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General Principles, Current Observations, and a Look at 2021

General Principles

Last year was another good year for investors. The major U.S. stock indexes closed near record highs, but the story was more mixed under the surface. I thought it might be helpful to remember what guides us in our financial planning and investing decisions. As a reminder, here are the general principles you and I are following:

  • You and I are long-term, goal-focused, planning-driven investors. The best course is for us to formulate a detailed financial plan and to build diversified investment portfolios that match the goals in our plans. We do not develop portfolios based on headlines, what’s “hot”, market movements, or some pundit’s view of the economy.
  • Inflation is in the headlines, but stocks historically have been very effective against inflation. Let’s consider stocks starting in 1965. I don’t think we’re headed into this kind of inflation, but the historical comparison might be helpful – and please remember that this was one of the most difficult stretches for stocks in the modern era precisely because of inflation. Earnings per share in the S&P 500 Index were $5.30 in 1965. By 1981, the earnings per share had climbed to $15.18.[1] In words, S&P 500 earnings nearly tripled. Inflation was almost identical over the same period – up just over 3 times.[2] Then the roaring bull market of the 1980’s started, and stocks have trounced inflation ever since.
  • We understand that diversification means investing in a variety of stocks that include small and mid-sized companies, foreign companies – both developed and emerging markets, real estate, bonds, and sometimes commodities. Diversification typically works wonders by helping us stay invested because it smooths out the highs and the lows of investment markets.
  • We believe in continuously acting on a rational plan versus reacting to current events. Unless our goals have changed, there is generally little reason to make significant changes to our investments.
  • We do not believe the economy can be forecast with much precision. Covid was the ultimate example of this. Likewise, investment markets cannot be consistently timed. We’re therefore convinced that the most reliable way to capture the long-term return of stocks is to ride out their periodic drops in value.
  • There are dozens if not hundreds of benchmarks in the investment world. While benchmarking can be important to evaluate a particular fund or strategy, it can easily lead us astray when we compare one to a diversified portfolio – too many benchmarks would be needed. Regardless, the performance of our investment portfolios relative to any given benchmark over an arbitrary time period is ultimately irrelevant to our investment success. You can beat a benchmark but still go broke in retirement. The most important benchmark is our financial plan, which indicates whether we are on track to achieve our financial goals.
  • We always make sure that we have enough cash (and bonds) for near-term expenses not covered by other (retirement) income so that we can more easily ride out the periodic drops in stocks prices.

Current Observations

  • The U.S. economy continues to recover in dramatic fashion. Earnings estimates were continuously revised higher for U.S. companies as 2021 progressed. Frankly, we’ve never seen so many earnings surprises to the upside.
  • The government provided massive monetary and fiscal relief. Reasonable minds might differ on whether the federal government provided too much or the right amount of relief. But the bottom line is that a tremendous amount of money was injected into the economy, and this helped households and businesses navigate through the government shutdowns and the worst pandemic in 100 years.
  • Inflation is proving to be more than “transitory”, and the labor force participation rate remains stubbornly low. It remains to be seen if these trends persist. We now have, in effect, supply-side inflation, and we haven’t seen this since the 1970’s oil embargos. But there is good reason to believe management teams have considerably more control over the current supply problems than we than we did in the 1970s.
  • Inflation has been surprising to the high side, but there are reasons for optimism. First, companies are now spending huge amounts of money to improve productivity[3] – post-pandemic, it’s become clear that companies must innovate and evolve. If successful, this should offset inflation. Second, technology continues to evolve, even accelerating, and technology is inherently disinflationary. Third, we have a declining birth rate and an aging population. Contrast that with the 1970’s when the Baby Boomers came of age and created a large mismatch in supply and demand. These are powerful, structural reasons to believe that inflation will retreat in the next 12 to 24 months.
  • If inflation is as bad as some media outlets claim, then one might wonder why gold hasn’t moved higher, most commodities are off their highs (some significantly lower), bond yields remain stubbornly low, and the dollar remains strong. Speaking historically, these are not inflationary signs.
  • It appears that the tax proposals set forth by the new administration have lost support. Reasonable minds might again differ on whether we need changes to the tax code. As investors, however, some of the proposals that have lost support can be viewed as a positive.
  • Large U.S. stocks had quite a run in 2021, but small and mid-sized companies are now looking quite attractive. The price-earnings multiple for smaller companies has dropped below large companies, and this is unusual.[4] While this is not necessarily a criterion for investing – and it’s certainly not a prediction – diversified portfolios like ours with exposure to small and mid-sized stocks could benefit nicely in 2022.

2021 Overview

Overall, large U.S. companies performed very well in 2021 along with many “value” companies that had been beaten down in 2020. I’m not sure there is ever a “normal” market, but 2021 was certainly not normal given the virus and massive government stimulus. As an example, Macy’s was up 135.38% last year while Amazon struggled to stay positive and was only up 2.38%. Macy’s was thought to be destined for bankruptcy prior to Covid. Many in our industry are calling this the “reopening trade.”

Real estate and commodities also performed very well. Bonds were mixed to negative. And small and mid-sized growth stocks along with foreign stocks had a very tough year, especially late in 2021. We saw hot inflation readings come through late last year, and Omicron piled on by fueling fears that more lockdowns and labor shortages would continue to feed inflation.

The sentiment turned decidedly negative towards many of the smaller growth and foreign companies near year-end. At the risk of getting too technical, inflation that leads to higher interest rates can cause growth stock prices to decline because future earnings are discounted back to present value at a higher rate of interest…in other words, current valuations are less. At least that’s the consensus reason for the turbulence. And higher interest rates could mean higher borrowing costs for these companies. Lastly, I believe that there was a fair amount of selling at year-end for tax positioning, especially among the more innovative and disruptive growth companies that performed so well in 2020 but struggled in 2021.

