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Special Client Message

May 9, 2022

Investment markets have continued to face a rough ride in 2022. In the first couple of months, equity markets dropped into correction territory. That is a decline of over 10% from previous highs.

In March, markets trimmed losses on hopes the worst was behind us. The recovery was short-lived as markets again declined in the face of the triple threat of inflation, rising interest rates and the war in Ukraine. As we closed out April, many equity indices have returned to previous year-to-date lows.

Perspective on market declines

Frequent and meaningful communication with our clients is part of our process, particularly during difficult markets. The three previous calendar years were great for equity investors. Over that period, the S&P 500 roughly doubled in value.

While rewarding, the returns were not easy. We had to navigate the pandemic as well as other concerns with discipline and restraint. It is difficult to watch these gains, even partially, erode. But periodic market declines are part of investing. Since 1928, a 10% decline has occurred, on average, about every 19 months.

This time, we are hearing that the decline feels different from some of the others we have been through. We agree. The pandemic-related decline of the spring of 2020 was quick and event-driven. The bulk of the brutal 34% decline lasted less than a month.

This decline feels different because it has been slower and grinding. The NASDAQ Composite, home to many big tech stocks, peaked in November of 2021 and has fallen into bear market territory (a decline of 20% or more).1 The S&P 500 peaked in early January of 2022.2 Since then, the optimism over vaccines and recovery has been replaced by a litany of systemic and event-driven concerns; supply chain disruptions, inflation, rising interest rates and the invasion of Ukraine.

Another difference between this and the previous decline is the relative absence of safe havens. During the pandemic sell-off, as risk assets like stocks dropped, lower risk assets, like bonds, particularly Treasuries, held firm and even rose, providing stability to portfolios. During market history, it is common for bonds to show strength in years where the equity markets decline. Not this time.

The Fed has made it very clear that they will be vigilant in efforts to tamp down inflation. That likely means more and faster interest rate increases. Broad bond indices have fallen along with stocks. When we turn to the fixed-income portion of our portfolio this time, we see declines as well. There is, however, a potential bright side to the bond declines. As bond prices decrease, the prospect for higher streams of income in the years to come increases.

How to get through them

We know all the historical facts and figures about the regularity of market declines, while true, are not all that comforting when looking at your investment statements.  While declines occur for lots of reasons and have different durations and in varying magnitudes, it is the long-term effect on investors that matters.

These effects fall into two groups. The first kind of decline is associated with the normal course of market movements. We are not dismissive of them. They can be painful and frustrating but unavoidable if one hopes to grow their purchasing power over time.

The second, and most dangerous type of portfolio decline, is “the permanent loss of capital.” This type of decline should be avoided if at all possible. While you won’t likely hear this phrase on CNBC or social media stock boards, it is over 100 years old.

It is often attributed to noted U.K. 19th century economist and former endowment portfolio manager of King’s College, Cambridge, John Maynard Keynes. Dedicated followers include Benjamin Graham and Charlie Munger. It has long been a core concept of our firm as well. Mr. Buffet even alluded to this principle at the Berkshire annual meeting this past weekend when he lamented that many had turned away from sound principles and turned to a “casino-like” mentality. During the lockdown speculation craze, the battle cry was often, YOLO; “you only live once.”

Taking outsized, often highly risky, leveraged bets was a popular choice for some. This approach has probably resulted in a permanent loss of capital for many.  Similarly, trendy growth IPOs with no present earnings and SPACs have experienced large losses. We agree that we “only live once,” but that just strengthens our resolve to be good stewards of wealth.

We all know attempting to predict short-term market movement is difficult, and there are no guarantees. There are, however, things that we can do. We accept that investment markets are both risky and unpredictable. Portfolios should be mathematically built with that in mind. We try to avoid speculation and leverage. In our opinion, the end goal is not to outperform an index or your brother-in-law’s meme stock trades. The goal, as in the pandemic decline and today, is to weather the inevitable downturns and live to fight another day. That is what matters.

We use diversification, risk tolerance, Monte Carlo and efficient frontier analysis and other mathematical tools to help. While you may not care to hear an hour-long explanation of these tools, many clients are glad to know they are there.

Remember that we are here; during the good times and the not-so-great times.  Let us know if you would like to talk things over.


1 The NASDAQ Composite is an unmanaged index of securities traded on the NASDAQ system.

2 The S&P 500 consists of 500 stocks chosen for market size, liquidity, and industry group representation. It is a market value weighted index with each stock's weight in the index proportionate to its market value.

