In this episode of Buckingham Weekly Perspectives, Head of Investment Research Jared Kizer explores fixed income investing in the current rate environment and shares three reasons why it’s crucial to take additional maturity risk.Continue reading
The model in which financial advisors earn income could influence their recommendations, which may impact your return on investments, long-term objectives and portfolio performance.Continue reading
Depending on your medical needs and those of your family, you may have enrolled in a high-deductible health plan that allows you to pay for medical expenses using a health savings account (HSA).Continue reading
Is it wise to allocate 100% of your portfolio to fixed income? In this episode of Buckingham Weekly Perspectives, Head of Investment Research Jared Kizer shares why this strategy has gained popularity recently and the surprising reasons why we don’t recommend this approach for most investors.
Jared Kizer: All right. So today I’m going to tackle a question that I recently got from a client that I think is a good topic to tackle, which is the question of are there any scenarios where I should allocate all of my wealth to fixed income without any allocation to say stocks or alternatives of any kind? Are there scenarios where that makes sense? Want to talk about that today and basically think there are a couple of cases, but by and large we’re going to talk about why we think that doesn’t make sense. Interesting question nevertheless to tackle because of course, we have seen interest rates go up a lot over the last couple of years. So this was certainly a question that we wouldn’t have gotten probably two or three years ago because rates were so low by and large. This was not probably a great or even feasible approach for basically any situation, but certainly a reasonable question today to ask now that we have seen interest rates go up. So let’s start with the situations, just a couple where I think this type of approach could make sense.
There is a Fixed Dollar Goal
Jared Kizer: The first would be where you have literally a fixed dollar goal, an exact amount of money that you know today that is due at some point in the future. And you say, I want to set aside that amount or something slightly short of that amount entirely in fixed income to cover that goal in the future. Because I know exactly with no doubts whatsoever what the dollar amount of that goal is going to be. So that would be situation number one, where that could make sense, not necessarily a common situation, but you do see this every now and again.
Your Investable Wealth Far Exceeds Your Spending
Jared Kizer: Situation number two, also not terribly common, but a great situation for those folks that find themselves in this situation would be where you’ve got so much investable wealth relative to the amount that you’re trying to spend over time that virtually any allocation could achieve the goal that you’re trying to achieve. Again, not a situation unfortunately that a lot of folks are in, but for those that are, certainly a great situation in that case, certainly an allocation entirely in fixed income or something closely approaching, that could make sense. Now let’s talk about the balance of the cases, which are cases where I don’t think this is typically the best long-term approach to take.
Fixed Income Allocations Do Not Have the Lowest Volatility Over Time
Jared Kizer: And the reason is going to be maybe somewhat surprising is that you actually do not see historically that allocations that are entirely fixed income have the lowest volatility over time. May be a little bit surprising because you think of well wouldn’t allocating all of my portfolio to, say, U.S. Treasuries be the lowest risk approach over time or the lowest volatility approach and you actually don’t find that. What you find historically is that an allocation of, say, 5% to 10% to stocks historically has actually produced a lower volatility total portfolio than being entirely allocated to fixed income. Why is that the case? Surprising because stocks are, of course, very, very volatile. But what you see there is a basic diversification effect. You see that there are periods like 2022 and other examples that would be even better periods that are very, very difficult for fixed income, that might not be quite as difficult for stocks. And therefore you’re offsetting some of the risks of fixed income with that ever so slight allocation to stocks.
Consider Treasury Inflation-Protected Securities (TIPS)
Jared Kizer: Last thing I would say just in general, for folks contemplating very, very high percentage allocations to fixed income, you might want to consider a sizable allocation portion of that allocation going to inflation-protected securities. So hopefully that’s some helpful perspective on thinking about 100% allocations to fixed income when they might make sense, generally when they don’t tend to make sense. If you have other questions you like for us to tackle, feel free to share those with your advisor or click the link below and submit questions in that way. Thanks.
If you have any questions please feel free to drop us a note.
