Three months ago, sitting down to write an article for the newsletter, UM was preparing to play for the National Title, and the Detroit Lions were getting ready to play in a playoff game. Today, the first two rounds of March Madness have been completed, and my bracket in the Majestic Financial challenge is already busted. The Otsego JV baseball team (I am an assistant coach) plays their first game of the season against Allegan, and I hope I have packed enough layers of clothing.
It may seem like my life revolves around sports, and to an extent that’s true. But what fascinates me so much about sports is the same thing that fascinates me about investments – options specifically. Sports are simple at their core – you play a game and one side wins, one side loses. The opposing teams play by the same rules, share the same playing field, and deal with the same arbitrators of justice (referees or umpires). Theoretically, there should not be any upsets since the games should come down to a simple matter of skill. However, the strategies and momentum are what makes sports…well sports! An Oakland University (without a single top recruit) can beat the storied University of Kentucky (starting 5 high school All Americans) by showing a defense that they didn’t play all year and feeding a hot 3-point shooter. The Detroit Lions can make it to the NFC Championship game by running variations of blitzes that were never shown during the regular season. What also intrigues me is that the upsets very seldom turn into championship stories. Oakland lost (in overtime) their next game, the Lions lost to the 49rs. Investing is the same situation, just more serious in nature. The theory is simple – buy low, sell high. Buy quality companies, maintain the proper asset allocation, increase your contributions when you can. Easy, right? But the strategies are endless and should be based on individual needs, risk tolerance, and goals. Are we selling call options, buying put options, tax harvesting? Are we selling or buying into a stock split or stock buyback? Are we making a trade to potentially take advantage of coming interest rate cuts, and are we using options for this strategy? At Majestic Financial, we are not investing for clients to make a quick buck, just like I wasn’t putting money on the Oakland University Grizzlies to make it to the Final Four. We want to use strategies to maximize the returns that our clients want and need without increasing risk. Our strategies may seem extreme while you are on the phone, in a zoom meeting, or talking with us in person and we are explaining them. But that is only because we are not afraid to find a different way of investing than you may have done in the past. As we head into the Presidential election, potential rate cuts, and continuing wars around the globe, remember that we are here to work with and for you. We want you involved in the plan and decisions. Unlike my NCAA bracket, we want to help you succeed for the long term. Give us a call and let’s talk strategies. Written by Sean Budlong, CFP®, AAMS, Chief Executive Officer, Majestic Financial, Financial Consultant, RJFS Disclosures: *Any opinions are those of Sean Budlong and not necessarily those of RJFS or Raymond James. The information contained in this blog does not purport to be a complete description of the securities, markets, or developments referred to in this material. There is no assurance any of the trends mentioned will continue or forecasts will occur. Investing involves risk and you may incur a profit or loss regardless of strategy selected. We are all aware of how the world around us has changed over the last 3, 10, and 20 years. Technology is King, and almost everything can be “Googled,” instead of learned. Car broke down, Google “engine stopped running.” Feeling sick? Google “achy head and stuffy nose.” Don’t want to pay for someone to construct the deck? Google “easy deck construction.” Simple, right? Until you do more damage to your car, you find out you don’t have a cold but COVID instead, and your neighbor falls through the deck. Just because you can read about a skill online doesn’t automatically grant you the ability to use said skill.