Sources: S&P Global, Dow Jones Indices, Forbes, CNBC, Morningstar, NASDAQ, Barclays, Reddit, Lincoln Financial Advisors. Diversification may help reduce, but cannot eliminate, risk of investment losses. Historical performance relative to risk and return points to, but does not guarantee, the same relationship for future performance. There is no assurance that by assuming more risk, you are guaranteed to achieve better results. Past performance is not indicative of future results.

Special Client Message

March 17, 2022

Like most years for investors, 2022 has been an eventful one. As the world continued to reopen, surging demand and supply bottlenecks have caused inflation to rise. After two years of stimulus, the Fed raised interest rates today, with the potential for more hikes to come.

As if all of this wasn’t enough, Russia, after years of saber rattling, launched a full-scale invasion of Ukraine in February.1 Our primary concern is for the people involved. There has been needless suffering and loss of life, and our thoughts continue to be with those affected.

Of course, investment markets have not taken these developments well. Most major world markets have moved down. U.S. equity indices, as well as international markets, have recently fallen into correction territory. That is a decline from the highs of 10% or more.2 Often, when uncertainty causes markets to fall, bonds rise in a “flight to safety” trade. Given the prospect of higher interest rates, even bonds are down for 2022.3

Looking forward and looking back

It can seem overwhelming with so many issues affecting the markets at once. Amid the headlines, important things can sometimes be overlooked. We prefer to look at the totality of circumstances for perspective. Financial markets celebrated an important anniversary on Marth 16th.  It was just two years ago that the world was realizing that the troubling reports of a mysterious virus would become a global pandemic.

The S&P 500 dropped 12% in a single day as markets fell into disarray. By the end of the decline, it had fallen 34%.4 The pandemic decline and recovery were swift. As students of the markets, we know that all market declines are different. However, there are principles that still apply to help get through them.

Volatility is part of investing

There is no real way around it. In order to benefit from the strong return equity markets have historically provided, one must be willing to tolerate declines. The key is to be aware of risk in advance and build portfolios accordingly. Warren Buffett has called this process weathering market declines while attempting to avoid a permanent loss of capital.

Taking a longer-term view

This is a phrase that is thrown around a lot but is of course harder than it sounds. We try to further define it. Whenever clients are making a significant investment decision, we encourage them to ask, “How will I view this move not over the next five days but over the next five years?”.  This can really help in making sound decisions that lead to better investment outcomes.

We are still in the middle of uncertainty and change just like we were two years ago. We made it through it then. The path and the timing will be different this time, but we can do it. As always, we are here to help.


1CBS News, February 24, 2022

2Standard and Poor’s, March 2020 and 2022

3Barclays, YTD

4CNBC, March 16, 2022

Special Client Message

February 24, 2022

After a partial recovery from bouts of volatility in mid-January, markets have turned bumpy again over the past few weeks.  Several concerns have contributed to these movements. These include recent Russia-Ukraine events as well as inflation and interest rates. We know that these headlines and market gyrations can be concerning. Afterall, they affect your portfolio and your ability to achieve your goals.

Russia and the Ukraine

The latest Russia-Ukraine tensions have been simmering for months. The potential effects have caught the attention of world governments and financial markets. U.S. equity markets posted back-to-back losses for the past two weeks. Last week, the Dow Jones Industrial Average fell just under 2%. Interest rates, which had been rising recently, modestly reversed course as buyers sought the safety of U.S. Treasuries.

After months of posturing and provocation, Russian President Vladimir Putin said Monday, Russia would recognize two breakaway regions within Ukraine. Putin then ordered Russian forces into those areas. The United States and European allies quickly announced sanctions. More are likely to come. These events and market reactions are fluid, and we continue to monitor them.

Our approach to managing assets includes perspective, a knowledge of market history and restraint. A closer examination shows that Russia-Ukraine conflict is not new. The tensions go back to the dissolution of the Soviet Union in 1991 when the country was dissolved into 15 independent states.  As the second most populous state, and given its strategic access to the Black Sea, relations with Ukraine were often strained.

In 2014, Russia invaded Ukraine and seized control over Crimea, a highly populated and strategic area of Ukraine. As in the current situation, sanctions and international outrage and saber-rattling followed. It is important to note that while foreign relations are important and often affect world investment markets, they do not control them. With all of the headlines and instability surrounding the Russian invasion of Crimea in 2014, the DJIA was up 7.5% that year.


Inflation concern was heightened last week when the Bureau of Labor Statistics reported that the Consumer Price Index, a widely watched measure of inflation, rose 7.5% for the trailing one- year period. This was higher than the 7.2% expectation. The jump was fueled by significant leaps in energy, vehicles, and grocery items. It is likely that at least some of the price surges are related to the reopening of the economy. The question is how long these rises will persist.

