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Rudolph with Your Nose So Bright

Investing 2021

If you don’t recall the most famous reindeer of all, Rudolph, the Montgomery Ward creation possesses the special characteristic to guide Santa’s sleigh among a fog that would have otherwise canceled Christmas. Like Rudolph’s nose, I’m going to highlight a couple of macroeconomics bright spots that we like right now, that will surely support markets and guide us through the fog of 2021. Enjoy the holiday season and may you have a prosperous new year. 

Unemployment – I think it’s fair to say that the spike in unemployment (fastest spike ever) and the subsequent drop in unemployment (fastest drop ever) have given politicians the hyperbole they need, but the rate getting back to 6.7% means a couple of good things going forward. Firstly, the “easy to lose” and “easy to return” jobs were flushed out in the spike, and the jobs that could easily return have. This means that while each percentage point from here on out is going to be harder and harder, the headline risk of massive jobless swings has likely settled for now. Unemployment in the +6’s has been the recent peaks for prior negative economic swings. In 2003, we peaked at 6.3%, 1992 7.7% even the economic crisis in 2009 only saw a peak of 9.9%. So at least the unemployment figures have gotten back to “normal bad” and not “historically bad”. But here is the good news for 2021, from this point forward we will get positive headlines for employment. I think we have crested, the liquidity in the markets has helped, and near term the unemployment outlook is stable. This pandemic is different than a cyclical recession, this can be resolved as quickly as the damage was done, and for between 4-8 quarters we can see a routine and constructive print for joblessness. This will be a supportive series of headlines for markets. 

Inflation – Inflation will be a headwind for bonds and cash but will be constructive for some assets. Those invested in equities will see an increase in capital chasing the same number of assets. This inflation will be constructive for stocks and other hard assets from 2021 but will cut into the expectations for the buying power of dollars going forward. Expect long term dollar weakness. Additionally, we’re not alone, this pandemic is global and I anticipate every central bank to prefer adding liquidity to their economies over the risk of inflation. Expect countries that emerge from the pandemic quickly to see a major tailwind from global inflation, those whose course is slower and shutdowns longer to be hampered by it.  

Debt – Record low borrowing costs should tee up leveraged companies for success. This is absolutely a situation where “zombie” companies will be created, so investors should be aware of the health of companies they are buying, but long term, allowing companies that have been historically highly leveraged to restructure at amazing rates, or even granting companies that have healthy balance sheets more cheap capital to take on more cap-ex projects for the at least a decade or more will be supportive for the market on the whole. As I write this, the 2-10 spread is .8%, in my opinion giving corporate CFO’s carte blanche to begin issuing new debt and extending all maturities on existing debt. Seeing these companies become so tenacious in the debt market normally would spook investors, but it’s hard to imagine a more supportive environment for borrowers than sub-2% borrowing costs for AAA companies and sub-4% for high yield borrowers. Debt was low for the recovery after 2009 and is now bargain-basement prices. These are rates that are likely to persist through 2021 and with Janet Yellen (Dovish) at the treasury, and no change in the attitude of the Fed I’m not seeing a change in sight. This will likely mean yields will be below inflation for some time as central banks try to juice the recovery at the expense of inflation. 

Earnings – Companies have broadly been able to understate their earnings projections through the pandemic. The science of slow-rolling their debts, and lowering the expectations of analysts has been fantastic. Companies across sectors have been able to step over the lowered bar without major disruption this year. Now while, for the most part, the pandemic has given them top cover to have earnings below their historic figures, the companies in the S&P 500 have done a fantastic job this year of collectively using this window to reset the expectations of investors without sounding alarms. Managing expectations lower, then beating them has been a theme in 2020, that in 2021 will look like a great trajectory for earnings as we emerge from COVID-19. This is going to be a fantastic and virtuous atmosphere of rising earnings. The usual suspects for this earning improvement cycle will show up, banks, technology, and consumer discretionary investors will like this reset in the cycle and the aforementioned upswing in earnings these groups are poised for.

