Mutual Funds vs. ETFs – What’s the Difference?

Contributed by: Nicholas Boguth, CFA®, CFP®

At the highest level…not much! Mutual funds and Exchange Traded Funds are two common types of investments that group individual securities together into a neat package to make it easier for us investors to build our ideal portfolios.

The difference between mutual funds and ETFs shows up more when you dig into the details of their liquidity, tax efficiency, costs, and transparency (more information on each difference is at the bottom of this post for anyone looking for the specifics). ETFs do have some structural benefits compared to mutual funds, which has led to their faster growth over the past decade, but the total assets invested in ETFs are still less than half that of mutual funds.

I buried the specifics at the bottom of this post because, for most of us, ETFs and mutual funds can be used interchangeably to reach our investment goals. In fact, some companies offer the exact same investment product in both fund structures.

The major question: "Which is better?" If only it were that easy…

ETFs do have a handful of advantages compared to mutual funds. Two of the most significant advantages are that they are often cheaper and more tax efficient. But like all things in investing, the best answer is…"It depends." Here are some examples where you might lean towards a mutual fund compared to an ETF: sometimes mutual funds ARE cheaper, or maybe you want to invest in a portfolio manager who doesn't offer an ETF, or perhaps you believe an asset class is better served by the mutual fund structure than the ETF, or you are holding a mutual fund in a taxable account and now have a large capital gain that you do not want to realize yet, or your trading platform charges higher fees to trade ETFs, or you want to set up automatic periodic purchases and a mutual fund is the only way to do that.

Ultimately, your investment portfolio can only be perfect for YOU. We would love the opportunity to help you build a portfolio that will help you reach your financial goals. Shoot us an email to get started!

• Liquidity: ETFs trade intra-day, similar to stocks, so you can get a different price when you buy/sell at 10 a.m. compared to 2 p.m., for example. When you buy or sell a mutual fund, the price is determined at the end of the day.

• Tax Efficiency: Mutual funds and ETFs rebalance and trade their individual holdings throughout the year, and those trades may generate capital gains. Mutual funds and ETFs must pass those capital gains onto you, the end investor. The difference is that the structure of an ETF gives it the option to create or redeem shares or "creation units" that allows them to minimize capital gains for the end investor throughout the year. From your perspective, the capital gains don't just disappear when you hold an ETF. You'll still realize those capital gains once YOU sell the ETF in your portfolio, but it gives you more control over WHEN you will realize them, which can be important for your financial plan.

• Costs: ETFs are generally cheaper than mutual funds. There are a whole host of reasons for this, from operational efficiencies to commission/load differences. However, the average ETF is about half the cost of the average mutual fund when comparing expense ratios. There are exceptions to every rule, though, and trading fees/commissions also have to be taken into consideration when building your portfolio.

• Transparency: Mutual funds generally only report their holdings to the SEC, whereas ETFs report daily. This gives end investors more transparency into what the fund is actually holding and can help inform our investment decisions.

• Minimums and periodic purchases: Mutual funds often have higher minimums than ETFs, but you cannot buy fractional shares of ETFs, which may cause some operational issues in smaller portfolios. You are also not able to set up automatic purchases or sales into or out of ETFs like you can with mutual funds.

Nicholas Boguth, CFA®, CFP® is a Senior Portfolio Manager and Associate Financial Planner at Center for Financial Planning, Inc.® He performs investment research and assists with the management of client portfolios.

Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. Investment advisory services are offered through Raymond James Financial Services Advisors, Inc.

Center for Financial Planning, Inc. is not a registered broker/dealer and is independent of Raymond James Financial Services.

This information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Any opinions are those of the author and are not necessarily those of RJFS or Raymond James. Every investor’s situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment or investment decision. Investing involves risk, investors may incur a profit or loss regardless of strategy or strategies employed. Asset allocation does not ensure a profit or guarantee against a loss.

Q2 2024 Investment Commentary

Contributed by: Angela Palacios, CFP®, AIF®

Contributed by: Nicholas Boguth, CFA®, CFP®

When the circumstances change, our perspective evolves. This anthem of the past year highlights the importance of adaptability and openness to new information. But as much as things have changed this year, much has stayed the same. Megacap tech stocks are still driving the S&P 500 gradually upward for the year. The S&P 500 has had the best start to a presidential reelection year by logging 31 record highs this year and low volatility. Interest rates are still high. Stocks are performing better than bonds, while the U.S. continues to trounce international and large company stocks, which continue to beat small company stocks. 

Elections

The remainder of the summer and fall will surely be dominated by election headlines. Because elections can be divisive and unnerving, it's important to remember that markets are often resilient even in the face of the most unsettling election scenarios. Watch for an invitation to our upcoming election event to hear more details on this topic, but here are some quick observations:

• U.S. stocks trend upward on average in election years regardless of which candidate wins the White House

• Balanced portfolios historically help investors meet their financial planning objectives while managing risk over presidential terms

• It's time in the market and not timing that matters the most for an investor; sitting on the sidelines with long-term assets sitting in cash can be costly to a long-term investment strategy

If you look at average and median returns through a presidential cycle, you can see that election years tend to be strongly positive. Historically, median returns are over 10% in an election year, with average returns over 7% in an election year. 