Interest Rates

Another concern is rising interest rates. Unfortunately, many media reports, by their structure, are limited to short sound bites like, “Interest rates surge.” Of course, this is of little help in analyzing the situation. We can do better. As always, examination of how we got here can help put things into perspective.     

One of the rates most often discussed is the 10-year note. This frequently serves as a benchmark for setting longer-term rates like commercial and residential mortgages. This rate is not directly set by the government. It is determined by market forces. As the reopening has haltingly progressed, rates have gone up. News reports are correct that on a percentage basis, rates are up a headline-grabbing 70%. It is important to note that the 70% increase is a move from 1.2% to roughly 2%. For perspective, the 10-year was roughly 3% just over three years ago. 

 How inflation and the Fed discount rate are related

Another important interest rate is the Fed discount rate. This rate is set by the Federal Open Market Committee, which is part of the Federal Reserve. It is used as part of monetary policy to attempt to help smooth the inevitable boom and bust cycles that the economy experiences at times. The discount rate has only been this low twice in recent history. This was during the 2008 Great Recession and again during the 2020 pandemic.

Low interest rates and other stimuli went a long way in keeping the pandemic from having far worse effects on the economy. Now, this stimulus must be withdrawn, and the rates are intended to rise. This isn’t necessarily a bad thing.

By raising the discount rate slowly and persistently, the Fed intends to cool the economy and quell inflation. The expected rate increases, at least at this point, could have a way to go to return to normal. In pre-pandemic 2019, the discount rate was 3%. The discount rate has been both very high and very low over the past 50 years.  The rate has mostly been in a range of 2.0% to 5.0% that has often been seen as a sweet spot for the economy, far above the current near zero rate.

While the rise in the discount rate could pressure certain bond returns in the near-term, there is a potential bright side for fixed-income investors. As rates rise, investors may be more reasonably compensated for their investment. Continued low rates, on the other hand, would mean an extension of the fixed income drought over the past few years.

Managing portfolios in uncertain times

These probably feel like uncertain times. Inflation has risen considerably due to the reopening of the economy. The Fed has signaled that to combat inflation it intends to raise interest rates for the first time since 2015. It can be a little overwhelming. But uncertainty is nothing new in investing. Tolerating uncertainty and volatility are parts of the value proposition of investing in equities. The key is to examine the risk one is assuming and measure the potential impact in advance. We do that.

For the short-term, long-term, and anything in between, we are here.

Over the last few years, we have been through the pandemic and a brutal bear market.  Over the longer-term there have been many other significant challenges. We made it through, based on our solid principles of mathematics, a knowledge of market history and restraint. Of course, our work isn’t finished. It never is. We stand by, ready to serve. Please feel free to contact us with your thoughts. We are here.


2021 Year-End Market Update

As we enter a new year with new opportunities and potential challenges, it is always a good idea to reflect on the past. 2021 was indeed an interesting year. If 2020 was the year of the pandemic, 2021 was the year of recovery and change. A new administration was ushered into Washington. There was much uncertainty about how this would affect tax policy. While the pandemic continued, new hope emerged as vaccines were approved and distributed. There was much international intrigue throughout the year. Domestically, there was the usual political wrangling about legislative agendas on national, fiscal and tax policy.

Speculation emerges due to low interest and boredom

Change was not confined to just the political and pandemic fronts. Investment markets were also affected. Some were fairly logical, and some were, well, weird. With so many people confined due to the pandemic, some apparently grew tired of Netflix and virtual wine tastings. They turned to stocks for entertainment. A handful of stocks, often touted on social media and fueled by leverage and speculation, gyrated wildly. In the end, despite the hype, many wound up losing money.
There were also waves of new companies called “special purpose acquisition companies (SPACs)” that were essentially blind pools often endorsed by celebrities and professional athletes. As is usually the case, the frenzy didn’t work out as well as some had hoped. The CNBC Post SPAC index, a measure of the price performance of post-deal SPACs, fell over 30% in 2021—even as the DJIA returned over 20%.

Sectors rotate and rotate again

2020 was mostly a year when growth stocks (e.g. technology) soared while value stocks (e.g. industrials and energy) failed to participate. That changed in 2021 as the rising rate of vaccinations fed hopes for a reopening. In 2020, the worst performing sector of the S&P 500 was energy, which suffered a bruising 34% decline. A year later, energy was the strongest sector of the market in 2021, roaring to a stunning 55% gain.
These quick rotations and reversals were very common with the reopening and stay-at-home stocks frequently reversing with news of each new variant and vaccine. There is an old investment saying among the momentum crowd that “the trend is your friend.” In 2021 it would be more like “The trend is, wait. Never mind.” We, on the other hand, believe that math, asking the right questions and goal-based portfolios are more lasting friends.

