Paragon would like to begin with a message to all clients, friends and family in Florida affected by Hurricane Ian. Please know we are thinking of you and are here to help however we can. The safety and well-being of all of you is far more important than our thoughts on the markets!
Along those lines, we also want to thank you. Many of you have referred your family, friends, neighbors, and co-workers to Paragon this year. This is such an amazing complement; we take great pride in receiving your referrals. As many people are opening their September statements, the market returns have been quite shocking, and many are looking for something different than the basic buy and hold strategy. We love to share our strategies with prospects!
I highly encourage rereading our July newsletter (which can be found on our website www.paragoncap.com). We discussed the historic worst start to a year for the U.S. stock market. The weakness in the market continued in the third quarter with a very weak September. Much has been written in the financial press this year about the demise of the 60/40 portfolio (a portfolio consisting of 60% stocks/ 40% bonds). Historically, the portfolio benefits from the negative correlation, normally exhibited between stocks and bonds (when stocks go down, bonds go up, and vice versa). That relationship has broken down this year due to high inflation and the very low starting point for bond yields. Both stocks are bonds are on pace to finish the year with negative returns. We continue to believe that active portfolio management coupled with the addition of attractive asset classes outside the traditional 60/40 portfolio is a better strategy at this time.
In last quarter’s newsletter we discussed several bullet points that we thought would be issues to be concerned about. There were:
• Recession concerns
• Bear market in stocks
• Rising interest rates
• Mid-term elections
• Other - cryptocurrency, supply chain/inventory, etc.
All of these are still issues to be concerned about as we do not feel the economy has entered a recession, the S&P 500 and Russell 2000 (small caps) are down over 20% and the Nasdaq 100 composite is down more than 30%, the Federal Reserve continues to raise interest rates, inflation remains at stubbornly high levels, and the mid-term elections are November 8th.
The good news is that unemployment fell back to 3.5%, tying the lowest level since 1969. As we discussed last quarter, the National Bureau of Economic Research (NBER) relies on a handful of metrics to determine if the economy is in a recession. It is unlikely we are in a recession with the unemployment rate at these low levels. However, inflation is what the markets are most concerned with. Federal Reserve Chairman, Jerome Powell, has stated many times he would like inflation to be around 2% and will continue to raise interest rates in an effort to lower inflation. We expect a 75-basis point increase during the next Fed meeting in the first week of November and another rate increase during the December meeting. More increases in 2023 are also likely.
When interest rates increase, bond prices decrease. We have seen a significant increase in interest rates across the yield curve this year resulting in a -14% return for the Bloomberg Barclays Aggregate Bond Index. As discussed above, we continue to expect more increases in the Fed Funds Rate which should continue to pressure fixed income returns. Our shift away from the use of the Bloomberg Barclays Aggregate Bond Index in client accounts coupled with our use of Callable Yield Notes and 3Private Credit have helped our clients shelter some of the exposure to this shift in the yield curve.
We are always excited when we can offer an additional investment strategy that we believe may be beneficial to our clients. Direct Indexing is an investment strategy that we believe may be beneficial for business owners or others with large expected capital gains in the future to consider. With some advanced planning, exposure to a Direct Indexing strategy should help offset some of the gains and deliver tax savings while maintaining exposure to the market. You will see a lot about this as many of the big brokerages are starting to offer it and advertise it. We do feel that experience is very important as well as a track record. As an example, one of our investment partners has been doing this for 22 years. Quoting them,“Tax-Advantaged Core Strategies are customizable portfolios that aim to deliver diversified equity market exposure while maximizing after-tax returns.” They essentially tax loss harvest on a continuous basis throughout the year while maintaining a portfolio that is highly correlated to a broad equity market index. In the first 6 months of 2022, for example, $1million invested in their strategy would have harvested more than $162,000 in capital losses. While this is an extreme figure as the first half of 2022 was historically bad, if this strategy is used for 5-10 years before your liquidity event, we can help carry-forward losses that can be used to offset the gains from selling the business, investment properties, or other capital gains. If this is something you think may be useful to you or someone you know, we would love to discuss this strategy in more detail.
Our financial planner, Gene Pal, has some great year-end planning tips.Gene is available to discuss any of these ideas or help you with your financial plan.
• Look for possibilities to prepay tax-deductible expenses and utilizing available tax credits in 2022 and/or deferring taxable income to 2023
• If making charitable donations, especially if doing “charitable bunching” with a Donor-Advised Fund and/or a Qualified Charitable Distribution from an IRA account, get started as soon as possible, waiting to mid-November or later runs the risk of the charitable gift not being completed in 2022.
• Review all your insurance plans, especially your health insurance plans. For example, those eligible for/enrolled in Medicare AdvantagePlan or Prescription Drug Plan have the annual “Open EnrollmentPeriod,” which runs from October 15 through December 7th, to improve their medical insurance. For those still working, one typically can make changes to their employer provided health benefits and options in November or December.
• Make sure beneficiaries and contingent beneficiaries are up-to-date on retirement accounts and insurance policies. These are good to review whenever a life changing event occurs, for example, marriage, divorce, having a baby, death of a spouse, etc.
• Make sure you have durable power of attorney (DPOA) for healthcare decisions and for financial decisions. The most overlooked DPOAs are those for children 18 and over. They are considered to be adults and having a DPOA granting you the right to make medical decisions if they are unable is very important.
We are always trying to improve, and we need your help and your input. We recently invested in new software that allows us to send one question surveys. These surveys automatically have a star rating, we are aware that the star rating does not always correspond to the question we are asking. We take your input very seriously and we review and discuss your feedback. We appreciate all of you that take the time to answer and share your thoughts with us. We are also available anytime to discuss what is on your mind, things we could do better or things we are not doing that you think would benefit our clients to start offering!
We are receiving great feedback on the use of Calendly to book appointments for quarterly reviews. Kelly has been reaching out to schedule meetings with your wealth manager and will continue to proactively reach out throughout the year. Calendly provides updated access to your wealth manager’s calendar and to a meeting time that is convenient for you! These meetings can be in person, video or by phone.
We take your security very seriously. Our security protocols require verbal confirmation of all money movements. If you email or message us to move money from your account to your bank, we will be calling to verify. We understand this creates an additional step in the process and may be viewed as an inconvenience, but it is for your security!
For up-to-date news and thoughts from Paragon, plus interesting articles on topics like saving and investing for children, taking care of elderly parents and their finances and other timely topics, we encourage you to follow us on LinkedIn and/or Facebook. We have company pages for both and appreciate your liking and/or following us. Also, please share your experiences with friends and family; we love the opportunity to help those you know with their financial success. Even though Paragon’s offices remain temporarily closed due to COVID-19, we are all working from home and staying in contact with each other daily. We are available to meet with clients at our office by appointment only and are also available to schedule account reviews via video or phone conference.