In this episode of Buckingham Weekly Perspectives, Head of Investment Research Jared Kizer provides an overview, update and outlook on interest rates and inflation as we head into August.
Jared Kizer: I wanted to jump on and provide an update of what we’ve seen in terms of interest rates and broader inflation readings within the economy as we head here into August. And we’ve certainly seen the last couple of months interesting developments on both the interest rate front and the inflation front.
How Will the Federal Reserve Handle Interest Rates?
Jared Kizer: So let’s start with interest rates. So we’ve seen how the Federal Reserve, which through monetary policy, basically determines what short-term interest rates are in the broader U.S. economy and of course has an impact at the global economic level as well.
The Federal Funds Target Rate Has Increased
Jared Kizer: We’ve seen it now increase its federal funds target rate from 5.25% up to 5.50%. You can think of the federal funds rate as essentially the benchmark in the marketplace that sets essentially all other short-term interest rates. So if the Federal Reserve is trying to hit a target of 5.5% interest rate on that particular rate, you’re now going to see, as we do that basically all other short-term interest rates are going to be north of 5% at this point and likely in the neighborhood of 5.5% or higher. So we’re now in certainly a rate regime well above what we’ve seen over the last couple of years.
Will the Federal Reserve Continue to Increase the Federal Funds Rate?
Jared Kizer: We think about going forward. I think the go forward picture is very interesting in the sense of will we see the Federal Reserve keep increasing short term interest rates. That’s one of the biggest economic questions currently out there and very muddled at this point. Whereas over past months it’s basically been with each month with each meeting, there is a general expectation that rates were going to be increasing. I think harder to say at this point, given what we’ve seen and broader economic and inflation readings, whether we’ll see additional increases in that short-term rate. So speaking of inflation, let’s talk about what we’ve seen there over the last couple of months and generally good developments in seeing inflation moderate significantly out there in the U.S. economy. So if you look over the last two months of the months of May and June, the month-over-month inflation rates have been just a .1% in May and .2% in June. Those are very, very low month-over-month inflation readings and certainly seems to indicate that we’re seeing inflation moderate. If you look back a little bit longer and say what have inflation rates been over the trailing 12 months, not just month-over-month, the last three readings have been an annual inflation rate of 5% down to 4% and then right around 3% in June with a trailing 12 months ending June 2023.
Inflation is Moderating
Jared Kizer: So certainly they’re also indicating that we’re seeing inflation moderate and hopefully that will continue. If we look forward and say, well, given that, what does the market expect inflation to be on a go forward basis? Relatively good news there as well.
Where Does the Market Expect Inflation to Land?
Jared Kizer: So if you look into the fixed income marketplace and asked that question, generally fixed income markets are expecting year-over-year inflation even over the longer term to be in that 2% to 2.5% range. So certainly the market is saying in addition to seeing inflation moderating in past data, it expects it to be relatively low going forward from here. So hopefully that’s a good overview in terms of where we sit here in August in terms of short-term interest rates and inflation and expected inflation. If you have additional questions you’d like for us to tackle, feel free to reach out to your advisor and suggest questions in that way or click the link below and submit questions there as well. Thanks.
If you have any questions please feel free to drop us a note.
Sources: Inflation measures are the U.S. CPI Headline Inflation Rate reported by the U.S. Bureau of Labor Statistics (BLS). Federal fund rates are sourced from the Federal Reserve.
When it comes to managing finances, seeking professional guidance can be an important step. However, not all financial planners are created equal. It is crucial to consider the credentials and qualifications of the individual you ultimately decide to guide you on your financial journey.Continue reading
As many committed couples are choosing to forgo marriage, it’s becoming more common for wealth advisors to receive questions on the financial planning implications.Continue reading
While we often talk about the financial aspects of retirement, it’s equally important to consider the emotional, mental and physical facets that accompany the next phase of your life. In this episode of Buckingham Weekly Perspectives, Chief Investment Officer Kevin Grogan shares ten key elements for creating and living a fulfilling retirement.