Returns also tend to come more strongly in the second half of the election year, as shown in the chart below. This year has broken the mold with strong returns through the first half of the year. Usually, when this happens, there tends to continue to be strong returns also through the second half of the year.

What Has Led to These Strongly Positive Returns?

While higher interest rates and high inflation seem like a staple part of the economy now, it is easy to forget that we enjoyed decades of low interest rates, low inflation and globalization that drove those trends.

Inflation has resumed its slow march downward despite a small pause this year and some numbers that had looked like they might be turning back upward. It seems unlikely that inflation will accelerate and should continue to resume the disinflation trend. Now, most of the inflation comes from shelter costs, and we have seen rent prices level off and slow slightly. Rent prices starting to come down should help this source of inflation. You also may have noticed your insurance rates increasing. Car insurance has contributed notably to recent inflation numbers. 

Many consumers still feel the sting of higher prices because slowing inflation only means prices aren't going up at the pace they were. The price increases we experienced over the past several years are here to stay and will need to be permanently factored into budgets going forward. Many households have found substitutes by shopping around at bargain retailers, and some have been lucky enough to experience wage inflation (although not enough to offset economic inflation.

Interest Rates and The Fed

It is hard to talk about inflation without discussing The Federal Reserve and the current interest rate environment. As of the end of the quarter, the 1-year treasury rate was ~5.1%, and the 10-year treasury rate was ~4.4%. You are still getting paid MORE in short-term bonds than you are in longer-term bonds – that is strange! In a normal interest rate environment, you would get a higher coupon from longer bonds because, in return, you are taking on more risk and uncertainty from the longer time until maturity.

This environment has made it much more attractive to hold money market funds, CDs, and other short-term instruments, BUT those are not without risks of their own. If the 10-year rate falls, for example, then the risk of being in the short-term bond is that you will miss out on the price gains of the 10-year bond, and if short-term rates fall as well, then you will have to reinvest your money at a lower interest rate once your bond matures. Without knowing the path of interest rates going forward, there is no way to know with certainty which type of bond will outperform. However, we are here to help make sure your portfolio is positioned well for YOUR financial plan.

Speaking of the path of interest rates, despite inflation heading in the direction that the Fed wants, they kept the Fed Funds rate steady at the same rate as it has been for almost the past year: 5.25-5.5%. There are advocates on each side of the argument saying that they should have cut rates already OR that they should even keep further hikes on the table. Jerome Powell continues to stress data dependence and their commitment to the 2% inflation target, and this sentiment is shown in bond rates as rate cut expectations have continually been priced out of the market year-to-date. No one has control over inflation numbers, the Fed, interest rates, or the stock market – you have to  invest given the hand you are dealt.

AI and Meme Stocks

Several investment crazes have filtered into this stock market rally; some have long-term validity, and some don't. The evolving landscape surrounding artificial intelligence has strongly impacted any company investing heavily in it. Nvidia corporation has been the poster child of a rally surrounding artificial intelligence, which has been up very strongly this year, even though it has recently pulled back some. Nvidia is viewed as a pioneer in the space as its business shifted from gaming consoles to data centers where its chips now power large language models like ChatGPT.  Meanwhile, Gamestop found itself in the middle of the meme stock craze again. While returns attributed to meme stock hype are usually short-lived, the idea of social media heavily influencing trading performance is something the markets are still trying to make sense of. While investing in a long-term productivity enhancement like artificial intelligence can drive long-term fundamental returns, meme stocks are more about hype and short-term volatility.

Hopefully, you take a few moments to check out the Olympics this month. I am often in awe of the amazing talent seen from around the world. That kind of talent comes from a lifetime of diligence and hard work, much like successful investing. Natural ability or luck can only take you so far and can't be counted on. Athletes must train in various muscle groups and mental stamina to be successful. Much like athletes rely on diversified training in investing, we rely on asset diversification, good investor behavior, and consistent saving over time to reach our finish line. We are here to help ensure your investments are helping you reach the finish line no matter what the market environment looks like. Don't ever hesitate to reach out with any questions you may have.

Angela Palacios, CFP®, AIF®, is a partner and Director of Investments at Center for Financial Planning, Inc.® She chairs The Center Investment Committee and pens a quarterly Investment Commentary.

Nicholas Boguth, CFA®, CFP® is a Senior Portfolio Manager and Associate Financial Planner at Center for Financial Planning, Inc.® He performs investment research and assists with the management of client portfolios.

Any opinions are those of the Angela Palacios, CFP®, AIF® and Nick Boguth, CFA®, CFP® and not necessarily those of Raymond James. The information contained in this report 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. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. 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 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 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. 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. Diversification and asset allocation do not ensure a profit or protect against a loss. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Past performance is not a guarantee or a predictor of future results. Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional.

The Asset Allocation That Is Right For YOU

Contributed by: Nicholas Boguth, CFA®, CFP®

The Center’s investment committee meets every month, and one of the most regularly discussed topics is the “Strategic Allocation” of our portfolios. The Strategic Allocation is what proportion of our portfolios should, at the highest level, be invested in stocks versus bonds. Then, beyond that, what proportion of the equities should be in large capitalization stocks, small cap, internationally developed, emerging market, and alternative equity asset classes. The same thing on the bond side of the equation when thinking about the proportion of bonds that should be in “core” bond asset classes like treasuries, high-grade corporates, and asset-backed bonds compared to riskier bonds such as high yield, emerging market, long duration, or alternative bond asset classes.

