Deciding how to invest your savings is one of the most important decisions you will make. Fortunately, successful investing doesn’t need to be complicated. You can make good investment decisions if you understand a few simple concepts and have a financial plan. The two most important concepts investors need to understand are risk vs. reward and asset class diversification.
Risk vs Reward
Investment options range from “very safe” to “very risky”. Riskier investments usually offer the chance for higher returns over the long run. Riskier investments also have a greater possibility of loss. Academic research shows that the most effective way to invest is by blending assets of different risk levels. This process is called diversification and is a key part of building a high-quality investment portfolio.
The three major asset classes appropriate for most investors are stocks, bonds, and cash.
Cash is usually considered to be the safest option, along with debt obligations of the US Government, which are often referred to as “Treasuries”. Cash, and mutual funds that invest in cash equivalents like money market funds, have the lowest risk. These kinds of investments also provide lowest potential returns. Often the return on cash is not even enough to keep pace with inflation. Keeping too much cash in your investment portfolio can cause you to lose real purchasing power over time.
Investment grade municipal and corporate bonds have more risk but are still generally considered safe investments. Bonds represent the debt of a company. Bonds are also known as “fixed income” investments. When companies borrow money, they issue bonds. Investing in a bond is the same as loaning money to the company that issued the bond. Bond investors expect to earn interest on their investments, and to have the loan principal paid back at some point in the future. If the company that issued a bond has financial difficulties, they may be unable to make the promised principal and interest payments. This risk is called default risk or credit risk. Investing in a fixed income mutual fund instead of individual bonds can help protect against default risk. Bonds are usually less risky than stocks, but riskier than cash.
Stocks, often called “equities”, are riskier than bonds, but also offer the chance for higher returns over the long run. Stocks represent ownership of a company. When you own a stock, you own a small slice of that company. Some investors choose to buy individual stocks, while others buy mutual funds or exchange traded funds. When you invest in an equity fund, you own shares in the fund and the fund may own stocks. Stocks offer higher potential returns, but also come with more risk than investing in bonds or cash.
There are some kinds of financial instruments with much greater risk than stocks, such as derivatives, futures, and options. These high-risk instruments are not appropriate investments for the vast majority of individual investors.
Which Should You Choose?
The mix of stocks, bonds, and cash is also known as your “asset allocation”. A high-quality investment plan makes use of all three of these asset classes. The right asset allocation depends on factors such as your savings goals, your time horizon, and your risk tolerance. Your financial plan should incorporate all these factors. The right asset allocation is ultimately the one that best supports your financial plan and maximizes the probability of successfully achieving your financial goals.
Matthew A Treskovich | CPA/PFS, CITP, CMA, CFP®, AEP®, MBA, CLU, ChFC, FLMI
Chief Investment Officer
The month of April was much better for investors than March had been. After what was a horrible month to endure, the market began to cautiously view April as a month of transition amid this crisis. Even though unemployment claims continued to rise, and states remained closed, the markets began to recover. Much of this had to do with COVID-19 developments and a clearer economic picture.
To start the month of April, infection rates and hospitalizations were growing across the country. It took a couple weeks to see the effects of social distancing on the medical statistics, but near the end of the month, key statistics were declining. At the same time, over seventy companies around the world were pushing drug treatments or vaccines through various stages of trials in order to have a toolbox to fight the virus. Nearing the end of April, several promising reports were published about different drugs suggesting treatments and vaccines may be closer.
As the viral statistics began to decline, the economic fallout became clearer through April. The number of unemployed individuals did rise to over 30 million, the highest since World War II. First quarter GDP came in at -4.8% and the second quarter is likely to be negative as well suggesting the country will officially be in recession for the first time since the financial crisis. While this information would normally be reason for concern, the markets rallied through the month.
Investors were rewarded for their patience as the month of April was the best month in the markets since 1987. The S&P 500, the Dow Jones Industrial Average, and the NASDAQ all finished up over 11% for the month. The markets did not ignore the negative economic data, but they focused on what was being done to combat the virus and support the economy. The Federal Reserve kept interest rates low and continued to support the bond markets by buying bonds. Congress and the President replenished the PPP funds and provided more funding for hospitals and virus-related aid. Finally, a few governors began reopening or publishing guidelines on how to restart the economy in their respective states.
While April was a great month, we want to remind everyone that volatility is likely to remain. It is too early to know if the worst is behind us or if more waves will come. It is likely that the second quarter economic data will be much worse than the first quarter, but also likely that the market will continue to look past the current data for the success of the reopening. Add this to a presidential election year and there is bound to be volatility.
Michael Scott | MBA, CFA
Senior Portfolio Analyst
Having spent the better part of two decades helping clients create, review, and assist with changes to their estate plans, I’ve seen and heard quite a few scenarios when dealing with estates. Below are a few tips to help you through the process of estate planning. Following these simple steps will be instrumental when visiting with your financial planner and estate attorney to draft, review or change your estate plan.
Making a Will
This may sound trivial to some, but not having a Will is like not brushing your teeth and then hoping your teeth look great for the rest of your life. It’s possible, but not likely. A Will can be a simple document that explains where you want your assets and valuables to be sent after you pass. Keep in mind that retirement accounts have their own beneficiaries, and these instructions may be different than who or where you want other items to be sent such as heirlooms or cash from bank accounts. A Will can also create trusts after your passing to protect assets and direct where and when they are to be distributed. This is especially important if you have minor children.
Have you recently had a child? Been married or divorced? Are there children involved? Not only might you update everyday items like cell phone users or address changes when you move-for estate planning, some life events can make your current plan useless and require change. Consider the example of a second marriage with children. You marry someone with children, and you have your own. In some states, when you pass, your assets go straight to the spouse. The spouse may have a plan to leave their assets to their children thus leaving your children out of any inheritance. Having your own plan in place to ensure your children receive something is paramount and far too often overlooked.
Consider Health Care Decisions
Most Floridians remember a case in Tampa where a woman was on life support for years because the husband and her parents argued over the woman’s directives. The battle even ensued on national news. Having a Living Will and Healthcare Surrogate can stop those types of situations from occurring because the Living Will and the Healthcare Power of Attorney will know which decisions to make as well as end of life arrangements, including organ donation.
If you’re the sole proprietor or large shareholder of a business, you should have a plan on how to sell your shares or business. Do you have a buyout option in place? What about life insurance agreements? Many times, the spouse of the deceased isn’t involved in operations and may not want the burden to take over. The other owners would probably feel the same. A carefully crafted agreement would easily explain how the business would continue to run or how to sell those shares in the event of a death.
Understanding The SECURE Act
The SECURE Act, signed into law December of 2019, changed estate plans in a major way. If your estate plan was created before December of 2019, a review of the plan with your estate attorney is necessary to ensure your wishes can still be followed given the new rules on retirement assets. Keep in mind that certain laws are set to expire in 2025, which is why I recommend reviewing your estate plan every few years. Not only does life happen, but estate laws change too.
Organize Your Life
Finally, keep your estate documents in a safe place, maybe a cloud repository to keep copies of important documents to review when needed, but allow the attorney or bank via safe deposit box to hold originals. Also, if you are the only one with knowledge of your usernames and passwords to bank accounts, investment accounts, etc., provide your spouse or family the know how to obtain that information when necessary. When in doubt about any of the above steps, ask your financial planner or trusted fiduciary. We’re here to help.
Derek M Oxford | CFP®, AEP®
Across the globe, the pandemic situation seems to be improving. Many nations continue to struggle with the economic fallout, but case counts and mortality rates hint that things are getting better. In the United States, the first wave of COVID-19 is waning, and many states are looking toward reopening their economies. Public health authorities remain concerned that a second wave of the virus will emerge. Meanwhile, investors are contemplating the possible shape of the recovery. The shape of the economic recovery will depend on how willing and able consumers are to return to their old spending habits.
Employment and Consumer Spending
Prior to the COVID-19 crisis, unemployment was at 50-year lows. Widespread unemployment is an unfortunate effect of the public health measures used to contain the virus. Economic data shows that tens of millions of Americans have already filed for unemployment benefits. The unemployment rate is expected to peak at 20% or perhaps higher. Wise investors know that the employment situation is “old news” as far as the markets are concerned. It is very possible to see the market go up on news that is “less bad” than expected, even while the headlines are bleak.
In times of crisis, Americans have historically reacted by saving a bit more. Many retailers, restaurants, and most entertainment venues are now closed, increasing the savings effect dramatically. In March of 2020, the personal savings rate registered the largest one-month increase on record, and now sits at the highest level in nearly 40 years. The last time the personal savings rate was this high was November 1981. While it is possible this increase in savings is a “new normal”, it is much more likely Americans will rapidly return to their free-spending ways. Using some “walking around sense”, it is not hard to see that most places that people can shop, are full of people shopping. New Year’s Resolutions usually expire a few weeks into January. This new trend of saving will probably last about as long as it takes businesses to reopen, and then consumers will hit the stores with cash to spend.
This Recovery Brought to You by the Letters V, U, L, and W
Investors and the markets are now contemplating what shape the recovery will take. The four most likely possibilities are described as being in the shape of a V, a U, an L, or a W.
- A V-shaped recovery is still possible, but rarely in history is an economic recovery as rapid as the decline.
- A U-shaped recovery is also possible, if fear of the disease keeps consumers home and businesses closed even after restrictions are lifted.
- For much of March, the markets were concerned the recovery would take the shape of an L, a sharp decline followed by a long period of stagnation. The swift public health response, and massive relief and stimulus, make this unlikely.
- If a second wave of the virus emerges, the recovery might take the shape of a W, especially if parts of the economy need to be closed again.
The good news for investors is that government officials and businesses now have much more experience with containment than they did a few months ago. If a second wave emerges, this experience will make future containment efforts more effective and less expensive. In the meantime, sentiment among consumers and businesses alike hint that the recovery will most likely be somewhere between a V and a U.
It is too soon to tell what shape the recovery will take, but we do know that the economy and the markets will recover. We also know that old habits die hard, and US consumers are very likely to continue to spend as they have in the past. For investors in great American businesses, the future is still bright.
Matthew A Treskovich | CPA/PFS, CITP, CMA, CFP®, AEP®, MBA, CLU, ChFC, FLMI
Chief Investment Officer
As we settle into our 2nd month of social distancing, we have had time to reflect on what has occurred since the start of the crisis. As with all major economic and global events, we are constantly trying to understand how we got to this point and in turn, what does history provide as a roadmap of what to expect moving forward.
Let us be clear, we are in unprecedented waters and this sudden and immediate draw down of the global economy due to a pandemic is certainly a unique event that we have not encountered in our lifetime. From an economic standpoint, what makes this event so unique is that we are experiencing both a demand and supply shock to the global economy. But while the circumstances relating to the sudden shutdown due to a pandemic might be unchartered, we can turn to history to find a few other examples of when we had both a demand and supply side shock.
Over 100 years ago, the world was faced with another pandemic, the Spanish Flu. Some of the same measures that we are currently putting into place today were used back then as well. Social distancing, wearing masks, etc. In addition to the pandemic, America was also dealing with the end of WWI and the return of troops back from Europe. We saw a gradual return to normal following the control of the pandemic and consumer confidence took months to take hold where consumers were finally comfortable enough to go about their daily lives. The pandemic slowed down the post-war recovery but what followed from that pent-up demand and supply chain led to the roaring 20’s and a period of great economic prosperity.
In the early 1940’s this country was thrust into WWII. During the build up to the war and over the course of the conflict, over 11% of our population was sent off to fight. This turned consumers into soldiers and the focus of the country went toward the war effort. One of our responses to this crisis was to turn to a non-traditional workforce, women. Additionally, capitalists and manufacturing companies were forced to repurpose their efforts to making necessities like tanks, airplanes, and guns. Similarly today, we are seeing a major shift in the workforce. Through modern technology, alternative workforces are being created through virtual offices, curbside pickups, home delivery services, etc. And of course, we are once again seeing American ingenuity in repurposing some of our manufacturing efforts toward the production of medical equipment, personal protective equipment and sanitizing systems.
The third example in recent history was the 1973 oil crisis. The crisis exposed our dependence on foreign oil and its control on our society. It left Americans waiting hours in line for gas, disrupting productivity and severely slowing down the US economy. This crisis ultimately put us on a path toward securing energy independence and moving from an oil importer to an oil exporter. Similar to the oil crisis, this virus has put a spotlight back on our dependence of foreign manufacturing for critical goods, specifically in the area of healthcare supplies and medications. Look for a post-virus push toward bringing more manufacturing back to the US that will not only create more jobs post-virus but also help shore up our supply chains to ensure our national security.
We are certainly in the midst of what will hopefully be a once in a lifetime event. But what history tells us is that American capitalism, grit and ingenuity typically leads to advances and growth post-crisis.
Our CPS Team is committed to helping both our clients and community get through these uncertain times. If you, or someone you know, needs assistance, please be sure to reach out. Our advisors are working around the clock to answer all your money questions: email@example.com
Michael A Riskin | CPA/PFS, CFP®, MST
Vice President | Treasurer | Partner
Considering my relatively young age of 31, it might surprise you that I have lived through not 1, not 2, not 3, but 4 “once in a lifetime” events that have affected the U.S. Stock Markets. While all four events were unique in their own right, they are a reminder that facing adversity is not necessarily unique, and may not be “once in a lifetime.”
When I was 1 years old, the “Oil Price Shock” was big news. The price for a barrel of oil spiked during this time period and created uncertainty that rippled through the U.S. Stock Markets. During the 1990’s we saw the first negative year in the S&P 500, -3.1%, after eight straight positive years!
When I was 10 years old, the “Dot-com Bubble” nailed the market. The enormous demand for anything with “.com” in the business name created a bubble around technology stocks. Unfortunately, we all know what happens to bubbles…they pop! When this happened, the U.S Markets declined for 3 years in a row! Between 2000–2002 the S&P 500 return was -9.1%, -11.9%, & -22.1% respectively. Ouch!
When I was 19 years old, the subprime mortgage crisis culminated in the “Great Recession.” We all remember this one! The imbalance between risk and reward created an environment where banks were lending money to anyone willing and able to sign papers. When this bubble popped, the S&P 500 recorded a -37% return in 2008. Again, ouch!
Now I’m 31 years old, and currently living through the “Coronavirus Crisis” from COVID-19. Luckily, I’m in a profession that can work from home, and work with a company willing and able to adapt during this crisis. Across the globe, schools, businesses, and social life have shut down while we witness history from the safety of our homes. At the time of writing this article, the S&P 500 has dipped roughly -14% for the year. If that number holds to the end of the year, that would make this only the third worst S&P 500 year since I was born.
While writing this article from home, I’m holding my nearly 1-year-old daughter in my lap. She is currently living through her first “once in a lifetime” market event just like I did when I was 1. Ironically, there is also an “Oil Price Shock” but this time, it is in the opposite direction. I don’t have a crystal ball, but if my 1-year-old daughter could understand me, I would tell her that this is not the first crisis to hit the U.S. markets, and it certainly won’t be her last “once in a lifetime” event. We have been through adversity before, and if history repeats itself, the U.S. economy will eventually rebound and continue to thrive.
Sterling J Searcy Jr | CPA
Senior Tax Advisor
Last week we urged all small businesses and some self-employed (Form 1099) individuals to continue to apply for the CARES Act programs, such as the Paycheck Protection Program (PPP), in preparation that more money could become available. The bill to add additional funds to the CARES Act programs passed the Senate this week, with speculation that it will pass the House on Thursday. The act as it is then expected to be signed by the President.
How Much are We Talking?
If passed, this bill would add $500 billion more in funds to the CARES Act, including, but not limited to, over $360 billion in additional PPP funding, another $10 billion in EIDL funds, and $100 billion for hospitals. Additionally, funds for ancillary health items & testing have been made available. On April 16th, the original $350 billion for the PPP loans ran out, leaving thousands of small businesses confused and frustrated. Some small business still haven’t heard back from their bank institutions at all, leaving some to speculate that they have been approved, but not yet notified.
So What Do I Need to Do Now?
Whether you’ve already filed and are waiting to hear back from your bank, or you haven’t filed just yet, it’s best to make sure your application is complete to ensure you have the best chance at getting these funds. A lot of banks are only working with their current clients, so now is the time to quickly build a relationship with your local branch, possibly your local community bank, to help increase your chances. It’s better to put in the work now in hopes these funds become available, than to scramble after they do. We’ve put together a checklist of documents your bank might request, so gather these before heading to your bank. And don’t forget to bring your completed application. If you believe your application has already been approved or submitted, be sure to call your banker and ask for an update.
What if I Already Received the PPP Loan? How Do I Track the Spending?
Great question! Just because you’ve received the loan, your work doesn’t end there. You’ll need to track the spending and prove you used the funds for its intended purpose which includes mostly payroll expenses. Use our PPP Reconciliation Schedule to perform a bank reconciliation at the end of the 8th week and tie your general ledger account to the bank statement.
What Other Resources are Available?
The Lakeland Chamber of Commerce has put together a robust list, but if you’re feeling overwhelmed by all the options, or are unsure of which programs you qualify for, don’t hesitate to contact us.
We’re Here to Help
The CPS Team is committed to helping everyone during these uncertain times. If you, or someone you know, needs assistance with the PPP loan application process, please reach out to one of our Financial Advisors: firstname.lastname@example.org
Don’t go at this alone. We’re all in this together.
Michael Scott | MBA, CFA
Senior Portfolio Analyst