Kevin Grogan: In most of these videos, we talk a lot about what’s going on in markets today. We’re really diving deep into the academic evidence behind how we invest client portfolios. But today I want to talk more about sort of the softer things or the softer ideas that you need to be thinking about as you move into retirement. And so what I’m going to lean on heavily for today’s video is a book titled “Your Retirement Quest” that was co-authored by Alan Spector and Keith Lawrence. And in that book, they really talk about the things you should be thinking about as you prepare to retire and they identify the ten key elements of a fulfilling retirement. So I’ll highlight each of these with just a couple of thoughts on each one. As in terms of things you should be thinking about as you move into retirement.
Key Element #1: Have a Life Purpose
Kevin Grogan: So the first key element that they mentioned is having a life purpose. And so as you retire, you kind of move out of one phase of your life and into another. And I think it’s only natural that many of us during our working lives kind of identify our life purpose alongside what our job is. So if you are a corporate executive, that’s what you identify your purpose as. And so once you retire, of course, that phase of your life ends and you need to find a new purpose in this new phase of your life.
Key Element #2: Find your Passions
Kevin Grogan: Pretty closely related with that first element is the second element, which is finding your passions. And so it’s very important as you move into retirement to identify what your passions are and try to pursue them as best you can.
Key Element #3: Adopt a Positive Attitude
Kevin Grogan: The third key element is your attitude. So having a positive attitude can make a difference, both in the quality of your life and how long your life actually is. And it’s been found in academic studies that having a positive attitude can add up to seven years to your life. So it is very important as you move into retirement to continue to maintain a positive attitude as best you can.
Key Element #4: Build Financial Security
Kevin Grogan: A fourth key element is financial security. So I won’t spend a ton of time on this one because that’s what the focus of most of our other videos is. But with financial security, really, the main key here is trying to match your lifestyle to the resources that you have available. And of course, having a good financial advisor can be very helpful in identifying what your resources are and whether or not your lifestyle matches up with the resources that you have at retirement.
Key Element #5: Give Back to Others
Kevin Grogan: Fifth key element is giving back. And so there’s good evidence here that supports the idea that by giving back to others, it can actually have benefits to yourself. So it’s been found that retirees who spend a good bit of time volunteering actually have benefits of lower mortality rates, higher functional ability and lower stress. So all of these are benefits to volunteering, at least with some of your time over the course of your retirement.
Key Element #6: Create and Maintain Healthy Relationships
Kevin Grogan: Sixth, is having healthy relationships. So many of us, certainly myself included, a lot of our strongest relationships are with those that you work with on a day-to-day basis. And so once you retire, you need to kind of have a plan for what those relationships will look like after you retire. So having friends, having people that you can interact with is very, very important as you move into retirement.
Key Element #7: Continue to Grow
Kevin Grogan: Seventh is growth. So it’s important to stay mentally active as you transition into retirement. So this can be helpful with, again, your quality of life over time.
Key Element #8: Have Fun
Kevin Grogan: Eighth key element is having fun. So that might be kind of an obvious one, but it’s important to focus on having fun as you retire because that can also have health benefits as you age.
Key Element #9: Focus on Your Well-Being
Kevin Grogan: Number nine is well-being which is it’s kind of the idea that you want to focus on your health. So focus on having good nutrition, having an exercise plan and focus on getting a healthy amount of sleep. And all of these things can contribute to having good health as you age in retirement.
Key Element #10: Create a Retirement Life Plan
Kevin Grogan: And then the last and tenth key element is having a retirement life plan. So while it’s super important to have a diversified investment portfolio, it’s also important to have a diversified portfolio of activities that you’re doing into retirement. And I would encourage anyone who’s not yet retired to really start envisioning and thinking about what their life will actually look like in retirement and start trying it out for size even before you retire. So if you’re going to think about moving to another state, maybe spend a lot of time in that new location before you even retire to make sure that actually fits for what you want to do in retirement. So once again, the name of the book that I’m mostly leaning on here today is called “Your Retirement Quest.” I would encourage you to check that out. And if you do have any questions or anything I’ve covered, please don’t hesitate to reach out to your advisor.