Those discussions may not sound entertaining to you, but we get very energized and spend a lot of time on them because asset allocation is probably the most important decision anyone can make as an investor. This is also why we write about it extensively (sometimes spicing it up with fun analogies…).

I recently listened to a podcast on nutrition and healthy eating habits and couldn’t help but notice the similarities between that topic and asset allocation. The guest on the podcast explained that there is no perfect one-size-fits-all diet for everyone. The ideal diet is the one that gets you to maintain your healthy target weight goal and the one that you will stick with for your ENTIRE life. A quick-fix diet can help with short-term goals, but if you go back to your original diet, there is a good chance that progress will fade. The same goes for investing. 

As financial advisors and portfolio managers, we are committed to helping you create the portfolio that successfully gets you to your target financial goal, AND to find the strategy that you will stick with for your entire investing life. Your asset allocation is useless if you are not committed to it, make changes every time there is a market headline or upcoming election, if it causes more stress than relief, or feel like you can’t take it anymore and would instead hold all cash. Quick fixes, reactive decisions, investing in the hottest asset class of the year, or moving to cash may (or may not) lead to short-term gains, but there is a good chance that progress will fade. Creating a strategy and asset allocation with the intention that you know you will stick with AND will get you to your desired goal is key. 

Many factors will help determine what asset allocation is right for you, and we are here to help you figure out what those are – then implement them all the way through your successful financial plan. How much growth do you need from your portfolio? How much income do you need your portfolio to produce? How much volatility are you comfortable with in your portfolio? Do you have things that you want to invest in that we have to work together to fit into your asset allocation? These are just a few questions we want to work with you to answer. Please don’t hesitate to reach out if you’d like us to help you find your ideal asset allocation or implement it.  

Nicholas Boguth, CFA®, CFP® is a Senior Portfolio Manager and Associate Financial Planner at Center for Financial Planning, Inc.® He performs investment research and assists with the management of client portfolios.

Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. Investment advisory services are offered through Raymond James Financial Services Advisors, Inc.

Center for Financial Planning, Inc. is not a registered broker/dealer and is independent of Raymond James Financial Services.

This information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Any opinions are those of the author and are not necessarily those of RJFS or Raymond James. Every investor’s situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment or investment decision. Investing involves risk, investors may incur a profit or loss regardless of strategy or strategies employed. Asset allocation does not ensure a profit or guarantee against a loss.

"Lock in Yields"?

Contributed by: Nicholas Boguth, CFA®, CFP®

Some common verbiage was recently used in Bloomberg's newsletter: "Lock in yields!"

I never liked this phrase because it is a bit misleading for a few reasons: 

1. Nothing in investing is "locked in". Returns are never guaranteed. That bond issuer MIGHT default. You might not get all those coupons, or worse, you might not get all your principal back. Inflation might eat away at that real return, too, but that is a topic for another time. 
   

2. Many investors hear "locked in" and then forget about price movements. That coupon may be locked in, but if rates increase, then the price of your bond is going to decrease. This isn't necessarily a bad thing (you would be reinvesting at a higher rate, and alternatively, you can see your bond's price RISE if rates move down), but it is the nature of bonds and something investors need to be aware of. 
   

3. If you buy a 10-year bond yielding 5%, you "locked in" $50 per year. $500 over ten years is closer to a 4.1% return annualized. So, did you REALLY "lock in" 5%? Sort of, but maybe not in the way that you thought. Total return on bonds also includes the reinvestment of the bond's coupons, so the path of interest rates over the bond's life matters, too! 

You may think that a certain yield is attractive at a certain duration, but be sure to understand the risks that come along with all bond purchases, such as default risk (risk that you might not get your money back), interest rate risk (risk that your bond's price may move), reinvestment risk (risk that you might have to reinvest the coupons at a lower rate), inflation risk (risk that $50 now might buy you less than $50 in 10 years), and liquidity risk (risk that you may not be able to sell your bond easily when you want to). 

Nicholas Boguth, CFA®, CFP® is a Senior Portfolio Manager and Associate Financial Planner at Center for Financial Planning, Inc.® He performs investment research and assists with the management of client portfolios.

Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. Investment advisory services are offered through Center for Financial Planning, Inc. Center for Financial Planning, Inc. is not a registered broker/dealer and is independent of Raymond James Financial Services.

The information contained in this email does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected.

Q1 2024 Investment Commentary

Contributed by: Angela Palacios, CFP®, AIF®

Contributed by: Nicholas Boguth, CFA®, CFP®

As the 4-year anniversary of the Covid stock market correction came and went last month, markets have given historians and economists much to reflect on. Since the consumer is the major driver of the U.S. economy, the aftereffects of the COVID-19 pandemic stay-at-home policies and the economic reopening policies meant it has taken several years for a recession to roll through the economy. This uncorrelation of the sector effects has made this business cycle feel quite different. For example, when staying at home, we shifted our spending to either saving money or spending on goods rather than services, causing a major recession and unemployment in the services industry (remember when we couldn’t travel and instead spent our money on things like a Peloton!). Once herd immunity was achieved, we shifted our spending patterns from goods to services and travel, causing recessionary characteristics to roll through the manufacturing industry. This lack of synchronization has caused the NBER (National Bureau of Economic Research) to not call a recession here in the U.S. even though we met the official definition of one back in 2022 of two negative quarters of GDP growth (Gross Domestic Product).

