A Thanksgiving Walk in the Woods

Tom Levinson Life with Money

A few days before Thanksgiving, motivated by above-freezing weather and a late-afternoon urge for outdoor time, I bundled up and biked a couple miles to a favorite woodsy hiking trail.

Often when I walk this trail it is empty of other people, and so as I pedaled, I presumed the same would be true. But as I turned into the postage stamp parking area, a Nissan Sentra had gotten there before me.

It wasn’t long after I shed my bike and started my walk that a thought emerged: it’s actually pretty desolate out here.

Now, don’t get the wrong idea: I’m not saying something was definitely going to happen. But there was a possibility – remote, sure, but in my “city-kid” brain, non-trivial – that something could occur. Who else was out here with me? It probably wasn’t “Jason” – I don’t know that he would drive a Sentra – or anybody super scary, but … what if it were?

I had a thought, and the thought tinted my walk.

I laughed it off – mostly! – and continued walking through the forest of spindly, skeletal trees. Nailed to one was a sign acknowledging the generosity of two families who’d donated this land for perpetual conservation, while also preserving the trail as a public easement. The last part of the sign read: “Hunting by landowner’s written permission only. Hunter orange is advised during firearm season for deer.”

I looked down. My outfit, marked by a conspicuous lack of orange. And I had no clue when firearm season for deer started and ended.

Was it safe to keep walking?

• • •

In our contemporary culture, we are trained to be attentive – hyper-attentive – to things that might happen. The news cycle bombards us with mayhem and conflict. The worst that can be done to or befall humans.

That’s so often the case in the financial and investing news scape, as well. Headlines blare about risk and recession, declines and volatility. Lurking around every corner, economic catastrophe. There’s so much to be frightened of – and some of it may come to pass.

But much of it doesn’t.
woman looking out window
Sometimes our worst fears are not realized. Sometimes they stay figments of our imagination. I’m grateful for that.

I’m grateful to take a walk in the woods. This time last year, felled by a hip ailment, I was confined to a wheelchair that surely couldn’t make it over roots and leaf piles.

I’m glad my face is uncovered and grateful that many of us, including friends and colleagues, are able to travel to see their families for the first time in years.

I’m grateful for a bike whose brakes work, a road without too many potholes, and the crunch of leaves under my feet.

Lest we forget: I’m also grateful that the Nissan belonged to an older couple. When I met them along the trail, they were studiously focused on a single bud on a winter tree. They were improvising how to design an optimally dark background for an iPhone photo of the bud. In that great big forest, the object of their awestruck attention was the size of a raisin.

At this time, I am grateful for the ordinary. The everyday.

• • •
Happy Thanksgiving to our Park Piedmont clients and friends. We are grateful for the opportunity to walk alongside you as years go by.

How to Invest According to ESG Principles

Sam Ngooi Life with Money

This week’s Life with Money is our second installment on ESG investing.

Last time we discussed various definitions and reasons why people might opt to invest in this way. One key takeaway was that “sustainable investing” is a general umbrella term, whereas Environmental, Social, and Governance (ESG) investing uses data to measure the sustainability of a company (both financial and in terms of global impact).

Today we cover how to invest according to ESG (environmental/social/governance) principles.

• • •

Originally, sustainable investing focused on including or excluding companies from a portfolio depending on whether they aligned with the investor’s values and interests (think: nixing gun-related assets). The level of customization and detailed analysis required to screen and select companies often meant that sustainable investing funds had higher expenses than traditional funds, and much higher than index funds.

These higher fees, along with the loss of diversification from highlighting or eliminating certain sectors, meant that many of these funds had lower returns compared to their traditional equivalents. Adding insult to injury, “greenwashing” has been an issue, with companies and fund sponsors trying to make their investment funds and strategies appear more impactful and good for the planet than they actually are.

More recently, a few developments are changing the ESG investing landscape. A recent push to standardize how ESG data is measured and compared, including new SEC disclosure requirements for companies, helps address the current lack of universal standards and combat greenwashing. Without standardization, choosing how to sustainably invest is like comparing apples and oranges. How can investors tell if one measurement of ‘diversity’ or ‘clean energy’ is the same as the next?