The same is true of investing. Many of the people I talk to about Majestic have the assets they need to achieve their goals, and the intelligence to invest them in simple mutual funds. And if investing was as simple as going to a website and buying the one fund that will get you to your goal, everyone should fire us and google their way to financial freedom. However, we all know it’s not that simple. If you look at the 10 top companies (based on market capitalization) from 1980 to 2000 to 20023, there is not a single company from 1980 that appears in 2023. In fact, many of the companies from 1980 disappeared (most through mergers) prior to 2000. While a technology company has held the top spot in all three years, it’s changed each time. In 1980, IBM was the largest company in the world with a $35 Billion cap. In 2000, Microsoft took the top spot with a $586 Billion cap. Just 23 years later, Apple crossed the $3 Trillion cap level. Just as the companies that you would invest in changed, so did the companies you invest with. In 2000, there were a handful of companies that offered “on-line” investing, led by Goldman Sachs, Prudential, PaineWebber, Ameritrade, Schwab and E*Trade. Very few (relatively speaking) clients were interested in on-line anything – banking, shopping, or investing. In 2024, there are far too many on-line platforms to name. However, here are a few that may not be as well known but can be found on a google search: Betterment, Fundrise, Robinhood, Ally Invest, eToro, Firstrade, Yieldstreet, Tasty Trade, Stash. Each of these sites offer different hooks to get you in, levels of services and fees, and “advice.” All you have to decide is how much time and money you want to spend while working as your own financial analyst and broker. And that’s the reason we talk to prospective clients first – we are not interested in charging clients fees just for them to do it all themselves. We want to make investing easy and profitable even when we don’t control whether Exxon Mobil is the 5th largest company in the world (2000) or Saudi Aramco is the third largest (2023). We don’t want a client who wants to google “why didn’t I make as much as the S&P 500 in 2023?” We want to have that conversation about why they didn’t have every dollar in the portfolio invested in the Magnificent 7 (Google it…). We know that the online companies will allow you to pay them less money for the right for you to do all the work. We know that the online companies will allow you to pay them to use tools that may not be helpful in deciding if your money should be invested in ABC or XYZ company. At Majestic Financial, we want to actually help you reach financial goals, not offer you a second job you pay for. Not everyone needs a human advisor – or wants one. But we aren’t interested in that person as a client, and we won’t compete with Robinhood. So, Google all day long, and enjoy learning just enough to be dangerous. We will keep investing in the ways that make the most sense for our clients. And if anyone happens to talk to Laurie, please tell her I found easy instructions for remodeling bathrooms online. Written by Sean Budlong, CFP®, AAMS, Chief Executive Officer, Majestic Financial, Financial Consultant, RJFS Disclosures: *Any opinions are those of Sean Budlong and not necessarily those of RJFS or Raymond James. The information contained in this blog does not purport to be a complete description of the securities, markets, or developments referred to in this material. There is no assurance any of the trends mentioned will continue or forecasts will occur. Investing involves risk and you may incur a profit or loss regardless of strategy selected. *The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. This month, I would like to explore how expectations have changed in a relatively short time frame.
Going back pre-social media and pre-pandemic (do you remember those days?), expectations were set on a local level. Family units, local school systems, and the local economy helped create an individual’s expectations. A college education could have been a family expectation. Spending the summer hanging out at the lake might have been the perfect vacation. The school district expected students to be in their seats all day from 8am until 3pm, when extracurricular activities would start. An employer probably expected the employees to be at their desks from 8 until 5 pm Monday through Friday. Fast forward to today’s world. Due to social media, kids’ expectations of vacations have changed dramatically. As an example, a few years ago my