Recently, the manufacturing numbers, as measured by the ISM index (a leading economic indicator), finally climbed out of recessionary territory (below 50 readings) after a 16-month continuous streak of contractions. This is the longest contractionary steak since 2002! If you couple this with a recovery in new home building permits (another leading indicator), it looks more and more likely that the Federal Reserve has been successful in engineering a soft landing. The Conference Board Leading Economic Index also rose in March for the first time in two years!

The stock market agrees as the year has started out very strongly, with U.S. stocks up over 10.5% as measured by the S&P 500, U.S. small company stocks up 5.2% as measured by the Russell 2000, and International stocks up 5.78% as measured by the MSCI EAFE. Bonds were off to a slower start, down .78%, as the market reset expectations of the number of interest rate hikes that are likely to occur this year.

As the S&P 500 hits new highs, it is natural that you might be wondering if the market is too expensive. Investing at all-time highs seems like the wrong time to add to your investments. Check out my recent blog for some interesting statistics on forward returns when investing on days the market is making a new high. The moral of the story, though, is that while valuations are expensive, they do NOT necessarily mean the market will crash tomorrow, next quarter, or even next year. Current valuations are usually a poor indicator of how markets will perform in the short run. It is important to set reasonable expectations of future market returns. This is not the same market we have seen over the past couple of years driven by a few concentrated names. Returns have broadened across the benchmark, and political headlines may start to creep into market performance in the short term.

Investing by Political Party: A Long-Term Perspective

What if you ONLY invest in the stock market when your president is in office? Over the past 80 years, the political party-agnostic investor beats the democrat and republican by ~3,000% and ~17,500%!

OK, this may fall under the “lying with statistics” category, but I think it still illustrates two very important points. Stocks don’t grow because of political parties, and time in the market is the single most important factor in growing your investment. 

Let’s consider three hypothetical investment strategies starting with $10,000 in 1945:

1. Republican Only Investor: puts 100% of their money into the S&P 500 when the president is a Republican, otherwise hides their money under their mattress.

2. Democrat Only Investor: puts 100% of their money into the S&P 500 when the president is a Democrat, otherwise hides their money under their mattress. 

3. Agnostic Investor: puts 100% of their money into the S&P 500 the entire time.

The results may shock you. The “Republican Only” investor ends up with ~$309k, the “Democrat Only” investor ends up with ~$1.75M, and the “Party-Agnostic” investor ends up with a whopping ~$54.5M.

Obviously, this hypothetical is a bit outlandish for a few reasons. It has an 80-year time horizon, which is much longer than most people are seriously investing. It is an all-or-nothing strategy that puts all its eggs in one basket or the other. One of those baskets earns 0% (which isn’t realistic if you compare it to money markets or short-term treasuries over time). And lastly, it might lead one to confuse correlation and causation when looking at the Democratic/Republican gap.

It would be easy to point to this as confirmation that the Democratic party is better for stocks, but digging a little deeper makes it less clear. The lead changes throughout history – if we wrote this in the 1990s, someone could point to it as confirmation for the Republican party and stock performance. Aside from that, the gap comes from two very distinct decades: the 2000s that gave investors one of the worst decades of stock returns in history, and the 2010s that gave investors one of the best. Lively debates are still happening today over what caused the Tech Bubble, the Great Financial Crisis, and subsequent recovery – but there were certainly more factors than one. In the long run, stocks grow because earnings grow, and earnings have much more to do with innovation and economic growth than those sitting in the Oval Office.

The second and even more important point is that the best way to partake in those growing stock earnings is, unsurprisingly, to invest in stocks! The chart below uses the same data as the previous chart but only shows the time each investor invested in stocks. Each party held office for almost exactly half of the time, so missing out on the other half was a HUGE detriment to results for both investors.

The Fed, Interest Rates, and Bond Returns

The Fed ended the fastest rate hike cycle in history last summer when they made the final hike to 5.25-5.5%. Since then, the bond market has been trying to pinpoint exactly when the first interest rate CUT would come. March? June? Later? Expectations have been shifting later than initially predicted. You can see that in the rising interest rates the past few months – the 1-year treasury rate was around 4.7% in January but back to 5% by the end of the quarter. What does all this ACTUALLY mean for bond investors, though?

Well, the Fed doesn’t control the entire yield curve – they only have a direct impact on the shortest durations of bonds at the front end of the curve. If you are invested in those short duration bonds, you will probably see the yields fall as the Fed cuts, but the prices of short duration bonds do not move nearly as much as longer duration bonds. Money market funds, for example, have become very popular over the past two years as rates have increased. Roughly speaking, if the Fed cuts rates from 5.5% to 4.5% over the next year, a money market investor would likely see their yield fall a similar 1% but wouldn’t see any price appreciation (they also wouldn’t likely see any price DEPRECIATION if yields were to rise).

Intermediate and long-term bond investors have more factors to consider because those durations are much more volatile and move with longer term economic growth expectations as well as inflation expectations. Just because the Fed cuts rates does not necessarily mean that the 10-year rate would also decrease. BUT if it did, that investor would see significant price appreciation. The flip side to that, as we all saw in 2022, is that those investors saw significant price depreciation as rates rose.