Second, the increasing popularity of ESG investing has led to more fund options and ways to invest (including within many workplace retirement plans). New developments in regulations, machine learning, and big data have already begun to offer more cost-efficient, effective, and automated ways to apply ESG data to sustainable investment funds.
So how does ESG investing work? Here are a few options to consider:

Stocks vs bonds: Whether it’s mutual funds or exchange-traded funds (ETFs), the ESG investing space has long been dominated by stocks. According to the Forum for Sustainable & Responsible Investment (US SIF), about one in four dollars (that’s $12 of $46 trillion in 2018) of total US assets under management are invested using sustainable investment strategies, and (according to Morningstar) ESG bond funds account for less than one-fifth of total ESG fund assets.

Increasingly, there are more sustainable fixed income investment options, particularly as credit rating agencies incorporate more ESG data in their research and ratings to assess risk. As new infrastructure is needed to address global environmental and social issues, the sustainable bond market is expected to continue growing.

Passive vs active: Active sustainable investing involves picking stocks, sectors, or mutual funds that align with investor and/or fund goals. It can involve using ESG data to handpick investments that are predicted to do well or choosing to exercise active ownership through direct engagement (e.g. proxy voting) with companies on ESG topics.

By contrast, passive sustainable investment options often use quantitative ESG data to group investments into indexes that meet a particular sustainability goal and achieve investment results comparable to the segments of the stock market in which they choose to invest. Passive sustainable investing has increased in popularity over the years due to the cost and tax advantages that give them a built-in edge over active sustainable investments. During the last few years, net flows into passive ESG funds have outpaced those into active ones. (The US SIF reports that in 2019, net flows into passive ESG funds totaled $12.7 billion compared to $8.7 billion into active funds).

PPA uses a passive, indexed approach to managing investment portfolios overall, and this extends to helping interested clients invest according to ESG principles.

Broad vs narrow: ESG investing can be as broad as buying all of the stocks that meet certain ESG criteria within a certain area, such as the US stock market or international (both developed and developing country) markets.

Other sustainable funds tout a primary, or “sector,” focus, such as climate change or gender equity, which might appeal to clients with interests in a particular aspect of ESG. Examples of ESG sector funds include SPDR’s Gender Diversity Index (SHE), which seeks out companies that employ women in high-level leadership roles, and New Alternatives Fund (NALFX), an actively-managed fund that focuses on global alternative energy and the environment.

Whatever the scope, investors should look beyond a fund’s name or primary focus to learn about its approach and whether it aligns with their values.

• • •

There is a lot to take in when it comes to ESG investing, but here are some key takeaways:

  • Start by reflecting on your issues: What are your motivations and priorities for sustainable investing? How do they align with your financial goals and needs?
  • Be aware of how sustainable investing is measured, but recognize that the system is imperfect and there are trade-offs.
  • Remember that, as a consumer, there are many other things you can do to live your values in a way that delivers a positive return beyond your portfolio. Perhaps that’s volunteering your time, pursuing philanthropic interests, or choosing to support certain causes through the businesses you frequent or the goods you buy.

Please feel free to reach out to your advisor if you have an interest in or questions about ESG investing.

Pledged Asset Lines: Features and Updates

Nick Levinson Life with Money

Many of PPA’s clients have short-term funding needs. The reasons vary: Some people require infusions of cash between pay checks, including those paid once a month, once a quarter, or only after completed transactions. Others need cash to make a down payment on a new house before their current house is sold. Still others want to finance renovation work on a house without taking on new or additional long-term debt.
Lines of credit (LOCs) are a useful tool in these situations. In general, LOCs are a pool of cash available to borrow, secured, or “collateralized”, by an asset. LOCs typically have adjustable interest rates, with payments required only on amounts borrowed at any point in time. Repayment is flexible, with no pre-payment penalties or fees (other than interest) to borrow again. There are also limited situations where the interest paid on an LOC could be deductible (details should be discussed with an accountant).

A common LOC for homeowners is the home equity line of credit (HELOC). These are secured by a home, typically in conjunction with a mortgage. Lenders analyze whether a borrower can afford a HELOC in a process called “underwriting.” This takes time and usually involves expenses in the thousands of dollars depending on the size of the HELOC.

