Over the past few years, technology stocks have outperformed other broad market indices.  This is due to a number of reasons, one being the decline of interest rates, as we’ve discussed in prior articles.  Low interest rates tend to increase interest in growth stocks over value-oriented stocks.  One thing to note is that could eventually change if interest rates were to begin to rise over time back to normalized levels, and especially if the Federal Reserve were to increase rates in the future.  See my book chapter 5 on the bond market.
     
     With that said, one item of interest to note is the correlation between the index funds, mutual funds, and the “market weighted” S&P 500 Index.  What do I mean by “market weighted”?  The S&P 500 Index that we all see on CNBC or The Nightly News is an index that invests a percentage of its holdings in each of the 500 companies based on their market capitalization (the value of the company).  A heavier weighting is assigned to stocks with higher value.  See Exhibit #1.  Just over 24% of the value of the index is invested in six companies that are in the technology sector. 
 
     Exhibit #2 lists the Nasdaq 100 stocks, and the top stocks are nearly a mirror image of the S&P 500 Index, weightings slightly different, but the same companies listed at the top. 
 
     ​What does this all mean?  First off, the S&P 500 index has benefited over the past several years from the growth of the top technology stocks like Apple, Google, Microsoft and Amazon.  We would think that the performance has been slightly skewed with a nearly 24% allocation to so few stocks in one sector.

     ​Then of course we have some of the top performing mutual funds that also invest a large portion of their portfolio to these stocks.  Afterall, a mutual fund’s performance needs to keep up with the index in order for individual investors to use their fund or fund family.  American Funds, for instance, are used by many of the well-known financial companies that invest for individual investors and 401k plans. 
 
     ​This is simply an example to show how first, you can overlap holdings just by simply buying two mutual funds from the same family of funds.  Second, you may own many of the same holdings if you own other fund families as well, including the S&P 500 Index Fund offered by Vanguard.  It’s important to dissect your stock holdings within the mutual fund or other financial products in order to make sure you aren’t just duplicating holdings.  See Exhibits #3 and #4.

     What do you do if you’re unsure about having too much exposure to technology stocks or just would like to know if you’re diversified enough?  It’s always a good idea to understand your portfolio, to know whether you’ve leaned too much in a certain sector.  Should technology stocks become out of favor over the coming years due to a change in the investing landscape, or just need to rest for a while, many of the mutual funds that have done very well may suffer. 
 
     It’s wise to take the opportunity while the subject is on your mind and get a second opinion.  Whether with us or someone else, it’s wise not to take for granted changes in the investing environment.  When investors change their mindset, what once worked for many years can change quickly.  The pendulum can swing and take years to get back to equilibrium.  Sometimes investors that have stuck with a certain mutual fund for years cannot understand why it no longer delivers the returns they were accustomed to.  This can be due to individual holdings, as we’ve discovered, or due to the fund owning bonds in addition to stocks, and the bond market loses at the same time the stock market loses.  Not something investors have been accustomed to in a very long time. 
 
     Another mistake that is often made with investors is they look for last year’s winners and buy them, as they believe that win streak will continue.  That can certainly work some of the time, but it’s not an investment plan of action that should be counted on to work consistently.
 
     ​Everything stated above is meant to bring to light that there is a need to look under the hood of your portfolio holdings.  Just having a list of mutual funds on your statement does not necessarily mean you’re diversified, or that those funds are not highly correlated.  Please take the time to analyze your portfolio.
 
     ​We’d be happy to start with a no-obligation “strategy session.”  Send me an email or phone call.  You can also schedule time on my calendar by clicking here.
 
If you would like to read my book, The Informed Retiree, visit my website www.TheInformedRetiree.com or send me an email to Len@GlobalWealthSolutionsllc.com
 
Also available on Amazon.com
 
Advisory services offered through J.W. Cole Advisors, Inc. (JWCA).  Global Wealth Solutions and JWCA are unaffiliated entities

Over the years, I have had the conversation with many pre-retirees who ask the question, “What do I need to do to retire early?”  The answer is not just one thing will do; it takes a series of strategic moves to be comfortable with the decision.  Why do we say this? 
 