So, What May Be Coming This Quarter?

• Presidential Primary races will continue throughout this quarter, concluding in early June, but with all opponents dropping out of the race, it looks like we will repeat the 2020 election of Donald Trump and Joe Biden. Market driving election headlines are likely to be minimal for now but may start to play into market performance in the short term. Holding the cash you may need in the next year, lengthening the duration of our bonds – to potentially offset equity market volatility, and rebalancing are all tools we are deploying to take advantage of or insulate against short-term market volatility.

• Next month, the SEC will shorten the standard trade settlement cycle from two business days to one business day after the trade date. This reduces the time between when a sale of a security occurs and when the proceeds are cleared for withdrawal.  

• Portfolio spring cleaning? Much like moving through the rooms in your house with a critical eye, the investment committee is focused on reviewing asset classes within the portfolio. We are focused on extending the duration of our bond portfolio with a partial change having already occurred. We will also be doing a deep dive into our international investments. 

We are grateful for the opportunity to guide you throughout your investment journey. If you ever have any questions, don’t hesitate to contact us!

Angela Palacios, CFP®, AIF®, is a partner and Director of Investments at Center for Financial Planning, Inc.® She chairs The Center Investment Committee and pens a quarterly Investment Commentary.

Nicholas Boguth, CFA®, CFP® is a Senior Portfolio Manager and Associate Financial Planner at Center for Financial Planning, Inc.® He performs investment research and assists with the management of client portfolios.

The Composite Index of Leading Indicators, otherwise known as the Leading Economic Index (LEI), is an index published monthly by The Conference Board. It is used to predict the direction of global economic movements in future months. The index is composed of 10 economic components whose changes tend to precede changes in the overall economy.

Any opinions are those of the Angela Palacios, CFP®, AIF® and Nicholas Boguth, CFA®, CFP® and not necessarily those of Raymond James. The information contained in this report 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. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. 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 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 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. 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. Diversification and asset allocation do not ensure a profit or protect against a loss. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Past performance is not a guarantee or a predictor of future results. Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional.

Should I Invest When Markets Are Making New Highs?

Contributed by: Angela Palacios, CFP®, AIF®

While it may seem counterintuitive, the answer can be yes! The chart below shows forward returns for the S&P500 when investing on days when the market is making new highs. The green bar shows the average forward returns when investing on a day the market makes a new high, and the gray bar shows the forward returns on average when investing on any day. You might be surprised to learn that the outcome is usually better when investing when markets are making new highs!

Think about timing the market less and focusing more on your short- and long-term financial goals. Deciding when and how to invest is more nuanced and needs to be tailored to your situation rather than focusing on short-term market fluctuations. If you are uncertain about the best course of action, ask your financial planner!

Angela Palacios, CFP®, AIF®, is a partner and Director of Investments at Center for Financial Planning, Inc.® She chairs The Center Investment Committee and pens a quarterly Investment Commentary.

Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. Investment advisory services are offered through Raymond James Financial Services Advisors, Inc.

Center for Financial Planning, Inc. is not a registered broker/dealer and is independent of Raymond James Financial Services.

The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of the author, and not necessarily those of Raymond James. Investing involves risk and you may incur a profit or loss regardless of strategy selected, including diversification and asset allocation. 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. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market.

Five Reasons Supporting the Case for Discretionary Investing

Contributed by: Mallory Hunt

We all lead busy lives. Whether you are getting down to business (in the throes of the grind??) or enjoying your retirement to the fullest, who wants to worry about missing a call from their advisor because something in their portfolio needs to be changed? Perhaps cash needs to be raised to meet that monthly withdrawal to your checking account so you can keep paying your traveling expenses. Or maybe you are still in the saving phase, and money has to be deposited into your investment account to keep pace with your retirement goals. Regardless of your situation, many investors find it challenging to make time to manage their investment portfolios. We would argue that this is far too important to be left for a moment when you happen to have some “spare time” (is that a thing?!). In the dynamic world of finance, making the right investment decisions can be a complex and intimidating task. Discretionary investing emerges as a powerful solution for clients seeking an investment strategy that places the decision-making responsibilities in the hands of seasoned professionals, offering a myriad of benefits that cater to the diverse needs of investors.

What is Discretionary Management?

Discretionary management is the process of delegating day-to-day investment decisions to your financial planner. Establishing an Investment Policy Statement that identifies the guidelines you need your portfolio managed within is the first and arguably the most important step of the process. Investment decisions can then be made on your behalf within the scope of your unique criteria laid out in this statement. Think of it as utilizing a target date strategy in your employer’s 401(k): you tell it how old you are and when you will retire, and Voilà! All of the asset allocation, rebalancing, and buy/sell decisions are made for you.

5 Reasons This Can Be a Suitable Option for Investors:

1. Adaptability to Market Changes: Financial markets are inherently unpredictable, and staying ahead of the curve requires constant vigilance. Discretionary management allows for swift responses to market changes, adjusting and rebalancing portfolios in real-time to capitalize on emerging opportunities or shielding against potential downturns. In the face of evolving market conditions, this adaptability ensures that your investments remain aligned with your financial goals, whether you can be reached or not.