daughter mentioned how jealous she was of a friend who was posting pictures in the Bahamas for Christmas – while my daughter was on her way home from the airport where she flew home from London, England! Schools offer both in person and online classes. In many cases, employers still haven’t returned full time to the office. Finally, jobs have changed to the point where many people are getting paid serious money to be an “influencer” on social media. This is incomprehensible to “old people” like me. What does this have to do with investing? Lately, the media and “experts” have commented on interest rates, saying things like “historically high rates,” and making predictions about the effect the rates will have on the market and the economy. While the level of interest rates will certainly influence the markets and the economy, these statements do more to establish expectations for investors and consumers than explain current events. As of December 18, 2023, the Fed Funds rate is 5.25-5.5%. The average mortgage is between 7 and 8%. Both numbers are considerably higher than 2020, when the Fed Funds rate was around 1.75% and the average mortgage was closer to 3 ½%. Frightening? Well, let’s look back over time. Anyone who bought a house, or a certificate of deposit in the 1990’s would chuckle at the idea that interest rates are high. Back in the 1990’s mortgage rates hovered in the 7-11% range, with the Fed Funds rate on July 13, 1990, hitting 8%. By May 16, 2000, the Fed Funds rate dropped to 6.5%, and mortgages stayed in the 7% range. When did the Fed Funds rate significantly change (along with mortgage rates)? On June 25, 2003, the Fed Funds rate was 1% and mortgages were down to around 4%. The rates stayed the same (even dropping to effectively 0%) over the next 17-19 years. I personally refinanced my mortgage twice over the past 5 years to below 3%. So back to expectations…if you bought a home in the 1990’s, you felt pretty good if you only paid 7% on your mortgage. Yet today, if you are asked to pay 7%, it’s historically high? This type of change in expectations occurs daily when reviewing portfolios too. Over the last 30 years, the S&P 500 (including dividends) has averaged 9.862% rate of return. However, individual years tell a very different story. The Total Return of the S&P 500 in 1995 was +37.58%, +32.39% in 2013, and +23.63% as of 12/15/23. In 2002, it was down 22.10%, -37% in 2008 and -18.11% in 2022. Depending on your portfolio holdings, you could be higher or lower than each of these numbers. Were you a rockstar with a 10% average return or upset that you only had a 30% return in 2013? My point to this blog is simple. Expectations need to be set based on your personal goals, experience, risk tolerance, time horizon and asset allocation. When you allow someone who doesn’t know you to set your expectations, you will be disappointed even when you perform extremely well under conditions. Written by Sean Budlong, CFP®, AAMS, Chief Executive Officer, Majestic Financial, Financial Consultant, RJFS Disclosures: *Any opinions are those of Sean Budlong and not necessarily those of RJFS or Raymond James. The information contained in this blog does not purport to be a complete description of the securities, markets, or developments referred to in this material. There is no assurance any of the trends mentioned will continue or forecasts will occur. Investing involves risk and you may incur a profit or loss regardless of strategy selected. *The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. The most commonly asked question of financial advisors is “why didn’t my portfolio perform as well as the S&P 500?” Interestingly, clients don’t seem to ask this question when the S&P 500 falls 10% and their portfolio drops by 5%... I will take a couple of paragraphs to address the current state of the market, viewed through the eyes of the S&P 500 and a typical investor.