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The Hidden Risks of Bond Funds: Diversification and Redemptions

Investors often turn to bonds as a lower-risk alternative to stocks, and for many, bond funds offer a convenient way to diversify their portfolios. However, the notion that bond funds are an inherently safer bet can be misleading. In some circumstances, bond funds can actually carry more risk than the underlying bonds themselves. Let’s dive into how the supposed advantages of bond funds, like diversification and pooled investment, can sometimes be double-edged swords. The Myth of Diversification  The basic principle of diversification is “not putting all your eggs in one basket,” but what if some of the baskets are riskier than you’d like? In a bond fund, your investment is spread across various bonds issued by governments, municipalities, or corporations. While this mitigates the credit risk associated with any single issuer, it also exposes you to sectors or asset classes you might prefer to avoid. Unwanted Risks Bond funds often hold a wide range of assets, including corporate bonds, high-yield (junk) bonds, and even international bonds. For example, if you buy into a fund for its exposure to high-quality corporate bonds, you might unintentionally take on exposure to lower-rated or riskier bonds. You may also be exposed to interest rate risk, credit risk, and even currency risk if the fund invests internationally. Lack of Control  Unlike direct bond investments, where you can pick and choose your level of risk and yield, bond funds don’t offer the same level of control. You rely on the fund manager’s judgment, which may or may not align with your own risk tolerance and financial objectives. The Domino Effect of Redemptions One of the biggest risks with bond funds comes from the potential for large-scale redemptions. Unlike individual bonds, which you hold until maturity unless you decide to sell them, bond funds are subject to the investment whims of all the participants in the fund. Forced Selling If a significant number of investors decide to pull out of a bond fund, the fund may have to sell bonds to provide the cash for redemptions. This is especially problematic if the bonds have to be sold in a declining market, as it locks in losses that are passed on to remaining investors. Liquidity Concerns The need to meet redemptions could force the fund to sell its most liquid assets first, leaving the fund holding a larger proportion of illiquid or lower-quality bonds. This can affect the fund’s performance and potentially increase its volatility. The Importance of Due Diligence The key takeaway here is that while bond funds offer the advantage of professional management and diversification, they are not without their risks. Due diligence is crucial before adding any investment to your portfolio, including bond funds. If you or the person who manages your money insists on just stuffing more money into bond funds, it comes at a substantial cost you you in the form of added fees, performance, and risks.  Investors should carefully read fund prospectuses and reports, understand the risks associated, and possibly consult a financial advisor to see if the fund aligns with their risk tolerance and investment goals. Only then can you make an informed decision about whether a bond fund is a right investment for you.  

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August 31, 2023 No Comments
saving automation
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Saving Automation 101: Routine, habitual, saving

At the foundation of any planning conversation is saving and saving automation can help make that easier and promote good money habits. Those that start saving early and do it throughout their entire working days are setting themselves up for a life without being employed. If you want to work until you pass away you almost can but I sure don’t. In this article I will share the best savings techniques I’ve seen and how the millionaires I work with got to where they are. Surprise, it’s not because they picked the next Apple. Although you can swing for the fence and be the next Barry Bonds with a great stock pick, you could also be the next Clint Hartung and make the wrong pick and lose it all. To us, risk is worth taking at the right times and with the right amount. But those that stay wealthy develop strong habits early. There’s a reason that over 60% of NFL and NBA players are bankrupt or under financial stress within 5 years of leaving their sport. Making a lot of money doesn’t necessarily correlate with long term wealth. So what should you be doing now for it to be habitual?  Here is my trick to saving: Automation Trick one is automating your savings. There is a reason why people’s biggest investments are their home and then their 401k. Take your income and give yourself a goal. If you make less than $100,000 try to save 15%. If you make more than $100,000 save 20%-30%. Then whatever is left over is your spending for expenses. The formula is not Income-Expense=Savings. Most companies allow you to automatically take money out of your paycheck (go into your payroll system) and have it go into an investment account that is set up to automatically invest for you. If you have to invest it yourself then you’re creating a step for yourself and therefore creating an obstacle which is what makes automating your savings so valuable. Once you’ve established how much you save then it’s a matter of where to save. The younger you’re the better it is to save in a Roth IRA and a regular brokerage account. But any savings vehicle is great! If you’re fortunate enough to have an employer that gives you a 401(k) match, meaning they will give you free money to participate in the 401(k) plan then max that out. If you have a family, make sure you have a minimum of 3 months of expenses in cash saved to support everyone if you lose your job. If you’re the primary breadwinner then have 6 months saved. After you have that saved in a savings account, then look to contribute to your 401(k). In 2020 you can save up to $19,500 if you’re under the age of 50 and $26,500 if you’re older than 50. If you’re in a lower tax bracket, look to save in a Roth 401(k) as this money will grow tax free (read Investing 101). If you’re looking to have a diverse group of accounts you can put half into your Traditional 401(k) and half into your Roth 401(k) as this will prepare you for whatever the tax situation may be in the future. I like maxing out my 401(k) then anything extra goes to a joint account that is invested in stocks and ETFs. Whatever the savings vehicle, especially when you’re young will do amazing things for you. The main reason why we like the Roth 401(k) over the other accounts is because you won’t be tempted to use it, it grows tax free, and with good investments you can hopefully stop working sooner.  Don’t let the politics or the status of the global economy get in the way of savings. It doesn’t matter where the world is when you automate your savings. All that matters is that you’re dollar cost averaging over time (lowering the overall cost basis of your investment) regardless of where the markets are. If they’re high don’t try to time the market. If they’re low then try to adjust your spending down and increase your savings during that time as you’re getting great discounts that only present themselves a couple of times per year on average. To review, saving as much as possible early is made possible through automation. Accumulating good debt (student loan, mortgage, starting a business, etc) is fine but stay away from erosive debt (credit card, expensive cars, etc). Automate your savings and investments. Income-savings=expenses. 

