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Here’s Why Today’s Housing Market Is Different from 2008

For homeowners, the increase in home prices over the last 16 months has been impressive. Nationally, home prices increased more than 20% year over year through April, with Florida leading the pack at more than 30%. It’s not a surprise for those of us who live in Texas to see that home prices have surged more than 20% during the last year.

Map showing price changes in the U.S. housing market
Source: CoreLogic

Rising interest rates have led to a drastic increase in the 30-year fixed mortgage loan rate. Last week, that rate hit 5.8%. By comparison, the rate at the start of 2022 was slightly higher than 3%. The low mortgage rates that we experienced over the last several years had been a real boon to the housing market and a big cause of the increase in home prices.

With the drastic increase in home prices, many are starting to wonder if this is setting up to be a repeat of the Great Financial Crisis (GFC) that we witnessed in 2008. The underlying drivers for this housing market appear dramatically different. Here are several reasons that we feel the housing market today will not experience a repeat of 2008:

• The housing market today is in better health thanks to new lending regulations that resulted from the GFC. The chart below shows the credit quality of loans today compared with the time leading up to the GFC. Today, more than 70% of home loans go to those with credit scores over 720. The average borrower’s FICO score today is 751, a record high.

The higher score wins

Graphic showing credit scores of borrowers in today's housing market
Source: Charles Schwab, Bloomberg as of 3/31/2022

• Home prices soared during the last two years as demand rocketed during the pandemic. Homeowners today have record levels of home equity due to the increase in prices. The amount of equity that homeowners can access is over $11 trillion, a 34% increase compared to last year. 

• The amount of leverage — how much debt the homeowner has against the home’s value — has fallen dramatically. Total mortgage debt is less than 43% of total home values, the lowest on record. Negative equity is basically non-existent. (In 2011, one in four borrowers were underwater.) Today, mortgage payments as a percentage of consumer’s disposable income are just 3.8%, about half of what it was before 2008.

Mortgage Debt Service Payments as % of Disposable Income

Graphic showing mortgage debt service payments as % of disposable income in today's housing market
Source: Board of Governors of the Federal Reserve System, St. Louis Fed

• There are 2.5 million adjustable-rate mortgages (ARMs), accounting for about 8% of all active mortgages and the lowest volume on record. In 2007, there were 13.1 million ARMS, representing 36% of all mortgages. More than 80% of today’s ARMs operate under a fixed rate for the first seven to 10 years. 

• Mortgage delinquencies are at a record low, with about 3% of mortgages past due. There are fewer past-due mortgages than there were before the pandemic.

• Following the Great Financial Crisis, a decade of underbuilding of homes ensued. As the millennial population is reaching peak home-buying age, there are millions of first-time home buyers waiting for the opportunity to purchase their first home.

Higher mortgage rates are already having the intended effect of slowing down housing prices. Existing home sales fell for the fourth straight month in May, and “further sales declines should be expected in the upcoming months given housing affordability challenges from the sharp rise in mortgage rates this year,” said Lawrence Yun, chief economist for the National Association of Realtors.

Existing buyers are still competing for a low supply of houses as builders face issues with supply chain, labor shortages and a decade of underbuilding. Higher rates taking some of the momentum from the housing market is not necessarily a bad thing for the economy and may help the Federal Reserve soft-land the economy (instead of a feared crash landing).

Promo for an article titled 4 Strategies to Help Investors Worry Less About the Markets

So, what can we learn from all this? We understand the concern that investors have comparing today’s housing market to that of the pre–GFC market crash. We take comfort in the fact that the amount of leverage and types of loans today are nowhere near what we witnessed during the GFC bubble. Lending has been in favor of those with much higher credit scores. Household balance sheets are in much better shape, and the percentage of one’s disposable income spent on mortgages is at an all-time low. We do not believe that the housing market will see a similar relapse to what we experienced in 2008.  We will continue to closely monitor the housing market and its effect on the economy.

We will continue to harp on the fact that what really matters right now is time in the market, not out of the market. That means staying the course and continuing to invest, even when the markets dip, to take advantage of potential market upturns. We continue to adhere to the tried-and-true disciplines of diversification, periodic rebalancing and looking forward, while not making investment decisions based on where we have been. It is important to focus on the long-term goal, not on one specific data point or indicator. 

In markets and moments like these, it is essential to stick to the financial plan. Investing is about following a disciplined process over time.

At the end of the day, investors will be well-served to remove emotion from their investment decisions and remember that over time, markets tend to rise. During volatile markets, it is important to remember that the fear of losing money is stronger than the joy of making money. Investor emotions can have a big impact on retirement outcomes. Market corrections and bear markets are normal; nothing goes up in a straight line. Making market decisions based on what might happen may be detrimental to long-term performance. The key is to stay invested and stick with the financial plan. Markets go up and down over time, and downturns present opportunities to purchase stocks at a lower value.

It all starts with a solid financial plan for the long run that understands the level of risk that is acceptable for each client. Regarding investments, we believe in diversification and having different asset classes that allow you to stay invested. The best option is to stick with a broadly diversified portfolio that can help you to achieve your own specific financial goals — regardless of market volatility. Long-term fundamentals are what matter.

Sources: CoreLogic, Federal Reserve Board, Kestra Investment Management, Schwab

Promo for an article titled Understanding the Importance of Market Liquidity

This material contains an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources.

Using diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss of principal due to changing market conditions.

Past performance is not a guarantee of future results.

The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation.

Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment Advisory Services offered through Kestra Advisory Services, LLC (Kestra AS) an affiliate of Kestra IS. CD Wealth Management and Bluespring Wealth Partners LLC* are affiliates of Kestra IS and Kestra AS.  Investor Disclosures: https://bit.ly/KF-Disclosures

*Bluespring Wealth Partners, LLC acquires and supports high quality investment adviser and wealth management companies throughout the United States.

How Has the Market Performed After Its Worst Years?

Last week was another tough week for the stock market. Major U.S. market indexes have now traded down 10 out of the last 11 weeks. Stock market losses occur for various reasons: Sometimes they are driven by excessive market valuations, like the tech bubble of 2000, and sometimes they are driven by external market events, such as a war or a global pandemic.

If the year were to end today, 2022 would be the sixth worst year in stock market history, as the S&P 500 is currently down 22.3% year to date. During times like these it is important to maintain perspective and know that even the worst market years will come to an end. Here are some points to keep in mind:

•The S&P 500 had 25 negative years between 1928 to 2021, meaning that 27% of the time, the market experienced a down year, while 73% of the time the market had positive returns.