2. Time Efficiency: For many clients, the demands of daily life leave little time for in-depth market research and portfolio management. Discretionary investing provides a welcome solution by freeing clients from the burden of day-to-day decision-making. This frees up your time and allows your focus to be redirected to what’s important to you: your family, your career, and personal pursuits. After all, time is the resource we all struggle to get our hands on. Need I say more?

3. Tailored Approach to Unique Goals: Discretionary investing is NOT a one-size-fits-all strategy. Seasoned investment managers take the time to understand each client’s unique financial goals, risk tolerance, and time horizon. This personalized approach ensures that investment strategies are aligned with the needs outlined in the Investment Policy Statement. Think of this as your customized roadmap to financial success. While this is similar to non-discretionary investing, discretion will allow investment managers the ability to keep your portfolio at this set target in a timely manner through strategic and tactical rebalancing when the markets are changing.

4. Diversification & Risk Management: Successful investing is not solely about maximizing returns but also about minimizing risks. Discretionary management employs strategies to diversify portfolios and manage risk effectively. By expanding investments across various asset classes and geographical regions, we can create a resilient portfolio that can weather market fluctuations and aims to deliver more consistent returns over the long term. Again, while this can also be applicable to non-discretionary management, it comes down to the time efficiency offered by discretionary management to continuously monitor your diversification and risk management with no bother to you.

5. Expert Guidance: Discretionary investing allows clients to tap into the expertise of financial professionals; it’s what we are here for! Financial planners and investment managers bring a wealth of knowledge and experience to the table, navigating the intricacies of the market to make informed decisions on your behalf, with your best interest in mind always. In turn, leaving the decision-making to the professionals may reduce the potential for poor investor behavior. Let those not emotionally charged by fluctuations in the market make decisions on your behalf.

In the fast-paced world of finance, where information overload and market volatility can overwhelm even the most seasoned investors, discretionary investing presents itself as a compelling choice. By entrusting investment decisions to experienced professionals, clients may enjoy soundness, time efficiency, and a tailored approach that empowers their financial future. If you have questions on whether discretionary management suits you and your portfolio, don’t hesitate to contact us. We’d be happy to help you weigh out your options!

Mallory Hunt is a Portfolio Administrator at Center for Financial Planning, Inc.® She holds her Series 7, 63 and 65 Securities Licenses along with her Life, Accident & Health and Variable Annuities licenses.

Keep in mind that discretion may not be appropriate for clients who prefer to participate in investment decisions or maintain concentrated positions. Additionally, discretionary authority may not be possible with certain investing strategies or accounts, such as options or annuities. Another consideration is whether an advisory account is the best option for client or if a brokerage account would be more suitable. Its important to consider all options and speak with a financial advisor about your specific situation.

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. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Mallory Hunt and not necessarily those of Raymond James. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Every investor's situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. Prior to making an investment decision, please consult with your financial advisor about your individual situation.

Center Clients Donate over $1 Million in Tax-Savvy QCD Strategy in 2023

Contributed by: Lauren Adams, CFA®, CFP®

We are proud to announce that The Center assisted clients in donating over $1,000,000 to charities using the Qualified Charitable Distribution (QCD) strategy in 2023!

The QCD strategy allows clients with assets in an IRA account and who are over age 70.5 to donate funds directly from their retirement account to a charity. Giving directly from an IRA to charity results in those dollar amounts not being included as taxable income for that year. That usually results in a lower tax bill for clients and can have positive downstream effects like lowering the amount they may pay for Medicare premiums and the portion of Social Security that is taxable to them, depending on their situation and income level. For those 73 or older, QCDs also count towards the distributions they need to take each year for their Required Minimum Distribution.

Now, there are some caveats for QCDs – for example, you need to be at least 70.5, and the charity must be a 501c3. There are also limits on how much you can give each year through this method, but that number is relatively high at $105,000 per person per year currently.

The Center’s mission is to improve lives through financial planning done right, and we are proud to be able to help clients make such a positive impact on the world (bonus points for it being in a tax-savvy manner!). 

Did you know that QCDs are only one of many charitable giving strategies our team helps clients deploy? Check out this video to learn more about ways our clients make their charitable dollars stretch further for the causes they care about while also potentially lowering their tax burden. 

As always, we recommend that you work with your tax preparer to understand how these strategies can affect your situation. If you want to explore these strategies and more, contact your Center financial planner today! 

Lauren Adams, CFA®, CFP®, is a Partner, CERTIFIED FINANCIAL PLANNER™ professional, and Director of Operations at Center for Financial Planning, Inc.® She works with clients and their families to achieve their financial planning goals.

The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of Lauren Adams, CFA®, CFP® and not necessarily those of Raymond James. 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.

Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. Investment advisory services are offered through Raymond James Financial Services Advisors, Inc.

Center for Financial Planning, Inc. is not a registered broker/dealer and is independent of Raymond James Financial Services.

Capital Gains: 3 Ways to Avoid Buying a Tax Bill

Contributed by: Mallory Hunt

As you may be aware, when a mutual fund manager sells some of their holdings internally and realizes a gain, they are required to pass this gain on to their shareholders. More specifically, by law and design, registered investment companies are required to pay out 95% of their realized dividends and net capital gains to shareholders on an annual basis. Many of these distributions will occur during November and December. With that in mind, ‘tis the season!  