First, let’s examine the history of the S&P 500 (S&P). The index as we know it began in 1957, when Standard and Poor’s expanded its well-known list to 500 companies. However, the S&P goes back to 1926 when it was known as the “Composite Index,” and it was made up of 90 companies. The S&P is a weighted index, based on market capitalization (Majestic’s advisors can explain this if you would like). As an investor, the index is used in different ways. It can be used as a benchmark – how did your portfolio compare to the overall S&P? It can be used to “buy” the market – buy shares of an S&P ETF or mutual fund. Or it can be used to identify stocks that may fit an investor’s portfolio based on the stock’s weighting in the index. Over the course of years, the companies that make up the index have changed – in some cases substantially. Only seven of the top 25 companies in the S&P in 2001 remain in the index (let alone in the top 25). Many of the companies that are no longer a part of the S&P are well known companies that have experienced a change in consumer demand for their goods/services. Due to the change in world economics, only one company that was in the top 10 in 2001 still remains in the top 10. Microsoft is still the number 2 weighted company in the index. This brings us to 2022 and 2023. In January of 2022, the major indices (S&P 500, Dow Jones, NASDAQ) all started dropping. Over the course of the first quarter of the year, all three entered correction territory and remained in Bear Market territory until early 2023. The primary reason for this was the drop in the big names of the indices. Apple, Google, Amazon, Microsoft, Meta (Facebook) and others dropped over 30% each. Owning the S&P through either a mutual fund or an ETF, means a drop point by point without owning any of the individual companies that were falling. This scenario can create heartburn every time the news reports a drop in the S&P. In 2023, this trend reversed. As of the writing of this blog (11/6/2023), the S&P has gained 13.71% (which means it is still below 2021 levels). This is above the average annual return of the index. However, 12 companies have made up 34% of this gain. The Information Technology, Communication Services, and Consumer Discretionary sectors are all up over 33%, more than double the overall index. The stocks driving the S&P are: Nvidia, Meta Platforms, Tesla, Royal Caribbean, Carnival, General Electric, Palo Alto Networks, PulteGroup, Airbnb, West Pharmaceutical Services, Advanced Micro Devices, and Booking Holdings. Do you recognize all of these companies? SO, when a 2023 investor asks why they haven’t had the S&P 500 return, the answer is simple – do they own these 12 companies? It’s not a recommendation. The choice is whether to own individual stocks – and accept the risk that they could fall substantially – or own an index and potentially limit exposure to both the losses and the gains of these same stocks. The bottom line to investing is to make sure that your goals and time horizon align with your portfolio. If you want simple investing and you don’t mind your portfolio just moving with an index, an ETF that matches the index might be the right investment. Personalization of a portfolio may increase both risk and return – which may be what the client wants. Written by Sean Budlong, CFP®, AAMS, Chief Executive Officer, Majestic Financial, Financial Consultant, RJFS Disclosures: *Any opinions are those of Sean Budlong and not necessarily those of RJFS or Raymond James. The information contained in this blog does not purport to be a complete description of the securities, markets, or developments referred to in this material. There is no assurance any of the trends mentioned will continue or forecasts will occur. Investing involves risk and you may incur a profit or loss regardless of strategy selected. *The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. *The NASDAQ composite is an unmanaged index of securities traded on the NASDAQ system. *Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary. Past performance does not guarantee future results. Benchmarks help us gauge our progress, performance, and results. As humans we compare ourselves to others more often than we think, consciously and subconsciously. Sometimes this can be a healthy behavior, while other times it can be a detriment. Kids racing each other at a park, constant sibling rivalries (usually about the most ridiculous things), competition for a promotion at work, an inner motivation to improve oneself by improving one’s fitness from one point of time to the next, reading more books than last year, or earning more money from one year to the next; all involve comparing one result to another over a given timeframe. Comparison and competition go hand in hand. It is paramount to compare similar things to each other though. At one time, it would be silly to gauge my performance by me beating my son in a race. I’m older, been doing it for longer, have longer legs and should be faster and stronger, but he just beat me recently…and I’m still trying to cope with it. Benchmarks need to be evaluated for their accuracy and this benchmark recently changed. The comparison should be apples to apples.
