which to participate in the eventual recovery. This hurts your portfolio’s staying power.

Sequence of return risk Illustrated

Consider two hypothetical retirees, Joan and Jane:

  • Both retire at age 65 with identical $1 million dollar stock portfolios.
  • Both start withdrawing $50,000 annually at the start of each year (not adjusted for inflation).
  • Both earn the same 7% average annual returns over their 25 years in retirement.

With so much in common, you might assume their portfolios would perform similarly. But what if Joan happens to enter into retirement during a horrible market? Let’s imagine her portfolio returns –30% and –20% in her first two years, while Jane earns 7% both years, and (implausibly) every year thereafter.

Markets recover nicely for Joan after two years so, again, she ultimately earns the same average 7% annual return as Jane. But Sequence of return risk takes a heavy toll on Joan’s remaining shares. She ends up with only about $150,000, while Jane’s portfolio grows nicely to around $2 million.

Illustration, not indicative of an actual investment allocation
Portfolio is hypothetical and exaggerated to demonstrate impact of volatility.
Source: Wendy J. Cook Communication, LLC

Managing the Sequence of return risk Wild Card

Sequence of return risk should NOT change your overall approach to investing. As the recent past has clearly shown us, you never know what’s going to happen next. Stock market corrections typically occur
without warning, while some of the strongest rebounds arrive amidst the darkest days.

So, whether you’re 40, 60, or 92, we still recommend building and maintaining a low-cost, globally diversified portfolio that reflects your personal goals and risk tolerances. We still advise against trying to pick individual stocks or react to current market conditions. We still suggest you only change your portfolio’s asset allocations based on life events, not market events.

What can you do to mitigate Sequence of return risk if it happens to you?

Keep working. If you are willing and able, you might postpone retirement, or even return to the workforce. Even part-time employment can help offset an ill-timed sequence of negative market returns.

Spend less. Since your portfolio is most vulnerable to negative sequence of return risks early in retirement, you may want to initially spend less than planned, to give your portfolio an opportunity to rebound.

Tap other assets. When you retire, you typically have several sources of income to draw from. You may have emergency cash reserves, Social Security, or pension plans. Your investments are usually divided
between stocks and bonds. You may have equity in your home. If you encounter a negative stock market in retirement, you might be able to tap a combination of your non-stock assets for initial spending needs.

Consult with a financial advisor. Sequence of return risk is usually not the only consideration at play in retirement planning. There are taxes to consider and estate planning goals to bear in mind. There are carefully structured investment portfolios to maintain. All these needs speak to the value an experienced advisor can add before, during, and after this pivotal time in your financial journey.

At Conrad Siegel, we help our clients prepare for and mitigate Sequence of Return Risk within the greater context of their goals for funding, managing, spending, and bequeathing their lifetime wealth. Please be in touch today if we can help you with the same.

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Article Featured News

To many, the beginning of fall is marked by the change in foliage, the return of football season, and the arrival of cooler weather. But to a select few, the beginning of the annual Medicare enrollment process is lurking among the pumpkins. This fall we’re inviting you to enjoy more treats (reminders and considerations) and less tricks (stress and uncertainty) with respect to Medicare plans, costs, and the open enrollment process more generally.

Mark Your Calendar: Open Enrollment Period

October 15th – December 7th (Annual open enrollment for Medicare’s medical and prescription drug plans)

Leading up to this period, you may receive important notices from Medicare or Social Security alerting you of any changes to your current health plan, as well as information on how to find plans in your area. During the open enrollment time period, you can make the following election changes:

  • Move from a Traditional Medicare plan to a Medicare Advantage plan
  • Move from a Medicare Advantage plan back to a Traditional Medicare plan (and possibly a Medigap plan)
  • Change from one Medicare Advantage plan to another Medicare Advantage plan
  • Change Medicare prescription drug plans

If you decide to make a change during this open enrollment period, your new plan enrollment will be effective on the following January 1st.

What about Medigap?

It’s worth noting that you may not be able to change Medigap plans during the October 15 – December 7 open enrollment period since the only guaranteed-issue rights with respect to enrollment in a Medigap plan apply during an individual’s initial Medicare enrollment period. If you have one Medigap plan and want to move to another one, you may have to wait for a special enrollment period to apply.

January 1st – March 31st (Additional special enrollment period just for Medicare Advantage plans)

During this time, individuals enrolled in a Medicare Advantage plan may change to another Medicare Advantage plan or move back to Traditional Medicare.

Which Plan Do I Pick?