I sense that many investors could be overreacting to the inflation data. Yes, the inflation readings have surprised to the high side, but traditional readings of other asset classes don’t indicate 1970’s style inflation at this time. Gold, bond yields, and most commodities as mentioned above have all recently been trending down or holding steady. I’ve been humbled by markets often enough to recognize that I could be wrong, but I believe that inflation should settle down as the data points turn more positive in 2022. Despite the recent negative sentiment, the fundamentals appear to be strong in the smaller, innovative growth positions we’re holding, and when sentiment and fundamentals detach, it usually represents opportunity.

Thank you for continued trust and confidence. I am available by phone if you would like to speak. We wish you and your family a Happy New Year!

[1] https://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/spearn.htm
[2] See https://www.bls.gov/data/inflation_calculator.htm
[3] https://www.yardeni.com/pub/capspendind.pdf and https://www.economist.com/leaders/2021/05/27/firms-are-rediscovering-their-love-for-capex-good.
[4] https://www.yardeni.com/pub/stockmktperatio.pdf. See Figures 3 and 4.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design) and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.
Securities offered through LPL Financial, Member FINRA/SIPC. Investment advice offered through Marshall Investment Management, LLC, a registered investment advisor. Marshall Investment Management, LLC and Kirsch Wealth Advisors are separate entities from LPL Financial.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Stock investing involves risk including loss of principal.
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By |2022-01-06T22:08:18+00:00January 6th, 2022|Uncategorized|0 Comments

Mr. And Mrs. Saver Discover the Benefits of Roth IRA Conversions

“Anyone may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one’s taxes.” – Supreme Court Justice Learned Hand in Gregory v. Helvering, 69 F.2d 809, 810 (2d Cir. 1934).

Often, I like to remind clients gently that their money eventually will go to one of four places: the government, a nursing home, a charity, or the family. Which one would they like? Funny how the answer is always the same…not the first two. But to make that happen, we need to do some planning.

How would you like to accumulate another $300,000 to $500,000 by the time you and your spouse are 90 years old? This extra money could cushion against further longevity, to transfer a larger inheritance to your heirs, or to make a larger donation to charity at your death. And imagine you could do this without working longer, spending less, or taking more investment risk…sounds interesting, right?

In a newsletter format, I certainly cannot say that we can do this for you. But I will tell you that my typical married clients can do this. The opportunity, however, will begin dwindling over the next couple of years.[1] Clients of this office are typical “millionaire next door” types who have done everything correctly but are, unfortunately, a little heavy in their 401k or IRAs. As you know, funds in 401k plans and IRAs must be distributed and taxed eventually…there is no way around that.

The way we help clients create this additional wealth is by converting $50,000 to $100,000 per year from their IRA accounts to Roth IRA accounts and paying the taxes from an outside source (i.e., a savings account or another non-IRA investment account). It works because tax rates for married people are set to increase in 2026…please read on.

Basics of Roth IRAs

The Roth IRA became a savings option in 1998. Unlike a traditional IRA, Roth IRA distributions are tax-free if you play by the rules of a Roth. In contrast, while the growth of a traditional IRA is tax-deferred, the distributions are always taxable.

There are two ways to get funds into a Roth IRA. You can either contribute or convert. Contributions are limited based on the annual contribution limit and your income. Employers have also been able to offer a Roth 401k option since 2006 that ease but, do not eliminate, the restrictions. But one can convert an unlimited amount from a traditional IRA regardless of income. Now, there are practical limits to how much one might convert, but there are no restrictions like there are on contributions.

Conversions cause the amount converted to become taxable income in the year of conversion (while contributions must be made with after-tax funds). Let’s assume Mr. and Mrs. Saver, both recently retired, have over $1 million in their traditional IRA accounts and, after speaking with their very sharp financial planner, decide to convert $100,000 to a Roth IRA. Mr. and Mrs. Saver also have $90,000 in a savings account earning very little interest and a small brokerage account worth $60,000. Their other income consists of Social Security and pension income that totals $80,000 per year. By converting $100,000 to a Roth IRA, the Savers will have to report an additional $100,000 on their taxes for 2021 and will now pay taxes on $180,000 of income (less standard or itemized deductions). For most people in Colorado, this means that the Savers will owe an additional $26,000 to $29,000 in tax. But that $100,000, which is now in a Roth IRA may grow tax-free for them and their heirs.

Tax Cuts to be Eliminated in 2026

The Tax Cuts and Jobs Act of 2017 (“2017 Act”) reduced tax rates for married people. For my clients, the reduction is generally 12% to 15%. So if they were paying $1,000 in tax, now they’re paying $850 to $880. A provision in the 2017 Act states that these lower tax rates will “sunset” in 2026 – meaning that they will expire, and we will revert to the old, higher tax rates in 2026. Now, Congress could do anything, including extending the lower rates or passing altogether new tax laws. But gridlock and a return to the old rates seems likely.

A Stunner for Mr. and Mrs. Saver

Now imagine Mr. and Mrs. Saver sitting there wondering whether they should accelerate the tax burden and pay taxes over the next five years rather than waiting to withdraw their funds when the tax rates are scheduled to increase in 2026. The 24% tax bracket for married people filing joint under the 2017 Act currently goes to $329,850 for 2021. When that sharp financial planner for Mr. and Mrs. Saver ran the projections into the future, the Savers said they were “stunned” to see that they could have another $364,000 in total assets by the time they reached their early 90s.[2] “Finally!”, Mr. Saver shouted, “I can justify the fees I’m paying you.” “You’re funny, Mr. Saver,” said the financial planner relieved that the Saver’s were seeing the wisdom in doing this.

But wait, it gets better because the Savers have children. Right before Covid struck, Congress passed the SECURE Act in December 2019. Without wading into politics, this was, in essence, an estate tax aimed at people like Mr. and Mrs. Saver. That’s because, when they both pass away, their IRA accounts must be emptied within ten years if going to their adult children. For Mr. and Mrs. Saver, they anticipate that their two children will be in their high-income years when inheriting their IRA accounts. If the IRA accounts must be emptied within ten years during the time when their kids are in their high income-earnings years, it’s easy to understand that much of this money will end up going to the government.