•Of the 25 negative years, 11 of those were double-digit losses as seen in the chart below.

a chart of the S&P 500's worst years and its returns after 1, 3, and 5 years

• The market has experienced two consecutive years of negative returns eight times since 1928. It has experienced three consecutive years of negative returns three times in this same period, however, this has only happened once since the Great Depression.

• The longer-term returns following the worst performing stock markets have been strong. The average three-year return is +35% while the average five-year return is +80%.

• The results for the year that follows a worst performing year are mixed, however, there has only been one three-year period with negative returns, which was during the Great Depression.

• Every five-year period following one of the worst years in the stock market saw positive returns.

• Since 1929, there have been 26 bear markets, 15 of which were tied to recessions. The average length of a bear market in the S&P 500 index has been 9 ½ months. For bear markets that have been tied to a recession, the average decline is 35%, while those without a recession have experienced an average loss of 25%.

• The chart below is a history of bull and bear markets since 1942. During that time, the average cumulative return of a bull market has been 155%, while the average bear market has a loss of 32%. It is important to note the length of time of a bull market compared to a bear market: The bull market has lasted, on average, 4.4 years, while the bear market has only lasted 11 months on average.

graph depicting the duration of bull and bear markets and their returns

Even after the worst years in the stock market, the markets have always bounced back. Those who remain disciplined in a down market, like we are in today, have the potential to enjoy better times ahead. Historically, the longer you stay invested, the greater the possibility you will have to reach your long-term goals.

So, what can we learn from all this? Today’s markets are certainly a challenging environment; however, when focused on long-term investing, there is no reason to panic. Since 1929, markets have experienced numerous challenges including multiple wars, asset bubbles, recessions, and a global pandemic. In each of these challenging times, companies and people have adapted and responded to get back on track. Investing will always be uncertain but sticking to the financial plan is critical to avoid short-sighted decisions. As Warren Buffet famously said, “The market is the most efficient mechanism anywhere in the world for transferring wealth from impatient people to patient people.”

What really matters right now is time in the market, not out of the market. That means staying the course and continuing to invest, even when the markets dip to take advantage of potential market upturns. We continue to adhere to the tried-and-true disciplines of diversification, periodic rebalancing and looking forward, while not making investment decisions based on where we have been. It is important to focus on the long-term goal, not on one specific data point or indicator. In markets and moments like these, it is essential to stick to the financial plan. Investing is about following a disciplined process over time.

The market is the most efficient mechanism anywhere in the world for transferring wealth from impatient people to patient people. — Warren Buffet
link to related content about the importance of staying invested

At the end of the day, investors will be well-served to remove emotion from their investment decisions and remember that over time, markets tend to rise. During volatile markets, it is important to remember that the fear of losing money is stronger than the joy of making money. Investor emotions can have a big impact on retirement outcomes. Market corrections and bear markets are normal; nothing goes up in a straight line. Making market decisions based on what might happen may be detrimental to long-term performance. The key is to stay invested and stick with the financial plan. Markets go up and down over time, and downturns present opportunities to purchase stocks at a lower value.

It all starts with a solid financial plan for the long run that understands the level of risk that is acceptable for each client. Regarding investments, we believe in diversification and having different asset classes that allow you to stay invested. The best option is to stick with a broadly diversified portfolio that can help you to achieve your own specific financial goals — regardless of market volatility. Long-term fundamentals are what matter.

Sources: Assetmark, Ben Carlson, Fact-Set, First Trust, PGIM

What Should Investors Consider in a Bear Market?

Markets are good at reminding investors that stock prices don’t always go up. U.S. stocks continued their sharp drop on Monday after Friday’s inflation report, which showed that consumer prices rose at their fastest pace in 41 years. Although economists were already seeing signs of peak inflation with home, used car and lumber prices decreasing, the war in Ukraine’s effect on oil and gas prices led to a much stronger increase in the month-over-month consumer price index (CPI). As the markets braced for the Federal Reserve’s announcement on interest rate hikes, stocks in the S&P 500 again entered bear market territory, closing more than 20% below their all-time highs (which were set earlier this year). As we’ve written recently, bear markets, last an average of 15 months, while the average bull market lasts about six years. The chart below is a great reminder that on average, stocks have performed well three, six and 12 months after falling into a bear market.

Down markets provide investors with opportunities that may help with returns, reduce risk and provide tax advantages over time. What should you consider in a down market like the one we have today?

First, and foremost, do not panic

Panic is not an investing strategy. Selling and going into cash when the market is down can do irreparable harm to your long-term financial outlook. There is a reason you have a financial plan, and now more than ever is the time to stick with it.

Rebalancing portfolios

Investment portfolio construction, when done properly, is made up of various securities and asset classes that each perform differently. You may have often heard the term “asset allocation,” which references how a portfolio is constructed of stocks, bonds, cash, etc. Within each of these categories, there are different investment exposures. For stocks, the exposures might be small-cap, mid-cap, large-cap and international, while bond exposure may have investment-grade bonds, high-yield bonds, floating-rate bonds, treasuries, etc. By combining each of the different asset classes together, the overall risk of the portfolio may be reduced.

Over time, the portfolio may need to be rebalanced. Think of it like taking your car in for a tune-up after hitting a big pothole or speed bump. After large market moves, either up or down, a portfolio may benefit from tweaks or adjustments. The graph below displays how a portfolio needs a tune-up. Following the pandemic, a portfolio that had a 50-50 stock/bond allocation has grown to 65% stocks and 35% bonds a year and a half later, due to the run up in the market. Rebalancing helps investors ensure that they’re taking an acceptable level of portfolio risk and adhering to their set financial plan. It also helps with the adage of “buy low and sell high.”

Without Rebalancing, Large Market Moves Can Add Risk to a Portfolio

Tax-Loss Harvesting

When markets are rising and stocks or funds are sold for a profit, taxable gains occur. While taxable gains are not necessarily fun, they are a necessary part of investing. Selling holdings when the values are down may generate losses, which can be used to offset capital gains and potentially lower your future tax bill. Investment losses may also be used to reduce taxes on ordinary income. For further details, please see our past client letter on tax-loss harvesting.

Dollar-Cost Averaging*

Who doesn’t like shopping when their favorite items are 20% off or even more? With Monday’s losses, the S&P 500 is down nearly 22% from its high in January. The NASDAQ and Russell 2000 are down almost 30% from their recent highs. Investing in stocks when prices are down can be a powerful way to generate wealth over time. We recognize that it may be hard to invest more cash into the market when it is falling, but that is where dollar-cost averaging comes into play. For those in a 401K plan, this is exactly what you are doing – every two weeks you are investing money into the portfolio, whether the market is up or down.

