2023Q2 Quarterly Client Newsletter

July 2023

Dear Clients,

The market’s good performance has continued as the rate of inflation growth has slowed and the economy and job numbers have remained strong. The biggest news is that the Federal Reserve has paused interest rate hikes. The interest rate hike cycle probably has been the number one drag on market performance since 2022 (with recession fears a related close second). While the Fed has signaled it may raise rates a few more times, both the inflation data and the Fed’s guidance point to only 1 or 2 more hikes in the coming months.

Nothing in the economic data points toward a recession being imminent. If you remember, we have seen steady calls for a recession since the start of 2022. At first, experts predicted a recession in early 2022, coinciding with the start of the interest rate hike cycle. When that didn’t materialize, calls for a recession were pushed out to the end of 2022 or beginning of 2023. Once again, we didn’t see a recession. Most experts are now (somewhat grudgingly) admitting we likely will not have one. We may still see a few sporadic calls for a recession in 2024, so don’t be surprised. By now, most people realize that those who have been predicting a recession since 2022 may not have the best economic models.

As I’ve pointed out in past letters, when the Fed raises interest rates, some sectors of the economy may slow, such as real estate or the auto market. But higher rates also add interest income, which stimulates the economy. The different sector effects come close balancing out each other. Rate hikes by themselves do not slow the economy very much.

Looking forward, there are still no signs of a recession. Job growth remains strong with the prime age labor force participation rate almost at an all-time high. Household financial health measure are all looking good. Corporate earnings are on track to continue to grow in the second half of the year, and corporate revenue and earnings guidance has all been better than expected.

While the past two years have been a bumpy ride and the market is still not back at its all-time high, I think it’s important to keep things in perspective. It’s human nature to view each new market high as the new amount of money you “have” and then benchmark future returns against that. Despite the market still being about 10% away (as of this writing) from its previous high, if you look back to 2019, the market has returned almost 75%!

In fact, during the market’s deepest drop in 2022, it was still up about 40% from the start of 2019. Believe it or not, this was still within the range of projected historical returns that I use for clients’ retirement plans (about 10% return per year on average for stocks). This longer-term comparative perspective is one of the main reasons (along with strong economic data) that I was not too concerned with the negative returns in 2022. The real economy was doing fine and the dip in the market, although difficult from a psychological perspective, was not large enough to throw your retirement plans off track.

I Series Bonds Update

Finally, a note on I Series Bonds. I Series Bonds are bonds whose interest payments change with inflation. If inflation is high, the bonds pay a high interest rate. At the peak of inflation, I Series Bonds were paying interest rates of over 11%. Now that inflation has fallen, the interest rate I Series Bonds pay has fallen as well. It is currently approximately 4.3%. We are continuing to see inflation trend down. The next time the I Series Bond interest rate resets, it wouldn’t be surprising if the rate falls again.

Right now, you can get better interest rates on regular Treasury bonds, CDs, money market accounts, and even some savings accounts. It no longer makes sense to put money into I Series Bonds. For clients with existing I Series bonds, remember that if you sell the bonds before five years you forfeit the last six months interest payments. It may be best to wait until the interest rate resets to about half the current rate that CDs offer (around 3%), wait six months, and then sell your I Series Bonds, moving that money into CDs (or similar). This is what I plan on doing with my personal I Series Bond holdings.

2023 Performance to Date

For 2023 all market returns have been positive so far. The US stock market led the way with a return of a little over 16%.

Bond market returns were all positive as well, although less than stock market returns.

US Stock Market: 16.18%
Foreign Developed Market: 11.14%
Emerging Markets: 4.76%

US Total Bond Market: 2.42%
International Government Bonds: 3.72%
Investment Grade Corporate Bonds: 3.32%
Inflation Protected Bonds: 1.96%
Real Estate: 3.43%

(All the returns listed are those of the ETFs we use.)

Because all client portfolios are individuals your portfolio will contain a combination of most or all the investments listed as well as others, so its performance will be different. Please see your statements for your exact portfolio details.

Reminder

Although you are all familiar with my investment management and retirement planning services, I want to take time in this newsletter to remind you of the other financial services I offer.

These services are available to clients as part of their comprehensive fee. I work with clients to build monthly budgets, help pick the best credit card offer, and give advice on their existing company retirement plans. Almost anything related to finance or money is something I’m available to help you with. I’ve even helped clients with non-financial things, such as picking out a new car. I enjoy helping clients, so please do not hesitate to give me a call. Shoot me an email or text if there is any way I can be of assistance.

How is ben invested?

Here is how my personal portfolio (my SEP IRA at FOLIO Institutional) is positioned for 2023

My investment breakdown is as follows:

• 31% in our Capital Appreciation Folio
• 32% in our Concentrated Stock Folio
• 31% in our Aggressive Growth ETF Portfolio
• 1% in Real Estate (Vanguard Real Estate Index, VNQ)
• 1% in Emerging Market Stocks (Vanguard Emerging Market Index, VWO)
• 1% in Investment Grade Bonds (Vanguard Total Bond Market Index, BND)
• 1% in Inflation Protected Bonds (Barclays iShares TIPS Index, TIP)
• 1% in Municipal Bonds (iShares S&P National AMT-Free Municipal Bond Index, MUB)
• 1% in International Investment Grade Bonds (Vanguard Intermediate Term International Bond Index, BNDX)

As you can see, I have a stock-heavy portfolio. I believe our strategies for investing offer the best opportunity for long-term wealth creation.

Note: I also have an older IRA account opened during grad school. That account is invested in one stock, Philip Morris International (PM).

Sincerely,

Performance Disclosure:

The performance data presented prior to 2011 represents a composite of all discretionary equity investments in accounts that have been open for at least one year. Any accounts open for less than one year are excluded from the composite performance shown. From time to time clients have made special requests that SIM hold securities in their account that are not included in SIMs recommended equity portfolio, so those investments are excluded from the composite results shown. Performance is calculated using a holding period return formula, reflects the deduction of a management fee of 1% of assets per year, and reflects the reinvestment of capital gains and dividends.

Performance data presented for 2011 and after represents the performance of the model portfolio that client accounts are linked too, reflects the deduction of management fees of 1% of assets per year, and reflects the reinvestment of capital gains and dividends.

The S&P 500 and Dow Jones Developed Market Index are used for comparison purposes and may have a significantly different volatility than the portfolios used for the presentation of SIM’s returns. The term “global stocks” refers to the Vanguard Total World Stock ETF (VT).

A copy of our most recent Form ADV Part 2A and Part 2B is available upon request.