Despite the side shows and volatility, stocks moved solidly higher

Despite the speculation in some corners of the markets, stocks rose strongly in 2021. However, the year was not without serious adversity. Markets were hit with significant choppiness throughout the year as, investors reacted to a host of concerns ranging from politics to supply chain disruptions. After each bout of selling, the market recovered. In all, the S&P 500 set 70 new highs throughout the year.

More change ahead in 2022. We’re ready.

We have some considerable challenges ahead of us. As the world haltingly reopened, demand for goods surged. Supply, still challenged by the pandemic and supply chain issues, struggled to keep up. This has caused inflation to jump to multi-year highs. Another issue is interest rates. As the world hopefully returns to a more normal state, governments around the world will have to gradually withdraw the massive stimulus that was applied during the pandemic. The Fed has already begun to taper its support of the bond market and has signaled that there may be multiple rate hikes in 2022.

While these issues are significant, they are not insurmountable. Conventional wisdom is that inflation and rising interest rates are bad for stocks. We prefer to look at the math. An examination of market history provides some insight. The truth is that there is little evidence that either rising interest rates or rising inflation have a strong correlation to one-year forward returns of the equity markets. Of course, we are not ignoring either inflation or interest rates. Anything that can affect your portfolio is of interest to us.

Domestic Equities: Stocks rose for the third consecutive year as earnings were buoyed by the recovery. The S&P 500 gained 11.0% in the fourth quarter and 28.7% for the year as both growth and value stocks rose. Midcap stocks also had a good year, aided by a strong economy and easier access to credit. The midcap index increased 2.1% for the quarter and 14.8% for the year.

International Equities: Foreign stocks were also positive but trailed the U.S. due to a less vibrant recovery from the shutdown and lingering disruptions around Brexit. The international developed markets index managed a 2.7% return for the quarter and 11.3% for 2021. Emerging markets were the laggard among global equities. Given concerns about overbuilt real estate and China’s apparently less friendly stance toward business, global equities turned in a 1.3% loss in the quarter and a 2.5% loss for the year.

Fixed Income: With the combination of a stronger economy and a less accommodating Fed, bonds were challenged. The Barclays Aggregate, a measure of the total bond market, was flat for the quarter and declined a modest 1.5% for the year. While we would like to see all asset classes advance, it rarely works that way. Given the changes in the pandemic and Fed policy, we consider the performance pretty good under the circumstances.


Together, we were able to navigate a year of change with strength, restraint and perspective, just like we did in 2020. It is wonderful to see investors so amply rewarded. Of course, the changes and challenges are not over.

As markets and the world evolve, we will need to examine our approaches and portfolios to adjust. However, some things will not change. Our principles of discipline and mathematically informed advice are at our core. To paraphrase noted poet and novelist Victor Hugo, “Adapt your opinions and actions as necessary but your principles remain, just as the leaves change but the roots remain.”

Whatever the new year brings, we will be here. Thank you for the opportunity to serve with you. We wish you all the best in 2022!


Sources of data- Wall Street Journal, CNBC, FactSet, S&P Global, MSCI, Russell, Bloomberg. The performance of an unmanaged index is not indicative of the performance of any particular investment. It is not possible to invest directly in any index. Past performance is no guarantee of future results. This material represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Three-year performance data is annualized. Bonds have fixed principal value and yield if held to maturity and the issuer does not enter into default. Bonds have inflation, credit, and interest rate risk. Treasury Inflation Protected Securities (TIPS) have principal values that grow with inflation if held to maturity. High-yield bonds (lower rated or junk bonds) experience higher volatility and increased credit risk when compared to other fixed-income investments. REITs are subject to real estate risks associated with operating and leasing properties. Additional risks include changes in economic conditions, interest rates, property values, and supply and demand, as well as possible environmental liabilities, zoning issues and natural disasters. Stocks can have fluctuating principal and returns based on changing market conditions. The prices of small company stocks generally are more volatile than those of large company stocks. International investing involves special risks not found in domestic investing, including political and social differences and currency fluctuations due to economic decisions. Investing in emerging markets can be riskier than investing in well-established foreign markets. The MSCI EAFE Index is designed to represent the performance of large and mid-cap securities across 21 developed markets, including countries in Europe, Australasia and the Far East, excluding the U.S. and Canada. The Russell 2500 Index measures the performance of the 2,500 smallest companies (19% of total capitalization) in the Russell 3000 index. The S&P 500 index measures the performance of 500 stocks generally considered representative of the overall market. The Wilshire REIT Index is designed to offer a market-based index that is more reflective of real estate held by pension funds.

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