If you have any questions please feel free to drop us a note.
Due to their regular cash flow and perceived lower risk, high-dividend paying stocks are popular with investors. But are they a smart option? In this episode of Buckingham Weekly Perspectives, Head of Investment Research Jared Kizer explains the basics of high-dividend paying stocks and shares why we don’t recommend exclusively investing in them.
Jared Kizer: All right. So today I’m going to talk about high-dividend paying stocks as an investment strategy, of course related to the stock portion of the allocation and get into why we generally don’t think that’s a good at least exclusive approach to the stock allocation portion of the portfolio.
What Are They, and Why Are They So Popular?
Jared Kizer: So really briefly on what high-dividend paying stocks are. So stocks can pay a dividend, so this is just a cash flow that you could earn over the course of the years we’ll talk about here in a second. Not all stocks actually pay dividends, and that’s going to be one of the critiques of this approach. But for stocks that do, they may pay, for example, a 5% dividend yield, which means that the stock is trading at $100, that over the course of that year, you can reasonably expect all else equal that you’re going to get paid $5 of cash.
Why Don’t We Recommend Focusing on High-Dividend Paying Stocks?
Jared Kizer: So because investors tend to be tempted toward cash paying strategies, understandably, to some degree, we do tend to see a lot of questions come in about why not specifically focus on high-dividend paying stocks. So let’s cover the three kind of critiques of this type of approach to investing again, at least as an exclusive approach to investing.
Reason #1: Stocks Will Be Stocks
Jared Kizer: So first point being that high-dividend paying stocks are still stocks, meaning they’re going to be responsive like all stocks are to what is going on in the broader economy and of course, specifically what’s going on with those companies. So you don’t necessarily shed yourself of the risk of stock market investing because you do tend to see if the overall stock market is down a lot, that these high-dividend paying stocks tend to be down as well. Very related to this first point is that because these are dividend payments, they’re at the company’s discretion. So you can, you know, own a stock that’s paying that 5% dividend yield, company hits a rough patch and they eliminate the dividend or cut the dividend in half and all of a sudden you’re not receiving the cash flow that you expected you would. So, there’s a good bit of uncertainty there.
Reason #2: Many Companies Don’t Pay Dividends
Jared Kizer: Second point which relates to changes in the market dynamics is it used to be the case 40 or 50 years ago that a very, very large fraction of stocks paid dividends. We’ve seen that change massively over that period of time to a point where a relatively small fraction of companies, certainly compared to years past actually pay dividends. So if you’re focusing only on those types of stocks, you’re likely going to be more concentrated and potentially focusing on specific sectors and just not be as well diversified as we would like investors to be.
Reason #3: Value Investing Offers Diversity
Jared Kizer: Finally, you’ve heard us talk about value investing, which is the concept of buying stocks that are trading at low prices relative to earnings or the book value of the company compared to the broader market. We think that can be a very sensible approach to stock market investing for a lot of investors. And that approach also tends to own the higher-dividend paying companies as part of that broader approach. So it doesn’t only own those companies, but those companies do tend to frequently fall in the value bucket. So that’s a way to have these companies represented in a stock allocation but not be exclusively focused on those companies. So hopefully that’s a good perspective on the way that we think about high-dividend paying stocks. If you have additional questions you like for us to tackle, feel free to reach out to your advisor or click the link below and submit questions in that way.
If you have any questions please feel free to drop us a note.
Whether it’s from an inheritance, settlement, divorce, a major sale, initial public offering (IPO) of your business or winning the lottery, most people would agree coming into a large sum of money is a good problem to have. But sudden wealth comes with a unique set of unexpected financial and emotional challenges.Continue reading