Whether it’s your initial enrollment in Medicare or your annual open enrollment, it’s a good practice to review the health plans that are available to you and decide which option best fits your needs for the coming year. The good news is learning the basics of available Medicare options is something you can even do prior to open enrollment.

Individuals enrolling in Medicare benefits essentially have two main coverage options, with a number of considerations regarding which of these options may work best for you, including:

  • Costs
  • Current medical conditions
  • The providers you regularly see
  • Where you expect to travel or live during the coming year

The two Medicare main coverage options are:

  • Traditional Medicare (Typically more broadly accepted by providers)
    • Comprised of Medicare Parts A and B
    • Possibly paired with:
      • Medicare Part D plan (prescription drug coverage) and
      • A “Medigap” or “Medicare Supplement” plan which is designed to help cover some of the traditional out-of-pocket costs that apply under Medicare, including the Part A deductible and Part B coinsurance.
  • A Medicare Advantage Plan (Structured more like a PPO or HMO that you may have had through an employer plan while actively working)
    • Also known as a Medicare Part C plan
    • May or may not be paired with prescription drug coverage
    • Could have a lower premium cost vs. Traditional Medicare & Medigap options
    • May cover additional benefits like hearing or vision, but may also:
      • Restrict your choice of providers (through a network that may be subject to local providers)
      • Feature cost containment measures (like prior authorizations or referral requirements)

One you decide which arrangement works best for you, you still have the choice of deciding which specific Medicare Advantage, Medigap, and/or prescription drug plan you want. Typically, your choice will be between plans with lower monthly premiums that feature higher out-of -pocket costs when services are provided and plans with higher monthly premiums and lower out-of-pocket costs for services. When you choose your plan for the coming year, it’s recommended you consider the total premium, the potential medical and prescription drug services you may incur in the coming year, and whether your current medical providers participate in your desired plan’s network (if applicable).

Additional Resources

Whether Part A, B and C sound more like complicated furniture assembly directions or you feel comfortable with your options, Medicare resources are available at both the federal and state level to help you evaluate your options and navigate the enrollment process.

The Centers for Medicare & Medicaid Services (CMS) (https://www.cms.gov/) have a number of online resources for individuals, in addition to creating an annual “Medicare & You” handbook that is sent to Medicare households each year in late September. This handbook provides the high-level basics on Medicare options, enrollment periods, and information on how an individual becomes enrolled in Medicare. The guide also has detailed and up-to-date information on all the services that are covered by Medicare. (For instance, acupuncture became an allowed service in early 2020!)

In Pennsylvania, the Department of Aging features a robust Medicare website with access to free counselors who are available to help answer questions and provide objective information to health plans available to you. These counselors can be a valuable complimentary resource to help you:

  • Understand the current Medicare plan you have in place
  • Learn how your current plan compares different options available to you
  • If you need assistance in processing a Medicare appeal.

If you are not a Pennsylvania resident, check your home state’s online resources to see what tools may be available to you.

As open enrollment season approaches, remember that a more informed choice on your Medicare coverage can help you manage healthcare costs and potentially bring a little more peace of mind with respect to your health as you begin a new year.

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Article News

Catherine Azeles, CFP®, RICP®, an Investment Consultant at Conrad Siegel has been named the winner of Central PA Leukemia and Lymphoma Society’s (LLS) 2021 Woman of the Year. During a 10 week campaign this spring, Catherine raised over $77,000 to help fund therapies that save the lives of blood cancer patients every day and research which has led to developments in all cancer treatments.

“Congratulations to our winners, and to all of our candidates and campaign team members who participated in this year’s Man & Woman of the Year campaign,” said Lauren Iannucci, LLS Regional Executive Director. “These exceptional volunteers are all passionate and determined individuals, and leaders in their communities. Together, we are getting closer to LLS’s goal of world without blood cancer.”

LLS is the world’s leading non-profit voluntary health organization dedicated to finding cures for blood cancers and ensuring that patients have access to lifesaving treatments. The funds raised through LLS’s Man & Woman of the Year are used for:

  • Research to advance targeted therapies and immunotherapies that are saving thousands of lives;
  • Blood cancer information, education and support for patients;
  • Policies that ensure patients have access to blood cancer treatments

At Conrad Siegel, Azeles is committed to helping families achieve their financial dreams. She works holistically with each one of her clients to explore their current financial situation and, craft the process for them to reach their goals.

Outside of her work at Conrad Siegel and being a mother, Azeles stays involved and helps educate her community through her involvement with the United Way’s Women’s Leadership Network and Investment Committee for The Foundation for Enhancing Communities (TFEC). She has also been featured in the media on ABC27, FOX43, WITF, and Forbes.

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