Happy New Year! And welcome to 2023. I will be a little longer than usual in this year's update and touch on three points. The first is a tool some of you utilize called “Ready to Check-In?”, which I send out monthly. Second, there is a lot of noise around higher interest rates and inflation so let's put at least some of that into perspective. Lastly, I want to point out that although the media makes this downturn sound different from previous Bear Markets, it is likely not based on history. We need to have a plan and stay with the plan.
Consider using that 'Ready to Check-In' feature each month, or at least periodically, and it can help you keep a long-term perspective. After answering two straightforward questions that do not change the report, it will show you how often your specific portfolio has had positive outcomes over one year. Then you can click and see the same answer based on three years, and then again based on five years.
Here's what it might look like:
Using this example, the portfolio above has a positive return 95% of the time when looking at it from a three-year perspective, and 100% of the time when looking at it from a five-year perspective. The other reality is this portfolio does lose money in one out of five years, which is why 2022 returns should not be a surprise, nor is it the end of the world. Next time you receive the Check-In email, consider answering the two questions and see how your portfolios have done over those three-time frames. We have quite a few portfolios that have not lost money in the three-year period of time. See how yours has done over these three-time frames, or call me, and I will show you via a Zoom call.
We try to keep you focused on a long-term perspective because much of the media — the talking heads on TV and the radio, financial channels, and so-called investment experts — seem to focus and report on short-term movements. We are not invested based on just one year but over your lifetime. And this is why we want you to have your investments invested based on “Time and Purpose.” Which summarized means to have a Now, Soon, and Later Bucket and invest assets in each bucket accordingly.
As we enter 2023, let's look at interest rates and inflation. I see these as one positive, and one adverse event from an investment perspective in 2022. As you likely know, most financial events are connected, and these two events are very connected. Adding some context and putting them into perspective can help guide us as we make long-term financial decisions together.
One Positive
Interest rates went up. This is positive for two reasons. 1) According to the Security Industry and Financial Markets Association (SIFMA), about 125 Trillion Dollars are invested in Bonds globally, while equities seem to have about the same amount. This means a lot of money was invested in interest-bearing instruments with low rates of return, close to zero in some cases, which was not a healthy investment scenario. 2) The interest income from investing 125 Trillion dollars in bonds has more than doubled in some cases, creating an income stream for many investors that did not exist a year ago. I realize this is another perspective, but in my opinion, higher interest rates are a net positive for most of us. The yield for ten-year Treasury Rates has gone from 1.5% to 3.75% based on YCharts data from January to the end of December. Having rates go up so fast was disruptive and painful, but we needed to get them normalized at some point, and doing it faster versus over a few years might have been the easier route in the long term.
One Negative
Inflation went over 7%. As investors, inflation is a significant risk. It is common to think that our major risk is the market going down, which it is, though inflation is also a significant risk. Inflation is likely more devastating over time to maintaining and growing wealth if we have a diversified portfolio, at least in my opinion. The problem with inflation is it is tough to see. We can easily look at our statements and see how much money we made or lost over a period of time. Inflation is not nearly as obvious when it comes to our buying power. Using the U.S. Inflation Calculator, and using $100,000 in 2000 as the benchmark, you can see the Cumulative inflation rate is 72.9%. That means $172,000 buys the same thing $100,000 did in 2000. That wasn't when our grandparents were children or when we were babies. That was 2000, just over 20 years ago!
To summarize, I expect 2023 will be another year with a lot of noise, volatility, and uncertainty. To help manage all of these, we have your portfolio(s) invested based on when you need the funds and what you need them for - Time and Purpose. If you need the funds in ten or more years, you will likely have more growth-oriented investments. We use seven core asset classes, and the amount you have invested in each is based on your risk tolerance and timeline to provide diversification and growth.
If you have visited my office, you might have noticed that I have framed the Time Magazine cover for October 1974 on my wall. The headline is: "Inflation, Recession, Oil." This is a reminder that the noise is the same 50 years later, and the best strategy is to have a plan and then follow the plan.
Have a prosperous and healthy New Year.
Call me if you have any concerns or questions.
Tim Clifford
Cell 317-674-6710
DISCLOSURE - All written content on this article is for information purposes only. We utilized ChatGPT and other sources for this article. Opinions expressed herein are solely those of Core Wealth Consultants. Material presented is believed to be from reliable sources, however, we make no representations as to its accuracy or completeness. Core Wealth Consultants, LLC a Registered Investment Advisor in the States of Florida, Indiana and Michigan. You should always consult an attorney or tax professional regarding your specific legal or tax situation. Diversification and asset allocation does not assure or guarantee better performance and cannot eliminate the risk of investment loss.