An alternative to a HELOC is a line secured by the value of the assets in a brokerage account (retirement account assets cannot be used as collateral). As many PPA clients know, Schwab refers to these LOCs as Pledged Asset Lines, or PALs. These lines are especially useful for people with financial assets who don’t own homes, or whose homes already have debt levels that won’t allow for a HELOC.

Another advantage of PALs is their relatively low cost: they typically require less underwriting than HELOCs, with no associated closing costs or other expenses. PAL rates include a fixed component that varies based on the amount of collateral securing the line, and a variable component based on a short-term rate such as 30-day LIBOR (London Interbank Offering Rate) or, more recently, SOFR (Secured Overnight Financing Rate).

Through the beginning of 2022, PALs were not only flexible but also inexpensive. Short-term rates like LIBOR and SOFR were close to zero, so the only interest expense was the fixed part of the PAL. As interest rates have risen along with the US Federal Reserve’s efforts to combat inflation, LIBOR and SOFR are now in the high 3% range, making the total annual cost for many PALs between 5-6.5%. This still compares favorably with most longer-term fixed rate mortgages, which have hovered around 7% in recent months. But the adjustable rate on PALs could rise further if short-term rates continue to increase.

In summary, PALs and other LOCs secured by brokerage accounts can be very helpful in managing short-term cash needs. But rising interest rates have made them significantly more expensive than they were just 6-9 months ago. Please feel free to contact your PPA advisor to discuss managing a current PAL or obtaining a new one.

The Stock Market Isn’t the Economy

Nick Levinson Comments

Stock market performance in 2022 has been dismal. Through October 31, the S&P 500, a broad measure of large companies in the US, had declined 19%.

The causes have been diverse: The highest overall inflation in 40 years. Interest rates that have spiked, with the 10-year US Treasury yield rising from 1.5% at the end of 2021 to over 4% currently. High gas prices, caused in part by the ongoing war in Ukraine. Economic and political tensions with China.

Add it all up, and many analysts expect a recession in the US and many, if not all, other parts of the world.

But underneath the headline stock market returns, we’ve seen glimmers of hope in recent months. Prices on the S&P 500 rose about 17% from July through mid-August. After declining by 8% in September, prices gained back 8% in October. (Remember that it takes a larger gain to offset a decline; for example, a 20% drop requires a 25% rise to get back to the starting point.)

What accounts for these mini-recoveries in the context of terrible economic news?
The short answer is that stock market participants try to look beyond the current economic climate to see what might be happening 6-12 months ahead.

That could be a recession, of course. But in October, it appears that traders were expecting better economic times ahead, and bid the S&P 500, along with other major stock indices, up accordingly.

The optimistic argument in the US appears to involve the Federal Reserve seeing reduced inflation based on the rate increases they’ve already instituted, and in turn starting to reduce, if not stopping altogether, future increases in the short-term interest rates they control. (The Fed has raised rates six times in 2022, including large 0.75% increases in the last five months.)

Lower rates would reduce costs for companies and consumers, and risky investments like stocks would again become more attractive. This is often referred to as a “soft landing” in the media.

Whether it happens or not remains to be seen, of course, but the main point is that the stock market and the underlying economy can diverge at times.

This is one of the primary reasons why PPA recommends that long-term investors (as opposed to traders with short-term perspectives) remain invested in an asset allocation appropriate to their specific circumstances.

Market recoveries can start at any time, even (maybe even especially) when the outlook appears darkest.

A Guide to Holiday Gift-Giving: Making It Merry & Meaningful

Sam Ngooi Life with Money

The holiday season is here! Or rather, major retailers would have you believe it has already been here.

This year, giants like Amazon, Target, and Walmart “moved Black Friday up to early October,” giving shoppers access to “highly anticipated … deals six weeks ahead of Thanksgiving.”

This may be good news for some: the “most wonderful time of the year” has been extended to three months (that’s a quarter of the year, for those keeping track).

But for others, holiday shopping can make the season of giving busy and stressful.

“Being obligated to give, and worrying about how people will react, interferes with the happiness we typically feel at the pure act of giving,” according to Harvard Business School professor Michael Norton.

While nearly 7 in 10 Americans would skip exchanging gifts if their loved ones would agree, we’d like to share a few ways to make holiday giving a bit more merry and meaningful—without saying “bah humbug” to the custom altogether.