“Now wait just another minute,” said Mr. Saver, “there’s more?!” Actually, there is, said the financial planner. From doing proper planning, it is clear that the Savers will not need 100% of their required minimum distributions (RMDs) during retirement to live their life and fund their goals. Funds held inside Roth IRAs do NOT have a RMD requirement.[3] Even if they did, there would be no tax due. But more importantly, the funds can continue to grow tax-free inside the Roth IRA while the Savers are alive (and for ten years with their children).

Mr. and Mrs. Saver Decide to Convert

Once they understood things, Mr. and Mrs. Saver decided to convert $100,000 this year to a Roth IRA, and they are now planning to do the same for the years 2022 through 2025. By paying the taxes sooner, they remove future earnings from being taxed AND their RMDs will be less, so therefore less tax payments for the government. The Savers will still have traditional IRA funds when they pass away. But after talking it over, they like the idea that they can give this money to charity while their kids (on an after-tax basis) inherit the same amount of money in Roth IRA accounts. The Savers nod approvingly when they realize that only the government is losing on this strategy.

When Mr. and Mrs. Saver were first told about this strategy, Mr. Saver resisted. “I’ve always been told that you defer, defer, defer taxes. Why on earth should I pay taxes now when I can wait? Plus, I’m 65 years old. This is for younger people.” “I get it,” said the empathetic financial planner. “That has been the traditional way of thinking about these conversions, and other clients have expressed similar concerns.” But even Mr. Saver finally admitted that, once he understood things, the benefits were too large to ignore. As Mr. Saver was leaving the financial planner’s office, he was laughing and said, “It took me a while, but now I’m convinced. You sure are a lot smarter than you look!” “You’re funny, Mr. Saver”, the financial planner said again, knowing that the amount of good he was doing for this family would be intergenerational.

Beware Some Potential Issues

This new approach to their financial plan sounds great, but their sharp – and admittedly handsome – financial planner told them that they must consider some potential issues. First, there is a 5-year rule that says they cannot withdraw earnings for five years after a conversion. They can withdraw principal, but not earnings. Second, if they end up with more income than they anticipate in any given year, they could trigger higher Medicare Part B premiums. The conversion would remain very much a net positive for the Savers, but the financial planner admitted that people are, shall we say, less than enthusiastic about paying more for their Medicare premiums. Third, there is 3.8% Medicare tax that, depending on other assets and income, could be triggered if the Savers’ income exceeds $250,000. Again, the conversion should most likely go forward – but this tax must be considered. Lastly, the Savers are told to talk with their tax preparer and make sure that they pay any estimated taxes due during the year of a conversion. Otherwise, a tax penalty could be assessed.


I don’t know of any better way than this to boost financial security for a married couple without taking additional investment risk, telling them to work longer, or to spend less. I want to emphasize that everyone’s situation will be different than Mr. and Mrs. Saver. But if you have interest in exploring this topic, then please reach out to schedule some time to talk.

Nobody can predict what Congress will do with tax rates. But the law as it stands today is that we will revert back to higher rates in 2026 for married people. You’ve been warned, so please act. I have read through the Biden tax proposals that were released on September 13th, and there is nothing in this release that indicates they are going to disturb this strategy.[4]

Bottom Line: Do yourself and your kids (and possibly a charity) a favor and consider converting traditional IRA funds to a Roth IRA. The temporary, lower tax rates in effect through 2025 are providing a unique opportunity to build wealth at the government’s expense.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Past performance is no guarantee of future results.
[1] This assume that the tax cuts of 2017 “sunset” in 2026 and rates move back up to where they were in 2017.[2] This analysis assumes that the old, higher tax rates go back into effect in 2026.[3] Though your adult children would have to empty an inherited Roth IRA within 10 years, but there would be zero tax paid on these distributions.[4] https://waysandmeans.house.gov/sites/democrats.waysandmeans.house.gov/files/documents/SubtitleISxS.pdf

By |2021-12-07T19:14:59+00:00September 21st, 2021|Uncategorized|0 Comments

How Long Will This Bull Market Last?

Nobody can consistently time markets, but investors can lean into trends. And one powerful, current trend is a long-term bull market – oftentimes called a “secular” bull market. This discussion gets a little wonky, but please stick with it.

If you stayed invested through Covid, then you most likely feel good about your account values. I am keenly aware, however, that much of the media will run with the apocalyptic crisis of the day claiming that stocks are priced too high and doomsday lurks around the corner. The media oftentimes deliver the precisely wrong message at precisely the wrong time. How many predictions have you heard since the 2009 Great Recession that the bull market in stocks is about to end?

Bull and Bear Markets Defined

A bull market is one in which stock prices have increased 20% or more – and a bear market is one in which stock prices have declined 20% or more. Most often, people use the S&P 500 to discuss such markets. When referring to these markets, people are typically referring to “cyclical” markets, which tend to be short-term. “Secular” bull and bear markets, however, are based on a longer-term trend rooted in psychology. I believe that the current Secular Bull Market began in March of 2009.[1]

What Drives Secular Bull and Bear Markets?

Psychology, and specifically fear, primarily drives secular markets: fear of loss and fear of missing out (FOMO). Some might call FOMO greed or euphoria. Call it what you want – it’s all the same. When sober thinking stops and risk is disregarded, it’s a sign that FOMO has taken over. We have not seen FOMO/greed/euphoria in stock prices since the late 1990s during the dot.com era.

Think of a secular market as an entire market cycle that is based on these emotions. Lots of things change over the years, but human emotions do not change. It takes a long time to beat out of market participants every ounce of fear or optimism that they acquired over many years.