There are very few free lunches in the investment world. As the saying goes, if it is too good to be true, then more than likely it is. However, asset allocation, diversification and periodic rebalancing are as close as it gets to a free lunch for investors. We are fully aware that down markets can be painful. At the same time, they can create opportunities for those who have excess cash. The chart below is a great reminder that historically, bull markets last much longer than bear markets, and the total return of a bull market far outweighs the negative return during a bear market.

Source: Charles Schwab

So, what can we learn from all this? Sticking with the financial plan during times like these can be a real challenge – but that is why you have the plan. If we use our heads and don’t act on emotion, we can expect a more successful investing future — and maybe even get a free lunch along the way, thanks to rebalancing, tax-loss harvesting and dollar-cost averaging.

During these challenging times, it is important to keep the following in mind: 

• Ignore the noise and sensationalist headlines.
• Remember that selling into a panic is not an investment strategy.
• Market declines are a part of economic cycles.
• Don’t try to time the market. Instead invest regularly, even when the market is falling.

It is likely that this recent market drop may be a mere blip in the long-term investment plan. We do not try to time the market. What really matters is time in the market, not out of the market. That means staying the course and continuing to invest, even when the markets dip to take advantage of potential market upturns. We continue to adhere to the tried-and-true disciplines of diversification, periodic rebalancing and looking forward, while not making investment decisions based on where we have been. It is important to focus on the long-term goal, not on one specific data point or indicator. In markets and moments like these, it is essential to stick to the financial plan. Investing is about following a disciplined process over time.

Sticking with the financial plan during times like these can be a real challenge – but that is why you have the plan.

At the end of the day, investors will be well-served to remove emotion from their investment decisions and remember that over time, markets tend to rise. During volatile markets, it is it is important to remember that the fear of losing money is stronger than the joy of making money. Investor emotions can have a big impact on retirement outcomes. Market corrections are normal; nothing goes up in a straight line. Making market decisions based on what might happen may be detrimental to long-term performance. The key is to stay invested and stick with the financial plan. Markets go up and down over time, and downturns present opportunities to purchase stocks at a lower value.

It all starts with a solid financial plan for the long run that understands the level of risk that is acceptable for each client. Regarding investments, we believe in diversification and having different asset classes that allow you to stay invested. The best option is to stick with a broadly diversified portfolio that can help you to achieve your own specific financial goals — regardless of market volatility. Long-term fundamentals are what matter.

Sources: Kestra Investment Management, LPL, Schwab

*Dollar cost averaging does not assure a profit and does not protect against a loss in declining markets.  This strategy involves continuous investing; you should consider your financial ability to continue purchases no matter how prices fluctuate.

This material contains an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources.

Using diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss of principal due to changing market conditions.

Past performance is not a guarantee of future results.

The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation.

Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment Advisory Services offered through Kestra Advisory Services, LLC (Kestra AS) an affiliate of Kestra IS. CD Wealth Management and Bluespring Wealth Partners LLC* are affiliates of Kestra IS and Kestra AS. Investor Disclosures: https://bit.ly/KF-Disclosures

*Bluespring Wealth Partners, LLC acquires and supports high quality investment adviser and wealth management companies throughout the United States.

4 strategies to help investors worry less about the markets

Rising recession fears pushed U.S. stocks briefly into bear market territory last week, with the S&P 500’s decline from its all-time high reaching 20%. There is no official bear market designation on Wall Street, though some may count Friday’s intraday lows as confirmation of one. The Dow Jones is mired in an eight-week losing streak, the longest since 1923. Meanwhile, the S&P 500 has been down seven straight weeks, the worst run since 2001.

We recognize that these times may make investors uncomfortable. Jack Bogle, the founder of Vanguard, famously said, “Stay the course, don’t let these changes in the market, even the big ones [like the financial crisis] … change your mind — and never, never, never be in or out of the market. Always be in at a certain level.” When the market was experiencing wild fluctuations in 2016, the great Warren Buffet told investors, “Don’t watch the market closely. Try not to worry too much about it.”

Here are four ways to stay on track toward achieving your goals while avoiding the common pitfalls investors experience during turbulent times:

Remember that this, too, shall pass. 

Declines have been common occurrences and, on average, have not lasted a long time. Investors who realize that declines are inevitable and temporary have avoided the imprudent behavior of selling out of the market during down times. The market has always recovered from declines (although past results don’t guarantee future results). The chart below puts into context the frequency and duration of previous declines.

Chart showing a history of market declines in the S&P 500 from 1951 to 2021

Keep your focus on the future. 

It is important to maintain proper perspective; don’t place too much emphasis on recent events or disregard long-term realities. Long-term investors have been rewarded: The chart below shows that going back to 1937, the 10-year average return of the S&P 500 is 10.57%. That doesn’t mean that there haven’t been periods of time with below-average returns, but staying invested through those times has paid off for the long-term investor.

Chart showing the S&P 500 rolling 10-year average annual total returns

Don’t try to time the market.

If you sell now and hope to get back into the market if it goes down further, you could miss out on gains when stocks recover. As we have written before, the pain humans feel from losses is greater than the joy they feel from an equal gain. Every S&P 500 downturn of 15% or more has been followed by a recovery. As shown on the chart below, the average return following the five biggest market declines since 1929 has been 70.95%. Over the longer term, the average value of an investment more than doubled over the five years after each market low.

Chart showing the five biggest market declines and subsequent five-year periods from 1929 to 2021

Don’t let emotions cloud your judgment.

As we often say, avoid the noise. Look past the headlines and stay focused on the longer-term goals. Don’t look at the market — or your account value — every day. During volatile times, look at the portfolio less often, knowing we are watching your portfolios very closely and continuing to make tweaks along the way. Investors tend to make poor decisions when they let their emotions take over.

Image of the emotional cycle during market volatility

So, what can we learn from all this? It is always difficult to see the value of your investments fall. During these challenging times, it is important to keep the following in mind:

• Ignore the noise of the sensational headlines.
• Selling into a panic is not an investment strategy.
• Market declines are a part of economic cycles.
• Don’t try to time the market, and do invest regularly, even when the market is falling.

It is likely that the current market drop may be a mere blip in the long-term investment plan. We are not going to try to time the market; what really matters is time in the market, not out of the market. That means staying the course and continuing to invest, even when the markets dip, to take advantage of potential market upturns.

We continue to adhere to the tried-and-true disciplines of diversification, periodic rebalancing and looking forward, while not making investment decisions based on where we have been. It is important to focus on the long-term goal, not on one specific data point or indicator. In markets and moments like these, it is essential to stick to the financial plan. Investing is about following a disciplined process over time.

