Fidelity for the Win!

This week I had the great privilege of spending several days with financial advisors from like-minded firms located throughout the US. We shared ideas, best practices, and digested thoughtful material. We had several folks speak on a variety of topics; however, a gent from Fidelity really stole the show. He didn’t skirt around any subject matter but rather took the Quint approach, dialing in and hitting hard topics head on. I always appreciate candor! While I won’t rehash the entire 90 minute presentation, I thought I would share 5 of my biggest takeaways.?

1.) Goodness, are Pundits Wrong – While it’s easy to look over the economic landscape these past few years and realize how many folks have gotten the Fed’s action wrong, I would almost give them a pass considering the crazy environment we’ve been in. While the Fed has telegraphed their moves quite well, few if any have been accurate in their prediction of where interest rates have been heading or where they would be. Again, it’s easy to write off this recent cycle as an anomaly; but, surely, pundits have been accurate in their forecasts of interest rates in the past, right? Wrong! You can see from the graph below, that goes back to 2002 and charts the median predictions of professional forecasters along with the actual rate cycle that ensued. Basically, the graph shows us that pundits are wrong a staggering 90% of the time. Take this into consideration the next time you read, listen or hear of someone predicting where rates will be in the next year. While there may be a small minority getting it right, odds are, as in the past, more will be deathly wrong.?

2.) Rebalancing Matters…big time – One of our core tenets at Joule is portfolio rebalancing, as we did near the end of last year and the previous year. The idea is really quite simple, you sell areas that have advanced beyond your desired allocated amount and buy areas that have declined. In essence, while you’re not timing the market, you are proceeding with a systematic method by which you reduce exposure to areas that are becoming overvalued and invest in undervalued areas. While I’ve known and proceeded with this as a foundational strategy, the following chart shares a much more dramatic picture of just why we do this. Compared to a buy and hold portfolio that does not undergo rebalancing, a monthly, quarterly or annual rebalancing adds value while a ‘threshold rebalancing’ target could add almost 50% more return over and above the 5.36% 60/40 return. Stats don’t lie, and this is a wowzer. Needless to say, you’re going to immediately begin reviewing our rebalancing in a much more statistical fashion. If you’re a casual reader and not a client, allow this chart to be a wake up call that periodic portfolio rebalancing matters and matters big time.?

3.) Rising Rates Crush Market Returns….not so fast – In 2022 there’s no question that the transitional shock of raising rates hit markets. In fact, I would argue that the speed at which our Fed raised rates and the disregard for any financial consequences, such as bank liquidity issues, was a direct catalyst for not only our 2022 bear market but the banking crisis we continue to navigate. That said, historically the idea that persistent higher rate hikes always result in lower returns is simply untrue. The following chart shows the S&P 500 annual returns going back to 1950. However, I specifically want to review the 1970s and early 1980s. While 1973 and 74 saw a considerable bear market, stocks adjusted and proceeded to advance 5 out of the next 7 years while the Fed Funds Rate, led by Paul Volker, reached a high of over 20%. The conclusion one can draw on the returns is that markets dislike surprises, but they reward consistency and real action to fight inflation. This chart was eye opening to me and one I had not considered. The reality is that markets advanced quite a bit at the same time as interest rates and when inflation topped and began to subside, the market fuel was only accelerated. The summary for me is that rates don’t matter as much as tackling inflation. No, I’m not inviting J. Powell to dinner just yet, but I’m no longer as disappointed as I have been.?

4.) Investors Buy High, Sell Low – We’ve known this and have written about it extensively. Over time, investors tend to follow their emotions with regards to their portfolios. Over the years, I’ve been able to relay personal evidence of this when I hear from folks who want to add risk during times when it's better to be looking at reducing, and reduce risk when it’s probably better to be adding. The chart below blew my mind as it plots the actual contributions of 401k holders at various market levels. At first glance, you may see the correlation between market return and deposits and consider this to be normal; however, upon pondering further, you’d be wrong. Consider when a person begins working and commits a specific % from earnings to be contributed to a 401k. If someone were to leave this % alone, it would, at minimum, result in a consistent dollar amount. However, more than likely over time, this would increase steadily due to wage adjustments that may correlate with inflation. Again, if someone left the contribution limit alone, the line for contributions would be flat; however, more than likely, it would show a slow and steady increase due to an increase in wages. What you see, however, is that when markets decline, people do the exact opposite and rather than add more or even remain consistent, they begin reducing those contributions and only increase them when the market seems to bottom and head higher. Again, the idea of buying low and selling high is great in theory, but the reality is that most folks pursue the exact opposite.?

5.) Market Timing based on emotion is very costly – It’s one thing to know that moving in and out of the market in an emotional manner hinders long term performance, it’s another to see the difference visually. The chart below tracks average retail investor portfolios that move in and out of stocks over time, compared to a systematic 60/40 allocation with periodic rebalancing. The difference is staggering with an approximate 25% drop in long term performance - meaning if someone would have achieved $1MM in portfolio value, they would only be around 750k. You have to ask yourself if 250k is worth it. Better to be properly allocated from the beginning with rewards to your risk tolerance, in my opinion, and avoid the emotional moves altogether. I’ve always known how detrimental this was, it’s powerful to see it in picture form.?

In our firm we don’t try to be all things to all people.?We actually do a few things very well and will keep doing them. First, we take a disciplined approach to financial and retirement planning by making sure goals are well established, finances are reviewed and an allocation is in place that will give a client the best probability of success over the long term.?

We monitor and make thoughtful adjustments as necessary. While we will never engage in broad based market timing, we will pursue overweights and underweights based on macro headwinds, geopolitical opportunities or general valuation.?Sometimes, we’ll get these moves right, other times wrong, but we’re always looking for opportunities rather than allowing the emotional ups and downs to pilot our portfolio.?

Finally, we’ll work very very hard to ensure that our clients stay the course, feel confident in their plan, rest easy with their allocation and know that we’re working hard so the client doesn’t have to. Day in and day out we’re reviewing positions, revisiting our process and refining our services. We will continue to invest in our staff and the resources needed to serve you, our clients.?

If there is one thing that has remained consistent over my 23 years in the business, it is the uncertainty about the future. No one has a crystal ball, and if they tell you they do run the other way. Rather than guessing, regardless of the environment, we will always take a thoughtful and consistent approach to realizing client goals.?

Disclosures

Joule Financial, LLC is registered as an investment adviser with the SEC. The firm only transacts business in states where it is properly registered, or is excluded or exempted from registration requirements. Registration as an investment adviser does not constitute an endorsement of the firm by securities regulators nor does it indicate that the adviser has attained a particular level of skill or ability. A copy of Joule’s current written disclosure brochure filed with the SEC which discusses among other things, Joule’s business practices, services and fees, is available through the SEC’s website at: www.adviserinfo.sec.gov

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This does not constitute an offer or solicitation. This information should not be considered investment advice. Opinions expressed reflect the judgment of the author and are current opinions as of the date appearing in this material only. While every effort has been made to verify the information contained herein, we make no representations as to its accuracy and it should not be regarded as a complete analysis of the subjects discussed. Past performance does not predict future results. Content should not be construed as legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation. All investing involves risk, including the loss of some or all of your investment.