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December 19, 2020 No Comments
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Private Placements in your IRA & 401(k)

A Self-Directed IRA (SDIRA) is very similar to a traditional IRA but gives you more ways to diversify your investments and retirement savings and can include using Private Placements. The SDIRA gives you greater control and flexibility by investing in things you know and believe in by widening your investment selections into your areas of interest or expertise.  Unlike your typical bank or brokerage account, you’re not limited to where you invest. The SDIRA gives you the ability to find alternative investments like real estate, private companies, start-ups, LLCs, LPs, etc.  At InSight, we partner with the Entrust Group to help administer the accounts, and empower our clients to invest in the things they’re passionate about to help them achieve their goals. Entrust shares our core beliefs that client’s should be able to find new ways to increase their potential for growth, protect their net worth against economic fluctuations through diversification, take more control, and grow their savings and retirement in tax advantaged accounts.  Being in Colorado, we’re surrounded by entrepreneurial leaders from technology to pharmaceuticals and we want our clients to get invested in those companies if they desire. Through Private Placements, our clients can invest in privately-held companies. Since a lot of those companies have a hard time getting the funding required to reach their goals, you could be the one that gets them the additional funding they need which spurs the company to new heights. Whether it’s LLCs, C-Corps, Private stock, Partnerships, Private Placements, business, or notes you can invest in almost anything. Private Placements allows companies to raise money by selling stocks, bonds, or other instruments. Some but not all offerings are exempt from federal securities registration requirements, meaning they may or may not have to comply with registration requirements of a public securities offering (meaning more risk if they don’t and less transparency).  It is extremely important that you make sure of a couple of key items before making this type of investment.  Before any investment do your due diligence. This can mean your own research, hiring someone to do a valuation, or a combination of both.  Understand your own liquidity needs and the liquidity of any investment prior to investing. Some investments in private placements require holding periods of 5-10 years so if you need or may need that money before or during that period then investing that money in that strategy isn’t for you. If you’re retired, you need to take RMDs. If you don’t have available funds the penalties for not taking it are extremely high You may be responsible for taxes in your IRA depending on if earnings are paid out or not LLCs can be considered securities and may be required to meet the standards of security offerings In order to make an investment like a Private Placement, you must be an accredited investor. Meaning, your net worth (excluding your primary residence) must exceed 1 million or you have to have income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year.  Risks of Private Placements even after doing your due diligence and research include: They’re not reviewed by regulators at the state or federal level and therefore have become a haven for fraud. They’re now the most frequent source of enforcement cases conducted by state securities regulators in North America.  Background checks of sellers, officers, or managers may not have been conducted  Generally speaking, they’re illiquid, and investors may have to hold their investments indefinitely Investors are usually provided minimal disclosure information than a public offering, meaning investors know much less about the investment itself and the people running the show The value of the asset may be provided by a qualified third party, but they must provide sufficient supporting documentation with the Fair Market Valuation Form. FMV Form How to protect your investment: Surround yourself with people to help you, processes to research and understand the investment, and policies to hold you accountable Don’t complete an agreement or questionnaire unless you fully understand it Hire a 3rd party professional to review the document and investment If you’re asked to falsify information, walk away If your gut is telling you no because of a lack of clarity you should probably trust it Invest in what you know Request as much information as you can and ask every question you want

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December 11, 2020 No Comments

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