At the end of the day, investors will be well-served to remove emotion from their investment decisions, and remember that over a longer time horizon, markets tend to rise. Understanding that people fear losing money more than they enjoy making money is important during volatile markets. Investor emotions can have a big impact on retirement outcomes. 

Market corrections are normal, as nothing goes up in a straight line. Making market decisions based on what might happen may be detrimental to long-term performance. The key is to stay invested and stick with the financial plan. Markets go up and down over time, and downturns present opportunities to purchase stocks at a lower value.

It all starts with a solid financial plan for the long run that understands the level of risk that is acceptable for each client. Regarding investments, we believe in diversification and having different asset classes that allow you to stay invested. The best option is to stick with a broadly diversified portfolio that can help you to achieve your own specific financial goals — regardless of market volatility. Long-term fundamentals are what matter.

Source: American Funds, CNBC

Promo for an article titled Frequently Asked Questions as the Market Correction Continues

This material contains an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources.

Using diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss of principal due to changing market conditions.

Past performance is not a guarantee of future results.

The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation.

Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment Advisory Services offered through Kestra Advisory Services, LLC (Kestra AS) an affiliate of Kestra IS. CD Wealth Management and Bluespring Wealth Partners LLC* are affiliates of Kestra IS and Kestra AS.  Investor Disclosures: https://bit.ly/KF-Disclosures

*Bluespring Wealth Partners, LLC acquires and supports high quality investment adviser and wealth management companies throughout the United States.

FAQs as the market correction continues

The overall market sentiment feels very negative as the market has declined five consecutive weeks and began this week in similar fashion. Consumer confidence, a leading economic indicator, is negative. Market volatility remains elevated, as the VIX index closed at 35, more than double the historical value. Inflation is on everyone’s mind these days, especially at the grocery store or the gas pump. 

All market corrections feel similar: The sky is falling — how will the market ever come back or turn around? While we recognize that these times are painful from a portfolio perspective, we also realize that market corrections are healthy for the long-term performance of the market. It is important to remember that stock market downturns often are followed by a period of positive market performance. Since 1987, every major decline in U.S. equities has reversed itself between 21% and 68% within the following year, as seen in the chart below. And those who dollar-cost average in their portfolios — whether in taxable or tax-deferred accounts — have the potential to take advantage of the market recoveries by adding more monies into the portfolio.

Chart showing the S&P's biggest declines and the next 12 months' returns
Source: Morningstar as of 2/28/20. Returns are principal only, not including dividends. U.S. stocks represented by the S&P 500. Past performance does not guarantee or indicate future results.

Here’s another way of looking at the volatile nature of markets and corrections: The chart below shows intra-year declines over the 20-year period from 2002 to 2021, which includes the pandemic. A decline of at least 10% occurred in 10 out of 20 years (50% of the time), with an average pullback of 15%.* Despite these pullbacks, stocks rose in most years, with positive returns in all but three years and an average gain of 7%.

Chart showing the S&P 500 Index annual returns and intra-year declines over the last 20 years

We want to share with you a few frequently asked questions that we are receiving during the market sell-off in hopes that they answer questions you may have:

I’m hearing a lot about I-bonds. What are they — and should we invest in them?

Series I Savings Bonds are a type of U.S. savings bond designed to protect the value of cash from inflation. Interest rates on I bonds are adjusted regularly to keep pace with inflation. Investors can purchase up to $10,000 of I bonds annually per person through the government’s Treasury Direct website. I bonds earn interest monthly, though you don’t get access to interest until you cash out the bond. You must own the bond for at least five years to receive all the interest that is due. You cannot sell the I bond before holding for one year. If you sell after one year and before the five-year holding requirement, you forfeit three months of interest that has been earned. These bonds have an actual maturity of 30 years. Keep in mind that these bonds cannot be purchased through our office and can only be purchased online through the Treasury Direct website.

Are there any changes to the portfolio that we need to make, and should we continue to purchase bonds?

As we communicate each week, we are constantly analyzing the market, the economy and the portfolios. To use the old hockey adage, we are skating to where the puck is going, not where it is. We are not going to make changes to the portfolio to time the market, but rather we are being strategic and thoughtful. We understand that market volatility is unsettling, but historically, this is not unusual.  The portfolios are diversified and invested per each client’s risk tolerance. 

We tweaked the fixed-income portion of the portfolio late last year to shorten the maturity and duration of the bonds. Bonds have had their worst start to the year in history, but we do not believe that it is in our clients’ best interest to abandon fixed income and move to cash or to increase risk tolerance and move to equities. While both stocks and bonds are down to start the year as inflation peaks and the Fed slows down interest rate hikes, we believe bonds will provide the necessary diversification and income to help the portfolio during market volatility. 

Bonds can be used for three primary purposes: income, capital preservation and equity diversification. As is the case with equities, being diversified within fixed income may help reduce portfolio risk. As always, we will communicate any portfolio changes as they occur.

Where does the market go from here?

Four main factors continue to be at play with this market: inflation, the war in the Ukraine, China and its continued lockdowns, and the Federal Reserve. Last week, the Fed raised rates by 50 basis points. Chairman Powell commented that the Fed is “strongly committed to restoring price stability” and that a 75-basis point hike is “not something the committee is actively considering.” Stocks are likely to remain volatile as the Fed pushes interest rates higher. 

The possibility of a recession later this year or next year remains in play, but strong earnings growth and record low unemployment are not recessionary indications. Remember that the stock market is a leading economic indicator, and often, the market sells off before the recession or the economic bottom of the cycle. By the time the economy feels worse, the stock market is already starting to recover. We do not know when the market will hit bottom, but we remain strong believers in the long-term fundamentals of the market.

Promo for article titled Before You Sell for a Loss, Make Sure You Know the Wash-Sale Rule

So, what can we learn from all this?  Selling into a panic is not an investment strategy. Understanding that people fear losing money more than they enjoy making money is important during volatile markets. Investor emotions can have a big impact on retirement outcomes.

It is likely that this recent market drop may be a mere blip in the long-term investment plan. We are not going to try to time the market; what really matters is time in the market, not out of the market. That means staying the course and continuing to invest — even when the markets dip — to take advantage of potential market upturns.  

We continue to adhere to the tried-and-true disciplines of diversification, periodic rebalancing and looking forward, while not making investment decisions based on where we have been. It is important to focus on the long-term goal, not on one specific data point or indicator. In markets and moments like these, it is essential to stick to the financial plan. Investing is about following a disciplined process over time.