• • •
Set Reasonable Expectations

Last year, 36% of Americans incurred holiday debt, averaging $1,249. Rather than worrying about holiday spending after the fact, take time to reflect on your expectations and financial goals.
An early conversation with people in your gift-giving circle can help align expectations around the number of presents, cost, or type of gifts.

Asking, “How do we want to handle gifts this year?” can generate creative gift arrangements, such as pooling money for larger gifts or taking a vacation together.

Shop Thoughtfully
Retailers spend millions to get shoppers to spend more. For example, one-day and limited-time store credit impose pressure on customers to buy things they wouldn’t otherwise.To avoid getting sucked in, recognize sales tactics and stick to a list, then research the best deals.
Give Intentionally

Research shows that gift recipients are more likely to value an experience or activity over material objects, due to the memories and stories generated by the experience (“Remember that time when … ?!”).

A personal note or token gift (think: a pair of hiking socks in advance of a camping trip) can further enhance the excitement and anticipation that make experiences more appreciated than material gifts.

Interestingly, people also feel happier when they receive something they’ve asked for, rather than a surprise. Practical, homemade, or timesaving (i.e., services) gifts are also well-received, provided some careful considerations are made about the recipient’s likes, wants, and needs.

Finally, charitable gifts on someone’s behalf tend to produce the most happiness when they have a well-defined purpose and a way to report back to donors on their impact.

Get Kids Involved

One effective way to reinforce values within families is to discuss the meanings behind holiday traditions and the feelings elicited by giving and receiving gifts.

Ron Lieber, author of The Opposite of Spoiled: Raising Kids Who Are Grounded, Generous, and Smart About Money, notes that involving kids in the gift-choosing process allows parents to encourage family values, such as matching funds allocated to homemade or philanthropic gifts. In addition, a holiday budget helps kids practice money management.

Savor Gratitude

Expressing gratitude can strengthen positive attitudes in the brain and increase happiness and satisfaction. Throughout the gifting process, it’s okay to enjoy the feeling of making someone you care about feel appreciated.

Similarly, communicating your appreciation for the work that went into a gift spreads the good cheer and strengthens your relationship with the gift-giver.

Focus on Values

Reflecting on values and priorities during the holiday season serves as a reminder of what gift-giving is all about: creating special connections and enriching our relationships through caring, kindness, and empathy towards others.

Taking time—either individually, with friends, or as a family—to think about this deeper meaning can help refocus the reason behind the rituals of the season.

• • •
Wishing you a merry, meaningful, and stress-free holiday season!

What is Sustainable Investing?

Sam Ngooi Life with Money

This week’s Life with Money features PPA advisor Samantha Ngooi exploring sustainable investing. This is a substantial, important, and somewhat complex topic – so our discussion will extend across a few installments of Life with Money.

In today’s part one, we provide broad definitions of various relevant terms and discuss why someone might want to invest this way. In upcoming parts, we will delve further into how the various investments work and what PPA suggests clients might look for in potential sustainable investments.

Enjoy, and please be in touch with follow-up thoughts or questions.

• • •

Sustainable investing takes into consideration a company or investment’s environmental and social impact, often with the goal of positive change for the world and a long-term financial gain for the investor.

With a history dating back centuries, this approach to investing has recently exploded into an alphabet soup of terms and definitions, often used interchangeably. While we use sustainable investing as an umbrella term, here are some definitions to help clarify (recognizing this is just the tip of the iceberg):

  • Socially-Responsible Investing (SRI):  this term has historical roots in investing and divesting according to religious, ethical, or moral values. SRI traditionally focused on divesting from undesirable industries (e.g., guns, alcohol, etc.) but now focuses on investing in a way that expresses values (these may belong to investors, fund managers, or a specific theme).
  • Environmental, Social, and Governance (ESG):  this is a system for measuring the sustainability of a company or investment based on its environmental, social, and governance policies and data. Environmental issues can touch on resource conservation and waste, while social aspects look at a company’s impact on internal and external stakeholders (e.g., workplace safety and ethical supply chains). Governance measures a company’s leadership and accountability to shareholders (e.g., how diverse is the board). The key takeaway is that ESG data is often combined with traditional financial metrics to pick or eliminate certain companies in ESG investment options, such as mutual funds and exchange-traded funds (ETFs).
  • Impact investing: often used to describe private investments in and lending to companies that have the intention to do good.