Many firms have started to publish estimates for what their respective mutual funds may distribute to shareholders in short- and long-term capital gains. Whether or not a capital gains distribution is considered short-term or long-term does not depend on how long you, as the investor, have held the fund; instead, it depends on how long the management firm owned the securities that produced the gain. Investors who hold funds with capital gains distributions in taxable accounts must report them as taxable income even if the money is reinvested in additional fund shares. In tax-advantaged accounts such as IRAs or 401(k)s, capital gains distributions are irrelevant as investors are not required to pay taxes on them as long as no withdrawals are made.

It can be frustrating to know that you may even face a tax bill on a fund with a negative return for the year. There are several reasons why funds may sell holdings and generate capital gains, including but not limited to:

• Increased shareholder redemption activity during a down market. In order to fund these redemptions, funds may need to sell securities, which may, in turn, generate capital gains.

• To reinvest the proceeds in a more attractive opportunity. 

• Concerns about earnings growth (or if a stock has become fully valued in the manager’s opinion).

• Corporate mergers and acquisitions also may result in a taxable sale of shares in the company being acquired. 

Investors concerned about tax exposure may want to consider investing in more tax-efficient equity funds. Such funds tend to be managed to limit capital gain distributions, when possible, by keeping holdings turnover low and harvesting losses to offset realized gains.

Capital gains distributions are a double-edged sword. The good news? The fact that a capital gain needs to be paid out means money has been made on the positions the manager has sold. Yay! The bad news is that the taxman wants to be paid. Boo! Do keep in mind that this is what you have us for, though. We are here to help manage around and alleviate the effect these capital gains distributions may have on you and your portfolio.

WHAT WE CAN DO TO MINIMIZE THE EFFECT OF CAPITAL GAINS DISTRIBUTIONS:

1. Be Conscientious

We exercise care when buying funds at the end of the year, which may mean holding off a couple of days or weeks to purchase a fund in your account in some cases. Why? We do this to avoid paying taxes on gains you didn’t earn. This also allows you to purchase shares at a lower NAV or Net Asset Value.

2. Harvest Losses

Throughout the year, we review accounts for potential loss harvesting opportunities (also known as Tax Loss Harvesting). Where available and when appropriate, we sell holdings we have identified with this potential to realize those losses and offset end of the year gain distributions from fund companies. *See our blog titled “Tax Loss Harvesting: The ‘Silver Lining’ in a Down Market” for more details on this strategy.

3. Be Strategic

We may sell a current investment before its ex-dividend date and purchase a replacement after the ex-dividend date to avoid receiving a company’s dividend payment. Dividends are treated as income by the IRS.

As always, there is a balance to be struck between income tax and prudent investment management, and we are always here to help distinguish.

Mallory Hunt is a Portfolio Administrator at Center for Financial Planning, Inc.® She holds her Series 7, 63 and 65 Securities Licenses along with her Life, Accident & Health and Variable Annuities licenses.

This material is being provided for information purposes only and is not a complete description of all available data necessary for making an investment decision, nor is it a recommendation to buy or sell any investment. Every investor’s situation is unique and you should consider your investment goals, risk tolerance, tax situation and time horizon before making any investment decision. Any opinions are those of Mallory Hunt and not necessarily those of Raymond James. For any specific tax matters, consult a tax professional.

Investors should carefully consider the investment objectives, risks, charges and expenses of mutual funds before investing. The prospectus and summary prospectus contains this and other information about mutual funds. The prospectus and summary prospectus is available from your financial advisor and should be read carefully before investing.

Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. Investment advisory services are offered through Center for Financial Planning, Inc. Center for Financial Planning, Inc. is not a registered broker/dealer and is independent of Raymond James Financial Services.

Q3 2023 Investment Commentary

Contributed by: Angela Palacios, CFP®, AIF®

The third quarter of the year has brought some downside volatility with it. While it can be concerning when opening your statement, it is important to remember that minor pullbacks are very normal throughout the year. August and September are, historically, the toughest months on average for markets, as shown by the chart below. The good news is that the last quarter of the year tends to be one of the strongest on average.

Over the past quarter, investor mood has shifted. The S&P 500 ended the quarter down 2.08%. A diversified portfolio ended the quarter down 2.63% if using a simple blended benchmark of (40% Barcap Aggregate Bond index, 40% S&P 500, and 20% MSCI EAFE International index). Quarters like this make it challenging to remember why you want to continue holding a diversified portfolio. Periods like that of 2000-2008 are a distant memory for most investors (and many have never experienced investing when U.S. markets and technology companies have struggled). If you dissect the returns of the S&P 500 year to date, you can see that most of the returns have come from the media dubbed “Magnificent Seven.” In reality, the remaining 493 companies in the S&P have contributed only about 2% of the positive 13% in year-to-date returns. The chart below shows how just these seven companies are responsible for most of the returns.

Source: Morningstar Direct

Maintaining a balanced approach to investing is important, as most of us are investing over a lifetime. While diversification may not always work over short periods of time, studies show it to be a successful strategy over the long term.

What contributed to volatility this quarter?

Higher intermediate and long-term interest rates have spelled trouble for equity valuations recently. The Federal Reserve (the Fed) did not raise rates in September but signaled that they are likely to raise one more time this year and are unlikely to cut rates in early 2024. This has caused longer-term bond rates to increase drastically over the summer (about 1%). We have continued to maintain our allocation to short-duration bonds, which has helped over that time period.