This leads me to something that should be addressed, especially when it comes to investing and specifically this year. After a tough last year where it seemed all areas of the market experienced losses, we are experiencing a rebound this year. As I am typing this, the “market” (Standard and Poor’s 500 Index) is up 14.54% (7/10/2023). Should we be overly excited with this increase, be cautiously optimistic since the Nasdaq Composite is up 31.12% for the year or totally dismiss it since the Dow Jones Industrial Average is only up 2.21% for the year? When people refer to the “market”, they can be referring to any of these indexes (or indices, both are acceptable versions of the plural form of index, by the way), or benchmarks. These are all ways to gauge how the “market” is doing, but they are not all the same and far from a good apples to apples comparison. There are a lot of other indexes that are used as benchmarks in the investing industry. For instance, the Bloomberg US Aggregate Bond Index would be a good index to use to know how the bond market is doing, but a poor benchmark for international markets. The MSCI EAFE or FTSE 100 would be better alternatives for this. A closer comparison would be the Russell 2000 compared to the Wilshire 5000, but still not apples to apples, since the Russell 2000 is for small companies and is more volatile, while the Wilshire is meant to be a broad-based representation of the domestic investment market. While this can be confusing, it is important to know what you may be comparing your investable life savings to and ultimately could be using to make very important decisions. With all the indexes to pick from, the most widely used are the Dow, S&P 500, and the Nasdaq. All are used to gauge the equity market, or stock. But as noted before, not the same. Besides the vast difference in returns between the three this year, there are other differences. The wide discrepancies of returns are due to what they are representing. The Nasdaq is heavily made up of Technology stocks. Its high return makes sense since the Technology sector of the market is up 40.7% this year according to Franklin Templeton. While investors enjoy those returns in a good year, the same sector was down over 30% last year. The middle ground index, S&P 500, is made up of a more diversified lineup of companies but is Capitalization Weighted (so is the Nasdaq), or Market Cap weighted. Essentially, what this means is that bigger, more valuable companies are given a bigger percentage of the Index. This is calculated by multiplying the outstanding shares of the company by the price of one share. So, today the S&P 500 is up over 14% but the weighting is overweight to Technology and bigger, more valuable companies like Apple, Alphabet (formerly known as Google), Microsoft, and Amazon. These companies are up between 32-50% for the year and make up a large part of the index, skewing the average. These companies were also down 30-50% last year creating quite a rollercoaster for the past two years and a feast or famine situation. Compare this to the steady Dow Jones and its low return for the year, which is only 30 companies (which many people think doesn’t reasonably represent the vast market). This index is Price Weighted, which is calculated by adding all share prices and dividing that by the amount of companies. This difference, and that it also excludes many stocks that are in the S&P, especially Amazon and Alphabet, accounts for the discrepancy of returns. Comparing a portfolio to any of these indexes is not a bad thing but should be done in the right context. Rarely an investor’s portfolio is identical to one of these indexes. Their tolerance to risk is probably not as high to weather the down years as well, creating a risk of selling at the most inopportune time. A diversified portfolio tailored to the investor and their goals is a time-tested approach, and when partnered with accurate expectations for fluctuations, it is an excellent way to achieve one’s goals for themselves, loved ones, and causes they hold dear. It’s easy to see a person’s money and investments as numbers and percentages, but it is important to remember to see it as resources to accomplish meaningful things and hopefully create cherished memories. Written by Leon Bennett, CFP®, Chief Operating Officer, Majestic Financial, Financial Consultant, RJFS Disclosures: *Any opinions are those of Leon Bennett and not necessarily those of RJFS or Raymond James. The information contained in this blog does not purport to be a complete description of the securities, markets, or developments referred to in this material. There is no assurance any of the trends mentioned will continue or forecasts will occur. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Please note, changes in tax laws may occur at any time and could have a substantial impact upon each person's situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional. *Certified Financial Planner Board of Standards, Inc. (CFP Board) owns the certification mark CFP® in the United States, which it authorizes use of by individuals who successfully complete CFP Board's initial and ongoing certification requirements. *The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. *The Russell 2000 Index measures the performance of the 2,000 smallest companies in the Russell 3000 Index, which represent approximately 8% of the total market capitalization of the Russell 3000 Index. *The MSCI EAFE (Europe, Australasia, and Far East) is a free float-adjusted market capitalization index that is designed to measure developed market equity performance, excluding the United States & Canada. The EAFE consists of the country indices of 22 developed nations. *The Wilshire 5000 Index is an unmanaged index of 5000 stocks traded on NASDAQ and the exchanges. *The NASDAQ composite is an unmanaged index of securities traded on the NASDAQ system. *Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary. Past performance does not guarantee future results. *The Dow Jones Industrial Average (DJIA), commonly known as “The Dow” is an index representing 30 stock of companies maintained and reviewed by the editors of the Wall Street Journal. *The Bloomberg Barclays US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. |
This blog is a collective effort from the Majestic consultant trio, Sean Budlong, Brandon Wilkins, and Leon Bennett.
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