At the end of the day, investors will be well-served to remove emotion from their investment decisions and remember that over a longer time horizon, markets tend to rise. Market corrections are normal, as nothing goes up in a straight line. Making market decisions based on what might happen may be detrimental to long-term performance. The key is to stay invested and stick with the financial plan. Markets go up and down over time, and downturns present opportunities to purchase stocks at a lower value.

It all starts with a solid financial plan for the long run that understands the level of risk that is acceptable for each client. Regarding investments, we believe in diversification and having different asset classes that allow you to stay invested. The best option is to stick with a broadly diversified portfolio that can help you to achieve your own specific financial goals — regardless of market volatility. Long-term fundamentals are what matter.

Sources: Blackrock, Forbes, Schwab
*As of Tuesday, May 10, the S&P 500 is down more than 15% year-to-date

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This material contains an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources.

Using diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss of principal due to changing market conditions.

Past performance is not a guarantee of future results.

The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation.

Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment Advisory Services offered through Kestra Advisory Services, LLC (Kestra AS) an affiliate of Kestra IS. CD Wealth Management and Bluespring Wealth Partners LLC* are affiliates of Kestra IS and Kestra AS.  Investor Disclosures: https://bit.ly/KF-Disclosures

*Bluespring Wealth Partners, LLC acquires and supports high quality investment adviser and wealth management companies throughout the United States.

Before you sell for a loss, make sure you know the wash-sale rule

Over the last three years, the stock market has provided some valuable investment gains. So far in 2022, the market has given back some of those gains — and as a result, we have an opportunity to capture some investment losses. One of the nice aspects of the tax code is that if an investment is trading at a loss, you can sell the holding and reduce your taxable income. 

We recognize that an investor may have seller’s remorse in a down market, but capturing losses to offset current income taxes or future gains is a prudent portfolio management strategy. It is important to note that when you sell a holding for a loss, you do not want to replace that holding with a “substantially identical” investment either 30 days before or 30 days after the sale date, within the timeframe pictured below. Doing so would be a violation of the wash-sale rule.

Graphic explaining the 61-day period set up by the wash-sale rule


What is the wash-sale rule?

When you sell an investment that has a loss in a taxable account, you may be eligible for a tax benefit. The wash-sale rule prevents investors from selling at a loss, then buying back the “substantially identical” investment within a 61-day window and being able to claim the tax benefit. This rule applies to stocks, bonds, mutual funds, exchange traded funds (ETFs) and options. 

The wash-sale rule states that the tax loss will be disallowed if you buy the same security or “substantially identical” security within 30 days before or after the date you sold the investment for a loss. This includes selling a holding for a loss in a taxable account and then buying it back in a tax-advantaged account. 

How can you avoid the wash-sale rule?

ETFs or mutual funds can be helpful in avoiding the wash-sale rule, especially if you are selling an individual stock for a loss. Swapping one ETF for another — or one mutual fund for another — can be tricky because of the “substantially identical” security rule. There are no clear guidelines on what constitutes a “substantially identical” security. If you sell one individual stock and then purchase another security, avoiding the wash-sale rule is much more straightforward. The IRS determines if your transactions violate the rule. If that does happen, you may end up paying more taxes than you anticipated.

You can avoid the wash-sale rule typically in the following ways:
   • Avoid buying the same or similar investment 30 days before and after the sale.
   • Invest in a materially different investment than the one you sold.
   • Have a long-term investment plan during market downturns to help you make the best investing decisions, and don’t sell into a panic and then repurchase.

Remember, you cannot sell an investment for a loss in one account and buy it back in another account, such as in an IRA or spouse’s account. This would disallow the loss to be used since the accounts are under the same ownership. As always, we recommend that you consult with a CPA if you have questions.

What is the penalty?

If the IRS determines that you have violated the wash-sale rule, you cannot use the loss on the sale to offset gains or reduce taxable income. The loss is then added to the cost basis of the new investment. The holding period is added to the holding period of the new investment. There may be a long-term benefit to the higher cost basis to reduce future taxes, and the holding period may help you qualify for long-term capital gains tax rather than short-term capital gains tax. In the short run, however, you are not able to use the loss that you were hoping to have when the investment was sold. 

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So, what can we learn from all this? While no one wants to see their portfolio value decrease, rebalancing the portfolio (as we did recently) may create some tax losses that can be used to help offset future gains or current income. Tax loss harvesting is an important investment principle and one that we have written about in detail. When one sells a holding for a loss in a taxable account, a “substantially identical” holding cannot be purchased 30 days before or after the sale to avoid the wash-sale rule. It is important to consult your CPA with any questions on the wash-sale rule.

Market volatility can be unsettling, but for long-term investors, it is not unusual. It is likely that the recent market drop could be a mere blip in the long-term investment plan. We are not going to try to time the market; what really matters is time in the market, not out of the market. That means staying the course and continuing to invest, even when the markets dip. 

We continue to adhere to the tried-and-true disciplines of diversification, periodic rebalancing and looking forward, while not making investment decisions based on where we have been. It is important to focus on the long-term goal, not on one specific data point or indicator. In markets and moments like these, it is essential to stick to the financial plan. Remember, first and foremost, that panic is not an investing strategy. Neither are “get in” or “get out” — those are just gambling on moments in time. Investing is about following a disciplined process over time.

At the end of the day, investors will be well-served to remove emotion from their investment decisions and remember that over longer time horizons, markets tend to rise. Market corrections are normal, as almost nothing goes up in a straight line. Making market decisions based on what might happen may be detrimental to long-term performance. The key is to stay invested and stick with the financial plan. Markets go up and down over time, and downturns present opportunities to purchase stocks at a lower value.

It all starts with a solid financial plan for the long run that understands the level of risk that is acceptable for each client. Regarding investments, we believe in diversification and having different asset classes that allow you to stay invested. The best option is to stick with a broadly diversified portfolio that can help you to achieve your own specific financial goals — regardless of market volatility. Long-term fundamentals are what matter.

Sources: Fidelity, Forbes, Kitces

Promo for article titled Today's Market Volatility is Unsettling but not Unusual

This material contains an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources.

Using diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss of principal due to changing market conditions.

Past performance is not a guarantee of future results.

The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation.

Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment Advisory Services offered through Kestra Advisory Services, LLC (Kestra AS) an affiliate of Kestra IS. CD Wealth Management and Bluespring Wealth Partners LLC* are affiliates of Kestra IS and Kestra AS.  Investor Disclosures: https://bit.ly/KF-Disclosures

*Bluespring Wealth Partners, LLC acquires and supports high quality investment adviser and wealth management companies throughout the United States.

Today’s market volatility is unsettling — but not unusual

U.S. stocks fell hard on Friday, extending a run of three consecutive down weeks in the market. The selling continued to begin the week as investors reacted to disappointing earnings results from Netflix and other companies, the Federal Reserve’s increasingly aggressive talk about interest rate increases, the war in Ukraine and further lockdowns in China. With its drop on Friday, the S&P 500 is down more than 10% on the year and back in correction mode. Market volatility, as measured by the VIX index, has increased as the Fed’s plans to tackle inflation have evolved. We are likely to see continued spikes in the VIX index, given the uncertainty in the current economic environment.

Last week, Fed Chairman Jerome Powell suggested that the central bank may be envisioning a quicker series of interest rate hikes than previously expected. Markets are bracing for a half-point increase in May, with more tightening ahead. The chart below provides a historical perspective of 10-year Treasury yields since 1980; we are a long way from the interest rates many remember from the early ’80s. David Hoag, the portfolio manager of Bond Fund of America said this week, “Central banks will do what they need to do to get inflation under control, but I don’t think that they will be able to go too far before the real economy starts hurting.” What he is implying is that the Fed is not likely to raise the federal funds target rate anywhere near the long-term historical average of 5% (today, we are in a range between .25% and .50%).

Free fall: Interest rates have plummeted in the era of easy money

Chart showing 10-year U.S. Treasury yields from 1980 to today
Sources:  Federal Reserve, Refinitiv Datastream. As of 4/11/22

Central Banks around the world are likely to join the U.S. Federal Reserve Bank in trying to get inflation under control. The strong global economy, war in Ukraine and supply chain disruptions continue to put upward pressure on prices. Most investors follow the stock market more than the bond market. As we recently wrote, the bond market has had a rough start to the year. The chart below shows that the bond aggregate index is down more than 10% through Friday. Rate-hike expectations have pushed bond yields higher, with 2-year Treasury yields up almost 2% on the year and 10-year Treasury yields up by almost 1.5%. We believe the bond market is pricing in most of the expected tightening. The good news: Higher yields create potential opportunities for fixed-income investors, who can earn better yields and returns than we have seen in the last three years.

Chart showing the Bloomberg Global-Aggregate Total Return Index

Over long periods of time, markets have tended to adjust to rising rates. During the last 10 periods of rising interest rates, the S&P 500 has posted an average return of 7.7%. Bonds have also held up well during the same time, with an average return of 3.9% during seven rate-hiking cycles dating back to 1983. Of course, the usual caveat remains: Past results are not predictive of future returns, as each market cycle is different.

Sources:  Capital Group, Refinitv Datastream, Standard & Poor’s, U.S. Federal Reserve
S&P 500 returns represent annualized total returns

Despite the uncertainties, plenty of reasons for optimism remain, and these are several to watch:

• NATO is unified against Russia, and the Macron victory in France is a big statement for unification.
• Russia is bogging down in Ukraine and struggling to win the war.
• Individual tax revenues are up by almost 35% this year compared to 2021. 
• The deficit appears to be shrinking at a fast pace and could end the year at $1 trillion, compared to $2.77 trillion in 2021.
• The Supply Management Purchasing Managers Index, a reliable predictor of growth across the economy, has retreated from its post-COVID peak but remains at levels that signal growth ahead.
• The labor market remains tight and is beginning to draw older Americans who quit or retired during the pandemic back into the workforce.
• Profit margins for S&P 500 companies stood at record levels at the end of 2021.

So, what can we learn from all this? Market volatility can be unsettling, but for long-term investors, it is not unusual. The recent market drop is likely to be a mere blip in the long-term investment plan. We are not going to try to time the market; what really matters is time in the market, not out of the market. That means it is important to stay the course and continue to invest, even when the markets dip. We continue to adhere to the tried-and-true disciplines of diversification, periodic rebalancing and looking forward, while not making investment decisions based on where we have been.

It is important to focus on the long-term goal, not on one specific data point or indicator. In markets and moments like these, it is essential to stick to the financial plan. Remember first and foremost that panic is not an investing strategy. Neither are “get in” or “get out” — those are just gambling on moments in time. Investing is about following a disciplined process over time.

At the end of the day, investors will be well-served to remove emotion from their investment decisions and remember that over a longer time horizons, markets tend to rise. Market corrections are normal, as nothing goes up in a straight line. Making market decisions based on what might happen may be detrimental to long-term performance. The key is to stay invested and stick with the financial plan. Markets go up and down over time, and downturns present opportunities to purchase stocks at a lower value.

It all starts with a solid financial plan for the long run that understands the level of risk that is acceptable for each client. Regarding investments, we believe in diversification and in having different asset classes that allow you to stay invested. The best option is to stick with a broadly diversified portfolio that can help you to achieve your own specific financial goals — regardless of market volatility. Long-term fundamentals are what matter.

Sources:  Bloomberg, Capital Group, Schwab

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This material contains an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources.

Using diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss of principal due to changing market conditions.

Past performance is not a guarantee of future results.

The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation.

Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment Advisory Services offered through Kestra Advisory Services, LLC (Kestra AS) an affiliate of Kestra IS. CD Wealth Management and Bluespring Wealth Partners LLC* are affiliates of Kestra IS and Kestra AS.  Investor Disclosures: https://bit.ly/KF-Disclosures

*Bluespring Wealth Partners, LLC acquires and supports high quality investment adviser and wealth management companies throughout the United States.

What portfolio changes are we making to start the second quarter?

As we enter the second quarter of 2022, we want to pause and look back at the difficult start to the year. The “Santa Claus rally” at the end of 2021 seems like a long time ago. Stock prices began to sink right from the first trading day of the year, and the S&P 500 recorded its worst January since 2009. At the low point of the first quarter, the S&P 500 index closed almost 14% below its all-time high. The NASDAQ was down more than 20% during the first quarter, an official bear market. Looking below the surface, the average stock in the S&P 500, NASDAQ and Russell 2000 is down significantly more than the overall index.

Chart showing major indexes and drawdowns

At the same time, the bond market in the first quarter saw U.S. Treasury indexes decline more than 10%, and the Bloomberg US Aggregate Index fell almost 6%. Volatility in the bond market portfolio’s so-called risk-free assets came amid worsening inflation, central bank tightening and the impact of the war in Europe.

We are in the process of reallocating and rebalancing our client portfolios to account for the current economic cycle, as more and more leading economic indicators are pointing toward a recession overseas and possibly in the U.S. in the next six to 24 months.

We are making the following changes: 

1. In 2020, we increased the technology position in the portfolio to take advantage of the boom brought about by the global pandemic. In 2021, we took some profits in tech stocks and slightly reduced the exposure to a market weight level. From a long-term perspective, we continue to believe strongly in technology stocks. As we move from mid cycle to late cycle, we want to continue to trim technology stocks to slightly underweight and add back mid-cap stocks for additional diversification, both in market capitalization and also across economic sectors.

2. While international equities remain less expensive than their U.S. counterparts, the war in Europe and the pandemic’s continuing effects in China continue to weigh heavier on international stocks. We are reducing our international exposure slightly and in turn increasing our allocation to higher-dividend-yielding companies that have a broad exposure to the overall economy in sectors like energy, financials and industrials. At the same time, we are reducing exposure to small-cap stocks. Smaller stocks tend to benefit coming out of a recession rather than heading into a slowdown.

3. From a fixed-income perspective, we reduced our duration of the portfolio in December as we anticipated higher interest rates in 2022. At the same time, we increased our exposure to strategic fixed income to provide for additional income in bonds. We are not making any additional changes to fixed income now, as we believe a lot of the selling in fixed income that occurred in the first quarter is pricing in a worst-case scenario for bonds. 

Our focus remains on long-term investing with a strategic allocation while maintaining a tactical approach. Our decisions to make changes are calculated and well thought-out, looking at where we see the economy is heading. We are not guessing or market timing; we are anticipating and shifting to areas of strength in the economy and the stock market. We strategically have new cash on the sidelines, and we buy in for clients on down days or dips in the market, as one does with a 401(k).  We continually speak with our clients about staying the course and not listening to the noise.

In the short term, the outlook for the global economy continues to deteriorate, and sentiment remains negative. Many economists feel that the Federal Reserve is behind the curve in regard to raising rates to stem the inflation tide while working on soft landing the economy to avoid a recession. 

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So, what can we learn from all this? Remember, a recession is a regular finale to a business cycle. Every expansion ultimately ends in a recession. We never encourage clients to time large-scale portfolio adjustments with recessions.

From a portfolio perspective, we continue to adhere to the tried-and-true disciplines of diversification, periodic rebalancing and looking forward, while not making investment decisions based on where we have been. As we say each week, it is important to stay the course and focus on the long-term goal, not on one specific data point or indicator. In markets and moments like these, it is essential to stick to the financial plan. Remember, first and foremost, that panic is not an investing strategy. Neither are “get in” or “get out” — those are just gambling on moments in time. Investing is about following a disciplined process over time.

At the end of the day, investors will be well-served to remove emotion from their investment decisions, and remember that over a longer time horizons, markets tend to rise. Market corrections are normal, as nothing goes up in a straight line. Making market decisions based on what might happen may be detrimental to long-term performance. The key is to stay invested and stick with the financial plan. Markets go up and down over time, and downturns present opportunities to purchase stocks at a lower value.

It all starts with a solid financial plan for the long run that understands the level of risk that is acceptable for each client. Regarding investments, we believe in diversification and having different asset classes that allow you to stay invested. The best option is to stick with a broadly diversified portfolio that can help you to achieve your own specific financial goals — regardless of market volatility. Long-term fundamentals are what matter.

Sources: Schwab, Bloomberg

Promo for article on the formula for wealth

This material contains an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources.

Using diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss of principal due to changing market conditions.

Past performance is not a guarantee of future results.

The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation.

Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment Advisory Services offered through Kestra Advisory Services, LLC (Kestra AS) an affiliate of Kestra IS. CD Wealth Management and Bluespring Wealth Partners LLC* are affiliates of Kestra IS and Kestra AS.  Investor Disclosures: https://bit.ly/KF-Disclosures

*Bluespring Wealth Partners, LLC acquires and supports high quality investment adviser and wealth management companies throughout the United States.

You’ve inherited an IRA. What happens next?

Prior to December 2019, if you inherited an IRA from someone who was not your spouse, you were able to take distributions from the inherited account based on your life expectancy and not the original owner’s, a strategy commonly known as a Stretch IRA. The benefit of using a Stretch IRA was that the beneficiary could stretch the taxable distributions over their lifetime, which potentially meant a lower tax bill. The rules were the same for a Roth IRA; even though the original Roth IRA owners did not have required minimum distributions, their heirs were required to withdraw the funds according to their life expectancy.

Under current tax law, the inheritance of an IRA is tax-free, but you are still required to take distributions from the account that may be taxable. When you inherit an IRA, you are free to withdraw as much of the account as you want at any time without penalty.

Stretch IRA rules changed with the passage of the SECURE Act in December 2019, however. The SECURE Act mandates that an IRA inherited from someone who is not your spouse must be depleted by Dec. 31 after the 10th anniversary of the owner’s death. For example: If you inherit an IRA this year, you will have to distribute the balance of the account by Dec. 31, 2032.

Spousal IRA beneficiaries have different rules and more options to consider when taking their required minimum distributions. As the chart below indicates, there are exceptions to the 10-year rule, such as a surviving spouse, a disabled or chronically ill person, a minor or a person who is not more than 10 years younger than the IRA account owner. These beneficiaries are not obligated to empty the IRA within 10 years but still must take their distributions. If you fall into the eligible designated beneficiary category, the inherited IRA can be taken over the life of the beneficiary (except in the case of minors). If you are a non-eligible designated beneficiary, such as someone who inherits an IRA from a parent, the 10-year rule applies.

Chart explaining the beneficiary categories in the SECURE Act of 2019

What does this mean for me?

If you inherit an IRA and are a non-eligible beneficiary, planning for taxes and how you take distributions becomes more important. Under current law, you have 10 years to deplete the entire value of the IRA. However, if you wait until the 10th year to take the entire distribution and the IRA has experienced significant growth, you may be in the highest tax bracket, having to pay almost 40% in taxes for that one year. If you take distributions over the 10 years, you may incur less tax on an annual basis, and the potential growth of the IRA may be minimized as well. As we have previously written, another way to potentially reduce taxes is to transfer up to $100,000 from an IRA directly to a qualified charity if you are 70 ½ or older.

The IRS has proposed new regulations to the SECURE Act which have yet to be approved. The proposed changes state that if you inherit a traditional IRA from someone who has already passed their required beginning date and had been taking mandatory distributions, you cannot wait until the 10th year to withdraw the money. Instead, under the proposal, you would be required take annual distributions in the first nine years and the balance in the 10th. A tax liability would occur each year from the required distribution.

The SECURE Act has brought Roth conversions into the conversation for those who want to help their heirs avoid a large tax bill. Roth conversions transfer the tax liability to the older generation, because taxes are paid when the conversion is done. If the conversion is done early in retirement, when income is low, the tax bracket may be lower and thus, lower taxes would be paid on the Roth conversion. Then the money can grow tax-free inside the Roth IRA and when the owner passes away, the money can continue to grow tax-free for an additional 10 years.

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So, what can we learn from all this? While the SECURE Act effectively eliminated the Stretch IRA, it did not eliminate the need for proper financial planning when it comes to taking distributions from an inherited IRA. We will continue to closely watch proposed legislation about the 10-year rule for inherited IRAs and ensure that our clients take the necessary distributions, if mandated by law. In the interim, we continue to analyze your situation and help you determine what makes the most sense for taxes, investments and your overall financial plan for IRA distributions.

From a portfolio perspective, we continue to adhere to the tried-and-true disciplines of diversification, periodic rebalancing and looking forward, while not making investment decisions based on where we have been. As we say each week, it is important to stay the course and focus on the long-term goal, not on one specific data point or indicator. In markets and moments like these, it is essential to stick to the financial plan.

Remember first and foremost that panic is not an investing strategy. Neither are “get in” or “get out” — those are just gambling on moments in time. Investing is about following a disciplined process over time.

At the end of the day, investors will be well-served to remove emotion from their investment decisions and remember that over a longer time horizon, markets tend to rise. Market corrections are normal, as nothing goes up in a straight line. Making market decisions based on what might happen may be detrimental to long-term performance. The key is to stay invested and stick with the financial plan. Markets go up and down over time, and downturns present opportunities to purchase stocks at a lower value.

It all starts with a solid financial plan for the long run that understands the level of risk that is acceptable for each client. Regarding investments, we believe in diversification and having different asset classes. The best option is to stick with a broadly diversified portfolio that can help you to achieve your own specific financial goals — regardless of market volatility. Long-term fundamentals are what matter.

Sources:  Kiplinger, Investopedia, Forbes, ThinkAdvisor

Promo for article on the formula for wealth

This material contains an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources.

Using diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss of principal due to changing market conditions.

Past performance is not a guarantee of future results.

The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation.

Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment Advisory Services offered through Kestra Advisory Services, LLC (Kestra AS) an affiliate of Kestra IS. CD Wealth Management and Bluespring Wealth Partners LLC* are affiliates of Kestra IS and Kestra AS.  Investor Disclosures: https://bit.ly/KF-Disclosures

*Bluespring Wealth Partners, LLC acquires and supports high quality investment adviser and wealth management companies throughout the United States.

Should investors own bonds in today’s market?

The bond market has been anything but sleepy to start the year. With inflation at its hottest level since the early 1980s and the Federal Reserve raising rates, the U.S. Treasury index had its worst start ever to the year. Historically, bonds provide diversification from equities during volatile markets. However, during the first quarter of 2022, bonds declined in tandem with stocks and have not provided the portfolio with the cushion that investors expect.

With more rate hikes coming this year, investors may be tempted to avoid bonds altogether. Historical returns suggest that even with the current headwinds of inflation and rising rates, bonds can still provide positive returns in an environment of rising interest rates.

What has caused bond prices to decrease?

Bond prices have an inverse relationship with interest rates. When interest rates rise, bond prices fall — and vice versa. For example: If interest rates are 0% and someone offers you a bond that has a 5% coupon, you would have to pay a premium to get the 5% income. However, if interest rates were to rise to 2% and that same person offered you the same bond, you would have to pay a smaller premium, because the price of the bond falls as the interest rate rises.

The Russia-Ukraine war has led to higher energy prices and higher commodity prices for wheat and corn. These increases put additional pressure on the Federal Reserve Bank to stabilize inflation and economic growth. As a result, selling in the bond market is taking place as the market anticipates the Fed raising rates an additional six times this year.

Amid such headwinds, why own bonds?

Bonds have historically provided an important buffer for portfolios during stock market downturns and corrections. In February and March of 2020, the S&P 500 index fell by almost 33% in a short period of time. As stocks fell, the Bloomberg U.S. Aggregate Bond Index rose, finishing 2020 up more than 7%. Bonds also have provided positive returns even as rates were being raised. During two of the most recent hiking cycles, both U.S. Treasuries and municipal bonds saw strong gains on a total return basis, as seen in the chart below.

How Bonds Have Performed When the Fed Was Raising Rates

Chart showing how bonds have performed when the Fed raised interest rates
Past performance is no guarantee of future results. Indexes are unmanaged and not subject to fees. It is not possible to invest directly in an index. U.S. Treasury Index, U.S. Municipal Bond Index. Source: Bloomberg

The longer the maturity of the bond or bond fund, the more sensitive the bonds are to interest rate changes. Diversification across maturities, sectors and credit risk can help mitigate portfolio risk during this more than volatile time in the bond market. For those who own individual bonds, rising rates present opportunities to purchase newer bonds as the current bonds are either called or redeemed. New bonds bring higher levels of interest income and potentially greater returns. In other words, rising rates may create some short-term pain but ultimately translate into longer-term gains.

So, what can we learn from all this? While every rising rate cycle may be different, fixed income has had positive returns most of the time during years of rising rates. Last week, we saw the yield curve invert for the first time since 2019. Remember, a recession is not a foregone conclusion. Even if a recession occurs in the next six months to two years, the stock market and bond market may continue to experience positive returns.

From a portfolio perspective, we continue to adhere to the tried-and-true disciplines of diversification, periodic rebalancing and looking forward, while not making investment decisions based on where we have been. As we say each week, it is important to stay the course and focus on the long-term goal, not on one specific data point or indicator. In markets and moments like these, it is essential to stick to the financial plan. Remember, first and foremost, that panic is not an investing strategy. Neither are “get in” or “get out” — those are just gambling on moments in time. Investing is about following a disciplined process over time.

At the end of the day, investors will be well-served to remove emotion from their investment decisions and remember that over a longer time horizon, markets tend to rise. Market corrections are normal, as nothing goes up in a straight line. Making market decisions based on what might happen may be detrimental to long-term performance. The key is to stay invested and stick with the financial plan. Markets go up and down over time, and downturns present opportunities to purchase stocks at a lower value.

It all starts with a solid financial plan for the long run that understands the level of risk that is acceptable for each client. Regarding investments, we believe in diversification and having different asset classes that allow you to stay invested. The best option is to stick with a broadly diversified portfolio that can help you to achieve your own specific financial goals — regardless of market volatility. Long-term fundamentals are what matter.

Sources: Kestra Financial, Bloomberg

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This material contains an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources.

Using diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss of principal due to changing market conditions.

Past performance is not a guarantee of future results.

The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation.

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