Higher interest rates contribute to equity volatility because investors view all asset classes through a risk/reward lens when determining where best to deploy money. When interest rates are low, investors are incentivized to reach for yield in equities as they pay an attractive dividend (more than treasury bonds were paying for a long time!). You also have the added upside potential of capital appreciation. When you can get interest above 5% in a money market or CD with extremely low risk, investors are less incentivized to invest money into equities, as most of the return needed to achieve long-term goals can be earned with little to no risk! Rates usually don’t stay elevated like this for very long. On average, the period between the last interest rate increase by the Fed and the first interest rate cut is nine months in historically similar periods. So don’t expect these high rates with no risk to stay around long.

Political brinksmanship is yet again holding the economy hostage to further both sides’ political agendas. The government averted a shutdown with only hours left but kicked the can down the road, so we may hear about this again in November. Like with the debt ceiling, we have been here before. The good news is, generally, shutdowns don’t coincide with recessions. There is a lot of noise and, usually, short-term volatility but not a longer-term impact on markets or the economy. The longest shutdown was 35 days at the end of 2018. While it created some temporary market fluctuation, it did not cause a larger economic issue. At that time, the economy contracted about .2% that quarter but got that back the following quarter because government employees get back pay once things open back up. Moody’s, the final of the big three debt ratings agencies to have the U.S. rated AAA, is questioning their AAA rating on U.S. government debt because of the behavior of the politicians. 

Economic Growth is slowing

While Taylor Swift’s Eras Tour is coming to a close and noticeably adding to the local GDP of the cities she performs in, the rest of the economy might be better described by her song “Death By A Thousand Cuts.”

The consumer is out of extra money (one can only buy so many $90 concert t-shirts). The chart below shows how families had stockpiled excess earnings and government transfer payments from the COVID shutdown but have spent this excess savings over the past two years.

The UAW strike will continue to impact numbers like the above chart. As the strike expands, so does the risk of increased shutdowns and layoffs spread throughout the economy. It remains to be seen how long the strike will continue and, thus, how much of a negative impact on GDP it will have. While this strike will have economic consequences, it is only one industry. While there could be spillover if it goes on long enough (for example, people may go out to eat less if they are on strike and not earning their full wages), the UAW strike shouldn’t single-handedly be the cause of a recession.

Home affordability will continue to be hurt by high-interest rates.

Student loan payments restart in October, pulling more money out of the consumer’s pocket.   

Jobs are strong, but job openings are pulling back.

These items, or something yet unknown, could be the tipping point for the economy to turn over into recession in early 2024. Most don’t realize we have already been in an earnings recession this year. This is classified as two or more quarters of contraction in earnings from the prior year. S&P 500 companies have experienced this as a whole this year. Equity markets are certainly spooked about this and are reacting accordingly now, even as the Fed tries to engineer a “soft landing.”

What is a soft landing?

In short, very rare. Ideally, the Fed will stifle GDP growth enough with higher rates to bring down inflation but not stifle so much that growth turns negative. Rather, it just slows down, avoiding a recession. They are counting on the strength of the labor market to remain, keeping the economy out of recession. Only time will tell if the Fed will need to keep rates higher for longer to put the inflation genie back in the bottle. They have come a long way in fighting inflation, as it was just a year ago that we were talking about 9% inflation, and now we are below 4%. The easy sources of inflation have been targeted and curbed (think supply chain shortages), so now it is time to let high interest rates work their magic throughout the economy.

Politics

The Speaker of the House, Kevin McCarthy, was ousted in a 216-210 vote, with 8 Republicans joining the unified Democratic vote. Patrick McHenry is serving as the temporary speaker, who is well respected in the house and should provide good leadership for now. Since we are well into the congressional term, proceeding without a formal leader shouldn’t be too disruptive to normal functioning as committees have already been formed and a rules process adopted. Electing a new speaker will, however, take valuable time away from working on funding the government past the November 17th deadline.

The media coverage is starting to pick up for the election in 2024. Undoubtedly, headlines will only pick up later this year and throughout next year. While there is no shortage of negative headlines during an election year, they tend to be positive for markets. Markets don’t care which party controls the white house. I think many view Republicans as being more pro-business and assume that returns will be far better than when a Democrat holds the office, but that isn’t true. The S&P 500 has gone up regardless of who holds the office most of the time. This is because markets focus far more on what is going on with the economy than on politics. American companies find ways to be innovative and successful regardless of who is leading the country.    

While all of this noise can create market volatility, keeping your long-term goals in mind is more important than ever. We do not generate future forecasts; rather, we trust in the journey of financial planning and a disciplined investment strategy to get us through the more challenging times and stay the course. We appreciate the continued trust you place in us and look forward to serving your needs in the future.

Please don’t hesitate to contact us for any questions or conversations!

Angela Palacios, CFP®, AIF®, is a partner and Director of Investments at Center for Financial Planning, Inc.® She chairs The Center Investment Committee and pens a quarterly Investment Commentary.

Any opinions are those of the Angela Palacios, CFP®, AIF® and not necessarily those of Raymond James. The information contained in this report 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. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. 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 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 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. 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. Diversification and asset allocation do not ensure a profit or protect against a loss. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Past performance is not a guarantee or a predictor of future results. Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional.