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.

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.

Required Minimum Distributions (“RMDs”) – Everything You Need to Know

Contributed by: Nicholas Boguth, CFA®, CFP®

“What is a required minimum distribution?”

RMDs are the amount you are required to withdraw from your retirement accounts once you reach your required beginning date. Remember all those years you added money to your IRA and 401k and didn’t have to pay tax on those contributions? Well, the IRS wants those taxes EVENTUALLY – which is why we have RMDs. These required distributions ensure that you will spend down the assets in your lifetime, and the IRS will receive tax revenue on that income. 

“When do I have to take RMDs?”

When you turn 73. This age has changed multiple times in the past few years from 70.5 to 72 and is intended to change further to 75 in 2033, but for now, anyone turning 73 in the next nine years will have to begin taking RMDs. You must withdraw the RMD amount by December 31st of each year (one minor exception is being allowed to delay until April in your first RMD year). 

“What accounts do I have to take an RMD from?”

Most retirement accounts such as IRAs, SIMPLE IRAs, SEP IRAs, Inherited IRAs/RIRAs, and workplace plans such as 401k’s and 403b’s require RMDs. RMDs are NOT required from Roth IRAs during the account owner’s lifetime. 

“How much will my RMD be?”

The IRS provides tables that determine RMD amounts based on life expectancy. For anyone taking their first RMD this year at age 73, the current factor is 27.4. So, for example, if you have $500k in your IRA, then you will have to distribute $500k / 27.4 = $18,248. That number may be lower if your spouse is listed as the beneficiary and is more than ten years younger than you. 

“What if I don’t take my RMD?”

There is a 25% penalty on the RMD amount. 

“Can I withdraw more than the RMD amount?”

Yes.

“What if I’m still working?”

For most accounts, such as IRAs, you must still take your RMDs. If you have a 401k with your employer, you may be able to delay RMDs in that account until you retire. 

“Will my beneficiaries have to take RMDs after I am deceased?”

Yes. These rules have also changed recently, and like most things in the IRS, there are plenty of caveats and asterisks, but generally speaking, your beneficiary will have to deplete the account within ten years. Certain beneficiaries, such as your spouse, have more options for determining required distributions. 

Tax-deferred accounts like IRAs and 401ks are a significant part of most retirees’ financial plans, so many of us will have to navigate this topic. We’re proud to say that we’ve been helping clients navigate the maze of retirement accounts, RMDs, and beneficiaries for over thirty years, so we are here to help if you have any questions. 

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 material is being provided for information purposes only and is not a complete description, nor is it 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. Rebalancing a non-retirement account could be a taxable event that may increase your tax liability. Conversions from IRA to Roth may be subject to its own five-year holding period. Unless certain criteria are met, Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals of contributions along with any earnings are permitted. Converting a traditional IRA into a Roth IRA has tax implications. Investors should consult a tax advisor before deciding to do a conversion. Matching contributions from your employer may be subject to a vesting schedule. Please consult with your financial advisor for more information. 401(k) plans are long-term retirement savings vehicles. Withdrawal of pre-tax contributions and/or earnings will be subject to ordinary income tax and, if taken prior to age 59 1/2, may be subject to a 10% federal tax penalty. Contributions to a Roth 401(k) are never tax deductible, but if certain conditions are met, distributions will be completely income tax free. Unlike Roth IRAs, Roth 401(k) participants are subject to required minimum distributions at age 72.

Morningstar’s “Star Rating”

Contributed by: Nicholas Boguth, CFA®, CFP®

You may have seen Morningstar’s popular “star rating” at some point in your investment lifetime. Sometimes it shows up on account statements, lists of investment options, or marketing materials – but what exactly is it telling you?

A common mistake we hear is that a fund is presumed to be a “good investment” because it is a “5-star fund” at Morningstar. While the fund may be a good investment, that is not what the star rating tells us.

The star rating is simply telling us how the fund performed compared to peers in the PAST, and we know from one of the most common financial disclosures in the industry that “past performance does not guarantee future results.”

In Morningstar's own words, "It is not meant to be predictive." They do have a qualitative rating that IS meant to be predictive, but that is only available to subscribers of their service (like The Center!) Morningstar is one of our team's many resources in its investment process.

We hope this provides some clarity for when you see these ratings out in the wild. Don't fall victim to what hedge fund billionaire Ray Dalio calls "the biggest mistake in investing" by thinking that just because an investment has done well in the past, it will do well in the future.

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

The information contained in this letter 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 Nick Boguth, CFA®, CFP®, and not necessarily those of Raymond James. Expression of opinion are as of this date and are subject to change without notice. With the Morningstar rating system, funds are ranked within their categories according to their risk-adjusted return (after accounting for all sales charges and expenses), and stars are assigned such that the distribution reflects a classic bell-shaped curve with the largest section in the center. The 10% of funds in each category with the highest risk-adjusted return receive five stars, the next 22.5% receive four stars, the middle 35% receive three stars, the next 22.5% receive two stars, and the bottom 10% receive one star. Funds are rated for up to three periods--the trailing three, five, and 10 years and ratings are recalculated each month. Funds with less than three years of performance history are not rated. For funds with only three years of performance history, their three-year star ratings will be the same as their overall star ratings. For funds with five-year records, their overall rating will be calculated based on a 60% weighting for the five-year rating and 40% for the three-year rating. For funds with more than a decade of performance, the overall rating will be weighted as 50% for the 10-year rating, 30% for the five-year rating, and 20% for the three-year rating. The star ratings are recalculated monthly. For multiple-share-class funds, each share class is rated separately and counted as a fraction of a fund within this scale, which may cause slight variations in the distribution percentages. This accounting prevents a single portfolio in a smaller category from dominating any portion of the rating scale. If a fund changes Morningstar Categories, its historical performance for the longer time periods is given less weight, based on the magnitude of the change. (For example, a change from a small-cap category to large-cap category is considered more significant than a change from mid-cap to large-cap.) Doing so ensures the fairest comparisons and minimizes any incentive for fund companies to change a fund's style in an attempt to receive a better rating by shifting to another Morningstar Category. For more information regarding the Morningstar rating system, please go to https://www.morningstar.com/content/dam/marketing/shared/research/methodology/771945_Morningstar_Rating_for_Funds_Methodology.pdf 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. Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. Investment advisory services are offered through Raymond James Financial Services Advisors, Inc.

Today’s Winners May Have Been Yesterday’s Losers

Contributed by: Nicholas Boguth, CFA®, CFP®

The markets can be described as cyclical, volatile, and full of booms and busts. Often those cycles seem clear as day when looking back on them through history, but they are much harder to identify in real-time. And even when most investors seem to be on the same page about what point of its cycle an investment is in, there is no telling just how far that investment can continue to climb or fall before it turns around. If many investors agree that Nvidia is in a “bubble” at ~35x price to sales, but its stock price climbs another 100%...were they right?

That cyclical nature creates an unpredictable stream of winners and losers every year, but it is important to recognize that it is just that…unpredictable. Today’s winning investments very likely could have been yesterday’s losers. Here are a few recent examples:

• Energy was the worst-performing sector in 2020 (down over 30% while the market was generally positive). Then from 2021 through 2022, it ran up an incredible 150% (the next closest was healthcare at +23%)

• The financial sector was the worst performer in 2011 but the best performer in 2012.

• Real estate was the worst sector in 2013 but the best in 2014.

This trend has been common throughout history. Does that mean we just cracked the code? Just buy the worst-performing sector from the prior year and profit! Well, that doesn’t always work out either:

• Energy was the worst-performing sector in 2019 and also the worst-performing sector in 2020.

• Communications was one of the worst in 2013 and again in 2014.

• Financials were the worst in 2007, and again in 2008.

The uncomfortable fact about the markets is that they are unpredictable, risky, and do not always seem to make sense at the moment, but with that risk comes reward. Trying to time market cycles is a losing game. We believe in creating an approach that positions our clients for success through every boom and bust in their lifetime. No one knows WHEN those booms or busts are coming, but we do know that they will happen sooner or later, and we want you to be prepared either way.

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

The information contained in this letter 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 Nick Boguth, CFA®, CFP®, and not necessarily those of Raymond James. Expression of opinion are as of this date and are subject to change without notice. There is no guarantee that these statement, 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, including diversification and asset allocation. Individual investor’s results will vary. Past performance does not guarantee future results. 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.

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

What to Expect Going Forward - The Economy and Your Investments

Contributed by: Nicholas Boguth, CFA®

At the beginning of the month, RJ released some market commentary with the striking line…

"While inflation fears remain high, it is likely that we are past peak inflation and the largest interest rate increases are behind us."

This year has been riddled with reasons to worry about the economy and your investments, but some encouraging data has been released that may provide some optimism. Jobs surprised on the upside early in August, the stock market has bounced off of its lows, personal consumption remains high, and we've seen gas prices come down to provide relief at the pumps.  

RJ ends the commentary with some more encouragement…

"We likely have more weakness to endure, but Joey Madere, senior portfolio strategist, Equity Portfolio & Technical Strategy, says investors can expect positive returns over the next 12 months and beyond, given the view that economic weakness should be relatively mild and inflation will moderate. Long-term investors should anticipate an eventual rally on the other side of this weak trend and take advantage of potential buying opportunities. Bear markets go down 20% to 35% on average, but bull markets average roughly 150% returns.

While volatility feels uncomfortable, experience suggests that adaptability and a cool head will help weather any market environment and position for the future.”

It's been a rough year for most asset classes YTD. Still, the pain and uncertainty also provide opportunity as bond yields increase and stock valuations decrease, suggesting higher expected returns going forward. We're continually monitoring the changing environment and are happy to answer any questions you may have about how it all affects or doesn't affect your overall financial plan. 

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

This market commentary is provided for information purposes only and is not a complete description of the securities, markets, or developments referred to in this material. Any opinions are those of Nick Boguth, CFA® 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. Past performance does not guarantee future results. Diversification and asset allocation do not ensure a profit or protect against a loss.

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.

Part 2: Are International Equities Dead?

Contributed by: Nicholas Boguth, CFA®

In part 1 of this 2-part blog series, we discussed the importance of diversified investing despite the recent pain that many asset allocations have felt. We're now turning our attention to a key asset class when thinking about diversification…international stocks.

The S&P 500 (U.S. Large Stocks) returned over 14% annualized for the past ten years. The MSCI EAFE (International Large Stocks) returned a "mere" 7% annualized over the same period. 

This run of outperformance from U.S. stocks has been nothing short of astounding. Between the past outperformance and the current geopolitical conflict overseas, you might feel pressure to throw in the towel on international stocks and invest all of your money in the U.S. stock market. Still, we're here to share some perspectives on why that may not be to your benefit. 

My colleague, Jaclyn Jackson, CAP®, Senior Portfolio Manager and Investment Representative, RJFS, shared some research and statistics on the benefits of diversification in a total portfolio. Spreading bets across many asset classes has historically provided a smoother ride for investors and ultimately led to a higher expected value for portfolios.  

The same principle applies within asset classes. History has repeatedly shown that owning many types of stocks, rather than concentrating on one type of stock, may help maximize investors' chances of achieving return goals and limits the chances of major financial loss.

Beyond the timeless lesson from diversification, international stocks are trading at a larger discount to U.S. stocks than we've seen in a long time. History has also shown us that neither asset class has held a permanent premium when comparing U.S. to international. Lower valuations now suggest higher returns in the future, so valuation is a compelling story if you're looking for a reason to stick to your international allocation. 

Chasing performance is a significant pitfall of both novice and professional investors, but rarely leads to improved investment outcomes. The recent, prolonged outperformance of the U.S. stock market may make it tempting to think that the U.S. will continue to outperform indefinitely, but history suggests otherwise. We don't believe international equities are dead, and we'll continue to stick to the timeless practice of diversification in our portfolios.

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

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 Nick Boguth, CFA® 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. Standard deviation measures the fluctuation of returns around the arithmetic average return of investment. The higher the standard deviation, the greater the variability (and thus risk) of the investment returns.

The MSCI is an index of stocks compiled by Morgan Stanley Capital International. The index consists of more than 1,000 companies in 22 developed markets.

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.

Battle of the Brackets…Portfolio Management Edition: A Center Spin-Off Competition

Contributed by: Nicholas Boguth, CFA®

I believe certain things make our team outstanding here at The Center, and a few of them were in the spotlight this past month amid the March College Basketball Tournament:

• We constantly practice our company values.

• We have a heavy focus on charitable giving.

• And ultimately, we are just a cool place to work.

In the spirit of education, teamwork, and some friendly competition, we ran a bracket competition with an investment focus (we did a normal bracket game too, but mine was busted the first day, so there is no need to talk about that). Every team member chose an asset class to represent their “team” in the tourney. The winner of each round is the asset class that outperformed over the week, and we are repeating for five weeks until we have our champion.

Some team members chose more stable asset classes like short-term U.S Treasuries or investment-grade bonds, while some chose more volatile options like Emerging Market stocks or commodities. Overall, it is fun for the entire team to collaborate and for all of us (not just those in investment roles) to watch how different asset classes move with economic news*.

*We all know there is no shortage of economic news lately from the U.S. and overseas. Markets have been volatile, and times like these stress the importance of having a plan in place. As always, we are here to help answer any questions you may have about your plan. One small but powerful tool in investment management that we have taken advantage of is tax-loss harvesting during volatile markets. Read more about that here.

The cherry on top of this competition is that we are playing for some of our favorite local charities. The Center’s Charitable Committee donated $1,000 to the winning four team members’ charities of choice. Check out the results from last year, as we ran the same competition using individual stocks instead of asset classes. We will continue to find new ways to collaborate, learn, and partner with charities here at The Center. We hope you follow our blog as we update along the way!

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

Any opinions are those of Nicholas Boguth, CFA® and not necessarily those of Raymond James. 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.

Inflation Hedges Explored

Contributed by: Nicholas Boguth, CFA®

Our Director of Investments, Angela Palacios, recently wrote about the factors influencing current inflation rates. She shared a helpful chart from JPMorgan and summarized, “you may be surprised to see the strong average performance from varying asset classes in this scenario. Inflation that is reasonable and expected can be a very positive scenario for many asset classes.”

As the debate continues over whether or not inflation is “transitory,” some investors are thinking about how to protect their portfolios from rising inflation.

Most bonds, aside from TIPS, are generally expected to perform poorly if inflation rises. This should make sense as the fixed income stream from a bond investment will deteriorate if inflation rises. To protect against inflation, one might conclude that removing bonds from a portfolio makes sense, but not so fast. Bonds are typically in a diversified portfolio to protect from the more common (and devastating) risk – a stock market decline. Be sure to know how your portfolio’s risk exposure would shift before considering a move away from bonds.

Vanguard recently released some research on the topic of inflation hedging and concluded that commodities were the best asset class to protect from unexpected inflation. While commodities are generally accepted to be pretty good inflation hedges, one major risk of owning them has been on display for the past ten years. Their return stream can look significantly different than stocks’. Admittedly, this has been one of the best decades in history for U.S. stocks and one of the worst for commodities. To demonstrate just how “different” the returns can be, if you would’ve held one of the largest commodity ETFs over the past ten years, you would’ve underperformed the U.S. stock market by almost 400%.

Trailing 10-year performance of two ETFs that represent the U.S. stock market and the broad commodities market. SPY (green line) tracks the S&P 500, and DBC (blue line) tracks a basket of 14 commodities. Total return. Source: koyfin.com.

Some portfolio managers like Ray Dalio or First Eagle portfolio managers, Matthew McLennan and Kimball Brooker, have been long time proponents of gold as a hedge against inflation. Gold can be a powerful diversifier in a portfolio, but has also seen sustained periods of underperformance that may make it hard to hold over the long term. Here’s a similar chart of how a popular Gold ETF has performed over the past ten years compared to the red hot S&P 500.

Trailing 10-year performance of two ETFs that represent the U.S. stock market and the price of Gold. SPY (green line) tracks the S&P 500, and GLD (blue line) tracks the gold spot price. Total return. Source: koyfin.com.

You may even see articles claiming that bitcoin is the best inflation hedge to add to your portfolio. These opinion pieces make some compelling arguments, but it is important to remember that they are just opinion pieces; emphasis on opinion. We haven’t truly had an inflationary period since bitcoin became popular in the past decade, so there is no way of knowing if its performance has any correlation to U.S. inflation.

Above all else, before jumping to action on your portfolio, remember that inflation is quite hard to forecast. There are an infinite amount of moving parts and multiple ways to measure them. Professional forecasters don’t even agree on what it will look like in the next 12 months, let alone the next ten years or the remainder of your investment time horizon. One of the best ways to hedge against inflation is to talk to your financial advisor and understand how rising inflation might affect your financial plan. That is why we’re here.

Want to know what The Center thinks about inflation? Check out these resources: Inflation and Stock Returns and How Do I Prepare my Portfolio for Inflation.

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

Opinions expressed are not necessarily those of Raymond James. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Past performance is not a guarantee of future results. Investing involves risk and investors may incur a profit or a loss. Treasury Inflation Protection Securities, or TIPS, adjust the invested principal base by the CPI-U at a semiannual rate. Rate of inflation is based on the CPI-U, which has a three-month lag. Bond prices and yields are subject to change based upon market conditions and availability. If bonds are sold prior to maturity, you may receive more or less than your initial investment. There is an inverse relationship between interest rate movements and fixed income prices. Generally, when interest rates rise, fixed income prices fall and when interest rates fall, fixed income prices rise. Investing in commodities is generally considered speculative because of the significant potential for investment loss. Their markets are likely to be volatile and there may be sharp price fluctuations even during periods when prices overall are rising. Gold is subject to the special risks associated with investing in precious metals, including but not limited to: price may be subject to wide fluctuation; the market is relatively limited; the sources are concentrated in countries that have the potential for instability; and the market is unregulated. Bitcoin issuers are not registered with the SEC, and the bitcoin marketplace is currently unregulated. Bitcoin and other cryptocurrencies are a very speculative investment and involves a high degree of risk.