Consider how Secular Bull Markets typically end. Over time, people grow more comfortable with risk, whether it’s simply buying stock, borrowing money, or starting a new business. Perhaps you would even invest in a friend’s new venture. Everyone begins to participate, including borrowers, lenders, management teams, and investors…in other words, all participants in the economy. As people grow more comfortable with risk, they begin investing in projects that, frankly, should not get funded. It’s a sort of narcissistic optimism, if you will – they see the project as they want it to be, not as it is.

It takes years for FOMO to overcome collective fear and pessimism and vice-versa. You don’t see it month-to-month or even year-to-year. But over 15 to 20 years, it builds…deeply. Eventually, dumb ideas get funded by lenders, money piles into markets by people who are afraid of missing out on a rising stock market, and new investment vehicles come to market that, in normal times, would be unthinkable. At that point, an adult called Capitalism enters the room and shuts down the party.[2] Like a person who eats spoiled food, Capitalism forces these dumb ideas out of the system violently and quickly. People and companies get wiped out and file for bankruptcy while stock prices can decline 40% or more. But it eventually cleanses the system of toxic ideas so we can start over. A new era of pessimism has now begun…in other words, a Secular Bear Market!

Prior Secular Bear Markets

The last two Secular Bear Markets took place from 1968 to 1982 and 2000 to 2009. The S&P 500 topped out at 108.4 in 1968, and it hit 102.4 in 1982. Tough times indeed during the Great Inflation. The S&P 500 topped out at 1527.5 in March of 2000 and bottomed at 676.5 in March of 2009 – even tougher times! Were there “cyclical” bull markets in between? Yes, of course! [3] But it took many years to change the collective mood from FOMO to extreme fear and pessimism. A Secular Bear Market also took place from 1929 to 1949 – prior to the formation of the S&P 500.

Prior Secular Bull Markets

Secular Bull Markets have run from 1949 to 1968, 1982 to 2000, and 2009 to today.

During the 1949 to 1966 run, the S&P 500 started at 13.6 in 1949, and it topped out at 108.4 in 1968. That was nearly an 8x increase from the bottom over 19 years.

During the 1982 to 2000 run, the S&P started at 102.4 in 1982, and it topped out at 1527.5 in 2000. That was nearly a 15x increase from the bottom over 18 years!

As always, there were short-term “cyclical” bear markets that punctuated these Secular Bull Markets. The last Secular Bull Market saw three nearly 20%+ dips in stock prices that happened in 1987, 1990 and 1998. And we have seen similar events since 2009.

The Secular Bull Market prior to these two was the infamous Roaring 1920s that ended in deep despair and ushered in the Great Depression.

Where Are We Today?

If we use March of 2009 as the starting point – and some commentators use a later date – we are only 12 years and currently at a 6.2x increase from the bottom. I wouldn’t be surprised if we hit 10,000 on the S&P 500 in the next six years or so. Plenty of residual fear remains in this market from the 2009 Great Recession – that’s a good indicator that we’re not through with this run. If we top out around 10,000, then that would be consistent with the prior Secular Bull Market of 1982 to 2000. And the economic forces at work today are arguably greater than those from the prior two Secular Bull Markets. Consider the advances in robotics, artificial intelligence, genomics, battery storage, industrial innovation, 3D and 4D printing, cloud computing, and mobile technology. The internet powered the end of last Secular Bull Market and set the stage for the current technological improvements – 7 billion minds are connecting globally and solving all sorts of important problems. That might sound naïve to a pessimist. But remember: pessimists have never been very good stock investors.

Three stages to a Secular Bull Market

As an advisor, I learned a tremendous amount from Jeff Saut while he was the Chief Investment Strategist at Raymond James. He would talk about Secular Bull Markets having three legs: the relief or “wall of worry” leg, the high-powered earnings leg, and the euphoria leg. I believe we are now transitioning from the 2nd to the 3rd leg. The early signs of euphoria have begun: think cryptocurrencies, “SPACs”, and so-called “meme” stocks AMC and Gamestop. Stay tuned, lots more risk-taking likely to come.

The last leg of a bull market can persist for a long time. Alan Greenspan quipped about markets being “irrationally exuberant” in 1994 – six years prior to that Secular Bull Market coming to an end!

Consider that many financial advisors and investors have never seen, much less participated in, a Secular Bull Market. FOMO will feel good to them while it will scream caution to us who have experienced the tough times. Millions of new, young investors apparently began trading stocks during Covid. You’ve most likely heard the term “smart money” – well, perhaps large amounts of “not-so-smart” money are entering the system. This was brought home to me by my 19-year old daughter in late May. We were cooking dinner one night, and she asked, “Dad, remember when you told me not to invest in cryptocurrencies?” I nodded cautiously. She said, “Well, I will have you know that I made $2,500 on dogecoin!” “Really? Have you sold it?” She said, “No…I think it’s going to keep going up.” OMG – and people…I don’t say OMG!! Where did I go wrong? You might say that this is the modern-day equivalent of the shoeshine boy giving stock tips during the last phase of a Secular Bull Market. Either that, or she is on her way to becoming a speculator extraordinaire.

What Could Go Wrong?

Lots of things: war, unimaginable terrorism, a disastrous geopolitical event, or a pathogen that is more deadly than Covid, etc. We call these types of things “black swan” events – something that is unpredictable and devastating. As always, putting your capital behind companies with great ideas to improve our lives always carries risks. Therefore, I would not recommend crafting a reckless investment strategy – it remains prudent to match your investments to the time when you will need the money per a well-constructed financial plan. But you might take comfort that we could have many more years of positive investing returns ahead of us.

Summing it All Up

Be confident in the strength of this raging bull. If history is a guide, we probably have another 4-6 years left – perhaps more. That doesn’t mean we won’t see significant pullbacks in stock prices before it’s over. But I believe this bull has plenty more room to run until we get to collective FOMO. Plenty of fear remains left over in markets from 2009, but I would expect that to dissipate over the coming years.

Bottom Line: Stay patient, stay disciplined, and stay invested!

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Past performance is no guarantee of future results.
[1] There is no precise definition of when these secular markets begin and end. For an even more optimistic discussion on the current Secular Bear Market, see https://am.jpmorgan.com/blob-gim/1383635875343/83456/PI-EQT-SECULAR_2020_r2.pdf.
[2] More often than not, the Federal Reserves gets blamed for taking away the party’s punchbowl. Undoubtedly, the Fed can play a role, but remember that the Fed is an easy, political target to blame. The Fed wasn’t formed until 1913, and there were plenty of economic busts prior to that time. Don’t confuse correlation with causation.
[3] There were even great years for stock investors in the 1930s during The Great Depression. The Dow Jones Industrial Average gained 66.7% in 1933, 4.1% in 1934, 38.5% in 1935, and 24.8% in 1936. But the pessimism wasn’t done with the onset of the second wave of the Great Depression in 1937 when the DJIA lost 32.8%. See https://www.macrotrends.net/1319/dow-jones-100-year-historical-chart.

By |2021-07-17T13:50:01+00:00July 17th, 2021|Uncategorized|0 Comments


As we all know, the media simply rolls from one crisis theme to the next. Catastrophic journalism continues to be alive and well. The latest crisis theme is inflation. But like most media-induced “crises”, I’m not too concerned about this one. Inflation certainly could get uncomfortable over the next six to twelve months, but there are reasons to think it won’t take root like the “Great Inflation” of the 1970s. There is a lot here, so I will do my best to break it down and explain things simply.

Government Actions

Both the Federal Reserve (monetary) and Congress (fiscal) acted strongly when Covid struck – much more aggressively than during the so-called Great Recession in 2008. The Federal Reserve has implemented extreme easy money policies including – but certainly not limited to – anchoring short-term interest rates near zero. On the fiscal side, Congress injected money directly into the system via “stimulus” checks, forgivable loans, expanded unemployment benefits, and deferred payments on rents and mortgages. Add all this up, and it’s like giving your 3-year old grandson a 6-pack of Mountain Dew and a box of Ding Dongs. Look out! The money supply has increased about 26 to 30% in the last year – it normally increases about 5-7%.[1] So there is a ton of money sloshing around in the system.

Severe supply chain disruptions and labor shortages are also putting pressure on prices. It appears that some government actions could be contributing to these pressures, though it’s not entirely clear. My hope is that the pressures will resolve once all states fully reopen and generous unemployment benefits are reduced.


The bond market has mostly shrugged off the inflation concerns, but the dollar has been under pressure – so there is cause for concern. Interest rates follow inflation, and the yield on the 10-year government note shot up to around 1.75% from .9% in the first quarter on inflation concerns. That caught market participants by surprise. However, the yield has fallen back near 1.45% as of this writing. Commodity prices have risen substantially. So has real estate. And the various consumer and producer inflation indexes are showing that inflation is now working its way into the system.

Forces That Should Keep Inflation Under Control

Technology, an aging demographic, government policies that favor regulation – though this can cut both ways – and a mid-term election next year should all work together to keep inflation under control. Higher taxes could also play a role. I have written for years that technology doesn’t get enough credit for keeping inflation under control. Nothing has changed with that thesis. If anything, Covid accelerated technology’s impact.

The Great Inflation of the 1970s

In retrospect, the causes of the Great Inflation of the 1960s and 70s shouldn’t have been a surprise. Demographics, easy Fed policies, elimination of the last link to the gold standard, and a heavy reliance on Middle East oil primarily led to the inflation. First, the Baby Boomers began hitting the system with a tsunami of demand. We simply couldn’t increase supply fast enough to meet demand like we can today. Second, Fed historians generally agree that the Federal Reserve was too easy with the money supply – and they are certainly easy today! Third, once Nixon closed the gold window to foreign banks, all discipline that a gold standard forced on the U.S. was eliminated. Hopefully, we’ve learned a bit since then. Fourth, we relied heavily on Middle East oil that was painfully brought to light during the 1973 and 1979 oil crises – and please note that energy was a much larger percentage of the economy back then. Let’s hope that we can continue to maintain the energy independence that we’ve achieved over the last 15 years or so. Lastly, throw in LBJ’s Great Society spending initiatives and the Vietnam war, and you had an inflationary hot mess. Yes, today’s situation has parallels to the 1970s, but I believe that better demographics and improved technology will keep us from another Great Inflation.


If inflation ends up surprising to the upside, you will want to own stocks over bonds. Stocks are generally a good asset class that can handle inflationary pressures. Now, it won’t be pretty in the short-term, because stock prices will adjust to reflect new assumptions. But management teams can generally respond with price increases and improvements in productivity via technology. Assuming things don’t get too uncertain, management teams should be able navigate the current environment and continue to make profitable investments for shareholders. As a bondholder, however, you’re stuck with the rate of interest on the bond you purchased.[2] Therefore, bonds can be a bad place to be during periods of unexpected inflation.

Summing it up

Most of the inflation so far has been contained on the goods side – not services. But the concern here is that the Federal Reserve might have to increase interest rates sooner than expected if inflation runs too hot, especially if inflation expectations get imbedded into wages. That would certainly cause disruption in markets. And frankly, that might happen. If it does, then it does. Please know that we have set up financial plans to account for these inevitable dips in stock prices. And if it does happen, it’s best to think opportunistically, such as moving available cash into stocks or converting traditional IRA funds to a Roth IRA.[3] Investing is never risk-free.

Bottom Line: Nobody knows for sure where these inflationary pressures end up, and it could get rather uncomfortable before it gets better. But like all uncertainties, I believe that sticking to a strategy pursuant to your financial plan gives you the best chance of reaching the goals in your financial plan. After inflation, you can bet the media will be on to the next journalistic catastrophe. In the meantime, stay patient, stay disciplined, and stay invested!


[1] https://fred.stlouisfed.org/series/WM2NS[2] Unless you own U.S. Government Treasury Inflation Protected Securities (TIPS).[3] When stock prices are down, it can be a good time to move shares of stock to a Roth IRA. You can convert the same number of shares at a lower tax cost. Then, assuming stock prices rebound, the shares rebound inside a tax-free vehicle.
Traditional IRA account owners have considerations to make before performing a Roth IRA conversion. These primarily include income tax consequences on the converted amount in the year of conversion, withdrawal limitations from a Roth IRA, and income limitations for future contributions to a Roth IRA. In addition, if you are required to take a required minimum distribution (RMD) in the year you convert, you must do so before converting to a Roth IRA.

By |2021-07-16T15:41:02+00:00June 17th, 2021|Uncategorized|0 Comments

Growth Stocks Get Overdue Market Correction in First Quarter

Thank heavens we finally got a correction in growth stocks during the first quarter.  As painful as this sell-off has been for some positions, we badly needed to get some of the euphoric excess out of this market.  The catalysts that have sparked the selloff are being attributed to a sharp rise in U.S. government bond yields (i.e., interest rates) and inflation expectations.  The yield on the 10-year government note jumped dramatically in the first quarter – about 88% as of this writing from a low of .93% at the beginning of the year to around 1.75%.  Folks, that’s big!  This gets a bit wonky – so please forgive me – but the thinking is that growth companies are now worth less because their future earnings must be discounted at a higher rate.  Perhaps.  And I will admit that there is plenty more intellectual fun to be had by geeks like me with this discussion, but let’s set that aside for now.

The focus in most media circles has been on the “macro” factors – inflation, interest rates, government debt, etc.  While these are certainly valid concerns, I believe that more attention will turn to earnings as the year goes on.  Earnings estimates have been strong and rising.  My hope is that investors will realize that solid management teams with great ideas are still going to make money for shareholders despite higher interest rates.  The innovative themes that led the rally remain in place (i.e., robotics, artificial intelligence, genomics, battery storage, industrial innovation, 3D printing, cloud computing, mobile technology, etc.)

Now to the psychology part of this missive.  Stocks are best used as long-term investments to accumulate wealth slowly over time – not as speculative, gambling devices.  But when things get a little too good, people cannot stand the fear of missing out.  Alas, a little euphoria tends to bring weak participants into markets.  Human nature – as it always has been, and so it will ever be.  These “investors” are generally the last ones to get in when things are good and the first ones to get out when trouble arises.  You might say that stocks are then returned to their rightful owners!  Based on market data, it appears that we are seeing this story play out again with growth stocks.

One of the managers in our investment models has been elevated to near rock-star status for her performance last year causing large amounts to flow into her fund at the beginning of the year.  Moreover, websites have sprung up that mimic her trades as if everything she buys only goes up.  This behavior is ridiculous and stupid – it’s a complete disregard of risk.  Eventually Mr. Market is relentlessly efficient, and corrections send these sorts of “investors” back to the sidelines.  And right on cue, her fund sold off hard beginning in mid-February.

I’ve also followed the stories in Gamestop and AMC with great interest and concern.  They’re fascinating stories, and a lot of quick money was made and lost.  Apps like Robinhood have brought in a new, younger generation of market participants who, uh-um, shall we say…seem to have some different attitudes towards investment risk.   Ultimately, the broader participation should be positive for markets, but these new behaviors certainly appear to be causing some volatility in the short-term.

I know it’s never easy to watch certain stock positions go down, but please think of these times like you would when pruning a tree.  By removing the dead branches, new and healthier growth will emerge.  A more committed investor base should provide stocks a more stable foundation for longer-term potential growth moving forward.

Bottom LineStay patient, stay disciplined, and stay invested!

By |2021-03-30T16:51:10+00:00March 30th, 2021|Uncategorized|0 Comments

The Super Bowl “Indicator”, the Madness of Crowds, and a Long-Term Perspective

“Every age has its peculiar folly: some scheme, project or fantasy into which it plunges, spurred on by the love gain, the necessity of excitement, or the mere force of imitation.” – Charles Mackay, Extraordinary Popular Delusions and the Madness of Crowds, 1841.

According to LPL, if the AFC wins the Super Bowl, the S&P Index has been up 7.1% on average for the year versus 10.2% for the NFC. Stocks have been “quite weak” when Tom Brady loses. And out of the 27 NFC winners, the best stock returns came when the Tampa Bay Buccaneers won. Who knew! (By the way, LPL wasn’t serious with this).

As with Gamestop and attempts to corner the silver market, it works…until it doesn’t. And so it is, and so it always has been. The madness of crowds is beginning to get my attention – euphoria might finally be entering the market for the first time in over 20 years. But it’s not all bad. I learned a new investment strategy this week: it’s called YOLO, which stands for You Only Live Once, so gamble as hard as you can in the stock market. Please don’t try this at home, people. As one with an adult memory, I can’t help but think of the late 1990’s when it was said, with a straight face, the new way to gauge a company’s value was based on the number of eyeballs going to websites. Earnings? What are those?

Using the Super Bowl or social media as a basis for investment decisions is akin to checking on when Mercury will be in Retrograde, looking to Presidential cycles or which political party is in power, and using “golden” and “death crosses”. Correlation is not causation!! Speculate and gamble away, if you must, but this sort of stuff is not investing with your hard-earned capital.

As an investor looking to reach long-term goals within a financial plan, your approach is a more sober and, admittedly, less exciting one. Stock prices rise because of human flourishing in the form of management teams using ideas and resources to deliver products and services that improve our lives. This has led to a steady and relentless rise in corporate earnings and dividends for over two centuries. I am attaching an article by my long-term mentor and author, Nick Murray, to give you a sense of where we’ve been the last 50 years. Enjoy! And Go Chiefs!!

By |2021-03-30T16:51:45+00:00February 9th, 2021|Uncategorized|0 Comments

2020 – What Have We Learned? And The Election…

“The only thing new in the world is the history you do not know.” – Harry S. Truman

2020. If nothing else, I believe 2020 has firmly reinforced the principles that I am constantly communicating with clients: ignore current events, economic forecasts and inane predictions while staying laser-focused on reaching the goals you set in your financial plan. I believe that you’ll be a better investor, and this should give yourself the best chance of reaching those goals. That’s because you’ll be less likely to “misbehave” by allowing emotions to influence your investment decisions. Covid-19 might have been Heaven’s gift to this philosophy.

Before getting further into the lessons of 2020, let me acknowledge and respect the uncertainty that remains with us and ahead of us. This uncertainty most certainly could cause markets to gyrate in unpleasant ways in the next few months. I am under no illusions about this. Covid-19 remains very much with us along with much of the economic dislocation caused by the resulting lockdowns. We are evidently closing in rapidly on a vaccine – indeed, a number of vaccines! While this is welcome news, it could be some time before most of us can receive the vaccine – and it remains to be seen if the public will embrace the vaccine. In the meantime, we will have to go through a bitter partisan election amid new mail-in voting procedures that could delay the results and cause, well, a storm of sorts. It’s a reasonable bet that the social unrest continues – or deepens, depending on the election results.

Setting these uncertainties aside for a moment, let’s review what we as investors should have learned – or relearned – since the onset of the great market panic that began in February of this year and ended when the S&P 500 regained its pre-crisis high in mid-August. The lessons, it seems to me, are as follows:

    • The overarching lesson of this year’s swift decline and rapid recovery is, of course, that markets cannot be timed. The long-term, goal-focused equity investor – with investments matched to future goals – is generally best advised simply to ride it out.
    • Reading annual economic forecasts is mostly a waste of time. No amount of study can prepare us for dramatic, “black swan” events, which come at us from deep left field. Thus, planning investment strategy based on “expert” prognostication – much less lurid financial journalism – sets up investors to fail. Instead, investors should focus on having a long-term financial plan, and working that plan through all the fears (and fads) of an investing lifetime. This tends to keep us on the straight and narrow by helping us separate our emotions from our investment decisions.
    •  The S&P 500 dropped 20% (a bear market) in a mere 16 trading days this year – apparently a record. It ultimately bottomed in 23 trading days at a 34% loss. No doubt, there was sheer panic in markets. However, the percentage drop was right in line with the average bear market since WW II. The S&P 500 drops about 1/3 every 5 years or so. With that in mind, it’s best to plan on such unpleasantness so that it’s not a surprise in the future. The lesson is that the declines in the past have not persisted, and long-term progress has always reasserted itself thereby rewarding investors who didn’t panic and sell out of their investments. Is there any good reason this will be different?
    • Almost as suddenly as the market bottomed, it completely recovered, surmounting its February 19th all-time high on August 18th. Please note that the news concerning the virus and the economy continued to be dreadful on August 18th as the market reached new highs. There are two interesting points here. First, the speed and trajectory of a major market recovery very often mirror the violence and depth of the preceding decline. Second, the equity market most often resumes its advance, and may even go into new high ground, well before the economic picture clears. Markets are always forward looking.

These are the investment policies you and I have been following all along. If anything – and despite the pain and uncertainty – our experience this year has validated this approach yet again.

The Election. And now, reluctantly, a few words about the election. Undoubtedly, our political culture has turned toxic in ways that are hard to comprehend. It’s completely understandable if you’re feeling anxious given the extreme political bickering and social unrest amid a global pandemic. These are strange times, indeed. But please know that, at least historically, mixing investment decisions with politics has been awful way to approach investing. History shows that neither political party is necessarily good or bad for investors. And each side loves to “horribilize” things in an election year (thank you, Urban Dictionary for making this a word). You know the line: “This is the most important election of our lifetime/generation!!”, etc. Well, maybe this one is – it’s hard to say. I am well-aware that there are some ideas being discussed today that were considered fringe ideas just four short years ago. But politicians running for election and their advocates are notorious for bluster. Please remember that if your candidate doesn’t win, then a mid-term election will arrive in just two short years. As long as that doesn’t change, then politicians tend to govern towards the middle if they want their party to hold on to power.

From my perspective, both presidential candidates carry considerable risk to your investments. Trump could begin wielding the blunt tool of tariffs again while not being constrained by re-election, and Biden could raise taxes and increase regulation in an economically weak environment. And this is just the beginning for both men and their ideas – I can horribilize, too! 🙂 There is no perfect candidate, and I would caution you against allowing your political interpretations and assumptions to get the best of you. Highly-skilled management teams at companies will figure out a way to work within the environment of either candidate’s policies. Please keep my comments strictly limited to the impact on your investments – I take no position in this missive on other issues that oftentimes are important to voters.

A few more thoughts to keep in mind: as to your personal feelings for the President, the market doesn’t care. Policy coming out of the Federal Reserve probably matters more. And it’s best to ignore most predictions: they tend to be wrong…a lot! For example, a Trump win in 2016 was thought to be good for energy and financials due to deregulatory policies. Yet those have been two of the worst-performing sectors in the S&P 500, especially energy.

In conclusion, I firmly and deeply believe that your hard work, thrift and delayed gratification coupled with sound financial planning will help you stay the course and give you the best opportunity to accumulate considerable wealth while reaching worthy goals. But we must stay that course! Don’t be sidetracked by current events. As always, I am only a phone call away to discuss any issues of concern – it’s in my job description to help you stay the course! These are strange times, but I continue to believe that patient and disciplined investors will be rewarded.

It is a continuing and sincere privilege to serve you and your family. Thank you.

By |2020-10-22T04:28:10+00:00October 22nd, 2020|Uncategorized|0 Comments

New Investment Risks Emerge From
Coronavirus – But Keep the Faith

“While the Optimist and the Pessimist were arguing over whether the glass was half full or half empty, the Opportunist drank it.” – Origin unknown

The current investment climate is the most difficult period I have ever seen. Much of the massive uncertainty of a few weeks ago is resolving, so we are seeing things settle down a bit. This is welcome, but new risks have emerged that seemed improbable or unthinkable just seven weeks ago that are causing new uncertainty. My aim in this missive is to provide a deeper dive into the new risks that have emerged while reminding you to remain hopeful and optimistic. I also discuss recent IRA portfolio moves.

For those of you we currently serve, you know me as a relentless optimist on free markets, people and their ideas, and capitalism. I believe in our system of private property rights, freedom to contract, and the rule of law. Despite its flaws – and there are many – our system is superior for the greater good. I remain, therefore, an unapologetic optimist for reaching long-term financial goals by investing in companies and the people who run them. That hasn’t changed.

But it’s far from clear whether we will bounce back quickly in what is known as a “V-shaped” recovery. Given the shutdowns, we are flattening jobs and businesses along with the “curve”. We simply do not have a historical example of shutting down a modern economy. I was more comfortable with the so-called Great Recession of 2008. It was a jarring, awful event. Reduced to its core, however, it was mostly a good, old-fashioned financial panic brought on by greedy, speculative behavior that had its roots in well-intentioned, but controversial government policies. Financial panics have frequently happened for hundreds of years.

Emerging Risks

Here are the new risks that have emerged in the last 6-7 weeks:

• Are the lockdowns causing irreparable harm to the economy? Thousands of companies may go out of business and millions are now filing for unemployment. Even as the lockdowns subside, how quickly will we walk back into stadiums or get on airplanes? When will we eat out in crowded restaurants and bars? Nobody knows. And will customers return in time to save otherwise good businesses. The small business assistance is bold and interesting. But will it be enough and timely? If the government gets this right, high fives all around.

• Can we get back to normalcy without triggering a second wave? There is a lot we still don’t seem to know about this virus. The flu of 1957 saw a second wave that was particularly devastating. According to the CDC, it killed 116,000 Americans on a smaller population. That was 63 years ago – undoubtedly vaccines, drugs, information-sharing and testing will happen more quickly than in 1957. But there is uncertainty here.

• How many T-T-T-Trillion of government “stimulus” are being approved? Yikes! Even Modern Monetary Theory proponents acknowledge that there is a limit to how much government debt we can sustain. Will these trillions of stimulus trigger inflation? We’ve experienced both a “demand shock” and a “supply shock” to our system. – i.e., when demand returns, if supply isn’t there to meet demand, then that’s a setup for inflation. It’s not my top concern, but it’s worth watching.

• Conversely, I am more concerned about deflating asset prices if things turn uglier. Deflating asset prices are real trouble for indebted companies and people. Debt becomes more burdensome in real terms when an economy is deflating. People can’t sell their homes if the debt is greater than the value of their home. The further fear is falling demand – people delay purchases because they think prices will decline further. We have a fiat currency, and Ben Bernanke quipped that the Fed could always drop money out of helicopters to cure deflation.

• Will the massive government aid now prop up “zombie companies” that were otherwise going out of business? Even in good times, companies are sold or otherwise closing their doors. Unproductive assets then get redirected in our system through bankruptcy to more productive uses. Propping up unproductive businesses distorts this valuable market function. Japan has done this with destructive, deflationary results.

• Millions of people are out of work. Social unrest is a risk.

• Are we now more vulnerable to a bioterror event? Is the unfolding coronavirus story a blueprint for bad actors on how to attack western governments? Or maybe we’re better prepared as a result of this experience. Hard to say.

• I am concerned about the “moral hazard” that continues to be imbedded in our society as we expect government to rescue all things – economic participants increase their risk-taking when there is an implicit government guarantee. The Federal Reserve is in uncharted territory attempting to repair credit markets by buying corporate and high-yield bonds. This is a significant expansion of the Fed’s role and should give you an idea of how serious they perceive the impact this virus is having on markets.

I understand that this is a tough list. Don’t despair, but please know these emerging risks are on my mind looking forward. The good news is that the number of coronavirus deaths is far below what the models were initially predicting. There are brilliant people working on solutions, and the U.S. has always been best when we’re motivated by a common enemy. We’ll probably see new, highly successful businesses emerge from this mess. And when things improve, I believe we will see the long-term “secular” bull market that began in March of 2009 resume – a topic for another time.

IRA Account Portfolios

With all of this in mind, I have rebalanced IRA accounts three times as we’ve moved through this bear market. I am generally loath to make changes to portfolios when markets are acting up, but the world quickly became a different place with new risks in the last 6-7 weeks. Therefore, I decided to provide some defense while also providing a bit more offense as things improve – all with a keen eye on the timeless principle of matching investments to the time when you will need the money. We might end up a tad defensive if things turn out better than expected – and let’s hope that happens! But please know how serious I take the responsibility of protecting your assets from the downside while investing for the upside. This is your capital, and we are in this together. And for what it’s worth, I hold the same investments that you do.

To generate some offense in portfolios, I have added investments that should benefit from the anticipated technological wave that is coming. I believe this could be a very good buying opportunity. The new technologies coming on board will most likely disrupt existing businesses unlike anything we have seen in decades. The coronavirus is probably accelerating this trend.

For defense, I have added a bit to government and investment-grade corporate bonds. I have also increased exposure to the normally defensive Berkshire Hathaway given the enormous amount of cash on their balance sheet. If history is a guide, Warren Buffett will pick his time in this mess and find an opportunity to deploy some of that cash. Even if he doesn’t, Berkshire remains a solid company with many diverse interests. The Federal Reserve announced last week that they would be buying high-yield bonds – another remarkable move, so I have added a small high-yield bond position. In conclusion, I am deeply grateful for your trust and confidence to help you plan your financial futures. Please keep yourselves healthy – mentally and physically. I am only a phone call away if you would like to discuss things – or a Zoom meeting! Thanks for reading.


By |2021-03-30T16:52:46+00:00April 20th, 2020|Uncategorized|0 Comments
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