Other terms you may have heard before are green, ethical, or values-based investing. With so many definitions and not much agreement on how to apply them, it’s important to look more closely at these investments to make sure they really do align with your intentions and values. We’ll address these details in one of our next Life with Money installments.

Who is sustainable investing for and why does it matter?

ESG is one of the fastest growing parts of the financial markets, with an estimated $120 billion invested in sustainable investments in 2021 compared to $51 billion in 2020, which in turn increased tenfold from 2018 and 25-fold from 1995.
Sustainable investing is considered largely driven by Millennials and Gen Z cohorts (born between 1980-2010) and their beliefs around issues including climate change, sustainability, and social justice. But research suggests that sustainable investing appeals to a wide range of investors with various interests and motivations that extend beyond the desire to make a positive impact.

Incorporating ESG data can provide a more complete view of a company, shedding light on its health and impact beyond its balance sheet. A United Nations report from 2005 called Who Cares Wins summarizes it well:

“In a more globalized, interconnected, and competitive world, the way that environmental, social, and corporate governance issues are managed is a key part of companies’ overall management quality that’s necessary to compete successfully.”

“Companies that perform better with regard to ESG issues can increase shareholder value by, for example, properly managing risks, anticipating regulatory action, or accessing new markets, while at the same time contributing to the sustainable development of the societies in which they operate. Moreover, these issues can have a strong impact on reputation and brands, an increasingly important part of company value.”

This is important for distinguishing the ideological, value-based (and therefore often politicized) motivations for sustainable investing from the desire to understand investment risks and opportunities through an analytical framework.

As mentioned above, in the next few weeks we’ll provide additional details about sustainable investing, including what investments are currently available, as well as some of the limitations of this type of investing and arguments made against the ESG trend.

Core Values Embodied in Work: A Reflection on Victor Levinson

Nick Levinson Life with Money

This past Sunday, family and friends of Victor Levinson gathered in New York City to remember Vic and reflect on his life, work, and relationships. Reflections were shared by several of Vic’s lifelong friends; three of his grandchildren; and his three adult children (Nick, Lynn, and Tom).

Each of the reflections offered a special window onto Vic. Nick’s reflections, in particular, shined a light on the ways that Vic’s core values were, and are, embodied in Park Piedmont Advisors’ work.

What follows is a portion of Nick’s remarks. We hope you enjoy them.

• • •

I think the best way to describe Vic, both personally and professionally, is that he was always his own man, comfortable in his own skin. He was unconventional, often argumentative, contrarian to the core.There’s no better example of this than his early embrace of indexed investing. Vic had this figured out in the 1980s, when very few others had even heard of indexing. It’s now a dominant approach in the investment world.

Not coincidentally, this is also a great way to serve investment advisory clients. Vic took the idea of being a fiduciary advisor—someone duty-bound to put the interests of clients ahead of his own—extremely seriously, and that has been PPA’s mission since we founded it almost 20 years ago.

PPA enabled Vic to express several of the timeless values he embodied for all of us every day at work. These include:

Curiosity – He was a lifelong learner and avid reader, consuming many books about the investment business, history, and politics. But he also wanted to find out about and understand what others knew and thought. curiosityThis was always evident during meetings with PPA clients, especially new ones, when Vic would gather important information about their financial situation as well as their interests and core values.

Humility – This lies at the core of indexed investing. We acknowledge that we really don’t know anything about the future, and therefore make no predictions about what will happen, especially in the short-term. Despite usually being the smartest person in the room, Vic rarely held that over anyone; he realized that others usually had important contributions to make.

Generosity – This came through best in his passion for sharing his knowledge, especially about investing. I’ve seen Vic spend hours with clients explaining complicated topics in a way calibrated to each person he was working with. This extended to PPA staff, almost all of whom Vic trained in the intricacies of the markets. I know this could be a scary process for PPA staff, but I think in the end all of you realized that he just wanted you to get it and maybe even share his enthusiasm. He was an educator at heart.