People are living longer than they did in the past, which means our money and income needs to last as well.  In addition, we have a good chance of using a portion of our assets towards assisted living or nursing care.  We could save a large nest egg, only to experience a sideways or declining market drop, one similar to 2000-2009.  When we retire, as it relates to stock market, valuations and interest rate levels can also have an effect. How our portfolio is diversified and if we have a steady stream of income not dependent on the stock or bond markets is yet another factor.
 
These and many more questions will be discussed in the series, “Would you like to retire early?”  We will begin with the topic of diversification.

Many of the name brand firms in the financial services industry use diversification to assist in reducing volatility and proving an overall total return.  Harry Markowitz in the 1950s pioneered modern portfolio theory 1*.  The idea of dividing a portfolio into a basket of different size companies with differing objectives, international, real estate, commodities, and bonds, was a way to reduce overall risk.  Many of the firms on Wall Street still utilize this approach.  At first glance, it still seems to make good sense; however, there are, in my opinion, a few flaws that could be improved upon.
 
One of the biggest flaws I currently see is the portion allocated to bonds.  Over the past 40 years, interest rates have fallen from the high teens to sub 1% in the 10-year Treasury​ 2*.  If you do not understand how interest rates work, think of a teeter-totter.  As rates fall, think one side of the teeter-totter, the other side goes up, which in this illustration, is the price of the bond.  Simply put, interest rates have fallen to levels never seen in the history of the bond market, and as such, the value of the bonds have risen accordingly.  If you would like to learn more, read chapter 5 of my book, “The Informed Retiree.”  It can be found at www.TheInformedRetiree.com

With that said, bonds just do not provide enough horsepower any longer to enhance total return for a portfolio, nor do they provide enough of a cushion to offset stock declines for more conservative investors.  So, all in all, the once powerful diversification into bonds may have run its course, and thus lost its luster.  However, it could be worse than we might expect.  What if rates actually began to rise over the coming years?  What would happen?  Think of the teeter-totter illustration again.  If rates rise rather than fall, as they have for decades, then the opposite happens, price of the bond loses value. 
 
This phenomenon would have a bigger impact on bond mutual funds than individual bonds.  Why?  Individual bonds eventually have a maturity date; thus, the investor receives their investment back as long as the company fulfills its obligation.  Yet mutual funds do not have a maturity date; they are a perpetual investment, and thus continue to follow the trend of underlying interest rates - and here is the point - whether they go up or down 3*.  Understand, not all bonds are equally affected by interest rates.  There are other factors that may affect the value of a bond beyond just interest rates alone.  However, for the most part, interest rates drive much of the underlying performance of the bond market.
 
What are investors to do?  Look for future articles in this series to read about the potential solutions to the problem that could exist for many years.
 
If you would like to read my book, The Informed Retiree, visit my website www.TheInformedRetiree.com or send me an email to Len@GlobalWealthSolutionsllc.com
 
Also available on Amazon.com
 
Advisory services offered through J.W. Cole Advisors, Inc. (JWCA).  Global Wealth Solutions and JWCA are unaffiliated entities

1. https://www.investopedia.com/terms/m/modernportfoliotheory.asp
2. https://www.macrotrends.net/2016/10-year-treasury-bond-rate-yield-chart
3. https://www.thebalance.com/how-bond-funds-can-lose-money-2466567

​When we consider past stock market cycles, there are occasions as noted in the graph of investor emotions, euphoria sneaks in.  Are we there now?  Hard to say, but it is a good time to look at how our 401k, Roth IRAs and other investment accounts are positioned.  How much is invested in stocks vs. bonds, International vs. Domestic and so forth.  

​As the stock market rises, our portfolios can automatically tilt towards risk, as bonds currently offer truly little total return, while stocks have risen over the past few years, as measured by the S&P 500 Index, and this throws off our target allocation.
 
One important question to ask ourselves:  How does the stock market value look today compared to history? 
 
Robert J. Shiller, Sterling Professor of Economics at Yale University, developed the CAPE Ratio to put a valuation measurement on the S&P 500 Index.  As of February 2021, that value measured 35.83, as seen in the graph below.  While this does not necessarily mean we sell everything and move to bonds or cash, it is prudent to look at the risk in our portfolios, versus our personal risk profile.   In addition, we may want another opinion in our portfolios, especially if we are within 5-7 years of retirement.

TheInformedRetiree.com has a risk assessment quiz that takes about 3-5 minutes to complete.  It’s prudent about every 3 years to update your profile to make sure you’re investing based on your current risk profile.  Life and situations in our lives change, and we must adapt to them, even with our investments.  Click here to access the assessment profile.
 
If you would like to read my book, The Informed Retiree, visit my website www.TheInformedRetiree.com or send me an email to Len@GlobalWealthSolutionsllc.com
 
Also available on Amazon.com
 
Advisory services offered through J.W. Cole Advisors, Inc. (JWCA).  Global Wealth Solutions and JWCA are unaffiliated entities

Hello,
All of us at Global Wealth Solutions, LLC hope this note finds you healthy. In lieu of
the recent events concerning the COVID-19 virus and the unprecedented volatility in
the financial markets, we wanted to reach out with some thoughts based on our
experience.

First, we hope everyone stays safe and heeds the warnings from government agencies
in light of the unknown. In addition, we want to say we are monitoring the
developments that seem to change on a daily basis. This is truly a “black swan” event
that can hit the financial markets without warning as to the overall effect and impact.
The combination of oil market turmoil over the weekend of March 7th and the
escalation of the virus, this has thrown a double whammy to the stock market.

At GWS, we have been cautious over the past due to the valuations of the financial
markets based on the CAPE Shiller ratio, among other measures. Thus, during this
market rout, we have weathered the storm much better than the indices in general,
measured generally by the Dow Jones or the S&P 500. We have raised cash in the
portfolios; however, this alone does not guarantee some short-term losses will not be
incurred.

We know it is important not to panic at this point or make emotional decisions. It is
possible the U.S. Government and/or Federal Reserve will come out with some sort of
stimulus that could help in the short term to stabilize things. The Government would
like to see this turmoil end with as little impact on the American Public as possible.

Again, we are monitoring developments and hope everyone stays healthy and safe
during the coming weeks. It would be our hope that the virus is contained, and the
spring months bring about an end to its spread.

Take care and please call if you would like to discuss anything further.

​Advisory services offered through J.W. Cole Advisors, Inc. (JWCA). Global Wealth Solutions and JWCA are unaffiliated entities.

As we head into 2020, all of us at Global Wealth Solutions, LLC (GWS) wanted to make a few comments in regard to the last year and decade, as well as what might take place over the next few years.

Looking in the rearview mirror, it has no doubt been a historical decade, one for the record books on many fronts. Without getting into a topic of politics, I’m sure everyone would agree the last decade brought us unprecedented historical changes that will be in textbooks and studied for years to come. Today’s technology has armed the sitting president with a method of reaching the masses, not through railroad travel or television news waves, but rather, social media. Would former hierarchies ever have predicted that one? The financial markets have needed and taken time to digest this Social Media onslaught and come to grips with this new form of direct, in your face communication. Never before has news traveled at literally light speed. Is it for the greater good? You can ponder that question on your own.

A few quotes that I think will set the stage for the remainder of this update are some of my favorites. Investors have certain tendencies that persist over time. We love the markets when they are going up, “bull market,” and hate them when they fall, “bear market.”

“To refer to a personal taste of mine, I’m going to buy hamburgers the rest of my life. When hamburgers go down in price, we sing the ‘Hallelujah Chorus’ in the Buffett household. When hamburgers go up in price, we weep. For most people, it’s the same with everything in life they will be buying – except stocks. When stocks go down and you can get more for your money, people don’t like them anymore.”
– Warren Buffett, Fortune Magazine (December 10, 2001)

Mr. Buffet has 2 rules to investing:

• Rule #1 - Don’t lose money.
• Rule #2 - Don’t forget rule one.

“I must say, after more than 30 years in this business, the stock market remains as manic as ever.”
– David Rosenberg, Chief Economist & Strategist, Gluskin Sheff + Associates Inc.

There is futility in trying to predict the future and the understanding of the current market risks headed into the next decade. The reality is that we can’t control outcomes. The most we can do is influence the probability of certain outcomes through the management of risks and investing based on probabilities, rather than possibilities, which is important to capital preservation and investment success over time. The last decade is about as interesting as it gets in the financial markets. In 20081, the Federal Reserve decreased interest rates from 3.50% to 0.25%, and over the course of seven years, didn’t raise interest rates until December 2015 to 0.50%. From 2015 to 2018, they raised at eight separate meetings 0.25% at each
meeting to bring the federal funds rate to 2.50%, still below the 2008 pre-financial crisis levels. Then after the turbulent stock market in the final months of 2018, they began to lower rates for the first time in August, September and October. The president was calling for this, referring negatively to the Federal Chairman Powell’s actions in several social media posts.

“The most important message from the financial markets in 2019 was, ‘Don’t Fight The Fed.’ The 180- degree turn in Federal Reserve policy…the Powell Pivot…caused markets to realize that it was, once again, ‘All About The Central Banks.’

In December 2018, the Fed raised interest rates and indicated that they expected to be raising rates in 2019…but instead of raising rates, they cut rates three times…stopped their quantitative tightening policies and wrapped up 2019 by pumping vast amounts of liquidity into the market.

The Fed’s policy reversal inspired Central Banks around the world to step up their own monetary stimulus programs. That global shift to easier monetary policy may or may not have kept the world economy from slipping into recession in 2019…but it certainly helped drive global stock and bond markets to big gains. Bond yields hit All Time Lows, the ‘stack’ of negative yielding bonds soared to a high of $17 Trillion and major stock indices kept making ‘New All Time Highs.'” Victor Adair Polar Futures *2

There is a nagging voice in my head that continues to make me wonder how this is really going to end over time. Yes, euphoria can go on longer than we can expect. Talking with many clients over the past year, the common theme seems to be, “When this party ends, its going to end badly.” Many that had that same nagging feeling in 2008 didn’t understand just how to act on it, but they had the feeling nevertheless. When you look under the hood of the internals of the S&P 500, for instance, you notice much of the gains come from a few numbers of companies such as Amazon, Microsoft and Apple *3. Reminiscent of 1999?

Some might ask, what has been fueling this stock market over the past decade? In part, it can be referred to as “financial engineering.” When interest rates remaining at historic lows for long periods, corporations may issue debt and use the portions of the proceeds to buy back their own company stocks. Genius when you think about it. Raise debt in a low interest rate environment, use proceeds to purchase company stock which reduces number of shares outstanding, lowers price to earnings ratio, potentially increases the value of the shares, which in turn increases the value of corporate execs’ large amount of stock options. All in all, while the party continues, it’s a beautiful win for everyone. What could cause the party to end?

The Corporate Debt Bubble

This bull market's excess is undoubtedly in the corporate debt sector. Corporate debt has doubled since the 2008 crisis *4. Corporate debt to GDP is at its highest level in all of recorded history. Naturally, too much debt lowers your credit quality. This is evident by the fact that roughly 50% of the corporate debt market is BBB, or just one level above junk. AT&T has amassed $191 billion of total debt. Ford has $157 billion of debt, but a much-less manageable approximate 450% debt/equity ratio *5.

Thus, the nagging fear is when the party comes to a screeching halt, what happens next? Another one of Warren Buffet sayings, “It’s only when the tide is going out that you learn who’s been swimming naked.” In other words, not if, but when the next recession hits, there may be less buyers of BBB and junk-rated corporate debt and those that are currently exposed may run for the exits.

The current buybacks propping up the stock market could come to a screeching halt, leaving the S&P 500 and other indices to more traditional market forces without the influence of central banks. At the same time, the Federal Reserve may have very little tools remaining in its toolbox to offset the recessionary forces. The financial markets could be caught unawares as they have spent the majority of the last decade intoxicated on the easy money “fix,” referring to quantitative easing.

Individual investors tend to follow the herd, with no strategy in place. Euphoria, to complacency, to despair, to “I’ve had enough” mentality. At GWS, we continue to have confidence that over time, a diversified portfolio with time-tested strategies to navigate financial markets will provide a less volatile portfolio (standard deviation) with a potentially higher win ratio. Remember, it’s not so much how much you gain in any given year, it’s how much you keep that’s important in the long run. Precisely why it’s imperative to have
strategies to exit and re-enter the markets, rather than just leave it completely to chance.

History of financial markets over the past 2 years:
Since January 2018, the S&P 500 has increased roughly 20%, while treasury yields as measured by the 10-year bond have fallen roughly -22%; European markets are flat with little-to-no increase in value; gold has increased roughly 15%.

United States 10-year Treasury yield is 1.87%, compared to the German 10-year Bund at -0.253%, and the Japanese 10-Year is -0.01%. Gold is currently over 1500 per ounce *6.

One measurement of the valuation of the stock market, whether it appears expensive or inexpensive, is Robert Shiller’s CAPE Ratio *7. Mr. Shiller is Yale University’s economic professor and 2013 Nobel Laureate in economics. He developed a method of measuring the valuation of the stock market that incorporates factors beyond traditional Wall Street methods. You can find more information about Robert Shiller in my book, The Informed Retiree. It can be downloaded at www.TheInformedRetiree.com. The website has a video section highlighting strategies such as this, among other financial topics.

I want to highlight in this letter the current ratio, which stands at 31. To put this in perspective, Black Tuesday, October 29, 1929, the ratio would’ve been around 30 had this tool been developed. Black Monday, October 19, 1987, the ratio was around 18, which is considered just above the mean. So today’s stock market is the second most expensive market measured by the CAPE ratio, next to the technology crash of March 2000.

Where does this leave us currently? Predictions again are futile, as so many factors can change over the course of a year or two. Will China fail to comply with phase one of the trade deal; will earnings growth and corporate profits continue to falter or reignite and catch up with lofty valuations; will interest rates rise, tripping up high-levered consumers and corporations? There are many more factors to consider, ones we could never put into a short update. We are watching these carefully, among other developments.

There have only been four election years that have produced negative returns since 1928, two of which have been in the last five elections, 2008 being the largest *8. After coming off a strong 2019 for the markets, it will certainly be interesting to see how the year unfolds. It’s my thinking it might be a year for the history books once again, one that stands out for years to come.

Leonard Rhoades

1. https://www.federalreserve.gov/monetarypolicy/openmarket.htm
2. http://www.polarfuturesgroup.com/blog/trading-desk-notes-december-28-2019
3. https://www.cnbc.com/2019/12/30/apple-microsoft-contributed-most-to-the-markets-2019-gains.html __source=iosappshare%7Ccom.microsoft.Office.Outlook.compose-shareextension
4. https://fred.stlouisfed.org/series/NCBDBIQ027S
5. https://seekingalpha.com/article/4285648-corporate-debt-bubble
6. https://www.cnbc.com/
7. https://www.multpl.com/shiller-pe
8. https://www.thebalance.com/presidential-elections-and-stock-market-returns-2388526
   

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​Advisory services offered through J.W. Cole Advisors, Inc. (JWCA). Global Wealth Solutions and JWCA are unaffiliated entities.