The last value I’d mention is integrity. I discussed this earlier in relation to PPA’s status as a fiduciary, but it showed up in pretty much everything Vic did. He didn’t fudge the truth, even when it would have been easier to do so; he was fundamentally civil, in an era where that’s increasingly rare; and he had a sneaky good sense of humor, which often involved breaking into song or going on about The Godfather.

• • •

We’re grateful for the opportunity to have learned from Vic while working alongside him, and his core values continue to be integral to the work we do on behalf of our clients.

Investing vs Trading

Tom Levinson Life with Money

In the everyday reporting about the ups and downs of markets, there is a frequent ambiguity that’s highly important, though easy to overlook.

Take this lead story from the front page of this past weekend’s Wall Street Journal.

“U.S. stocks slid Friday after a relatively strong jobs report, capping a roller-coaster week in which investors built up hopes for easier monetary policy—only to then give them up again …

“Stocks soared Monday and Tuesday, with the S&P 500 and Dow Jones Industrial Average logging their best two-day stretch since 2020 [but] weak data on the manufacturing sector and job openings led investors to bet that the Fed might slow its pace of interest-rate increases in the coming months.” (Emphasis added.)

The article uses the term “investors” several times, though the described behavior – making day-to-day, or even minute-to-minute, gambles on market movement – is that of traders. This is an important distinction.
What are the primary differences?

Investors make investments. Traders make trades. While the same securities markets are used for both of these activities, that doesn’t mean they’re interchangeable.

The crucial difference is the time period over which an outcome is achieved. Successful investing is a long-term process, measured over periods of years. In those timeframes, investors will experience significant up and down periods. By contrast, trading outcomes are known in a matter of moments, or minutes (think the role of the dice, or a horse race, or whether somebody makes a putt).

Long-term investors are interested in participating in the long-term economic growth of the world’s economies. This growth does not come in even amounts and may not come at all for some period of time.

However, to the extent investors have a positive view on the prospects for long-term economic growth, they can be willing to allocate at least some of their investment portfolios to risky asset classes, particularly stocks. At Park Piedmont Advisors (PPA), we manage investment portfolios only for clients who seek to achieve some long-term investment objectives.

We are investors, not traders.

The investment industry is populated by vast numbers of people and institutions who seek short-term profits from trading the very same marketable securities that investors own as investments. What characterizes this activity is that the long-term prospects for a company, or market sector, or the general economy, plays virtually no role in the trader’s decision-making, which instead is focused on whether the trade can be completed at a gain, before it turns into a loss.

In recent market movement – both intraday and day-to-day – we have seen significant volatility. This is largely the product of traders. From the perspective of investors, trading turns financial markets into a casino. Trading disregards any notion of underlying value represented by market prices. As a result, it can undermine the confidence of investors in the financial markets themselves.

So when you read, hear, or see reports in the media about the ups and downs of markets, ask yourself: is this the work of investors, or traders?

Consistent Advice Through Difficult Times

Nick Levinson Comments

After a miserable month of September when stock prices declined 8% and bond prices dropped 4%, we want to provide some context for what’s happened so far in 2022.

Accounting for the most recent few days of significant gains in October, the S&P 500 is down a little more than 20% for the year. Bonds have fallen about 15%. The bond price declines are in many ways much more dramatic than the stock price changes, as New York Times columnist Jeff Sommer wrote in his 10/2/22 piece entitled, “Bonds May Be Having Their Worst Year Since 1794!” (our exclamation point). The causes appear to be varied, including high inflation, supply chain disruptions, and war in Europe.
stock market
We’ve been working with clients for almost 20 years now (Park Piedmont started in 2003). We’ve lived through difficult times, for markets and the economy, and our American and global societies more broadly. We certainly don’t want to minimize the pain caused by large market declines, but we think it’s useful to present some of the guidance we provided during two previous challenging periods.

The main take-aways are as follows:

  • Declines happen; the markets do not provide straight-line positive returns.
  • No one knows when declines will start or end, or how deep they will be. There can be one or more “fake-outs” that look like recoveries but don’t persist.
  • Recoveries also happen. They are similarly impossible to predict.
  • If you’re out of the market when the recovery really starts, you can miss some or all of it.
  • Given all of this uncertainty, we recommend sticking with otherwise appropriate stock and bond allocations for your long-term financial situation. If you have a short-term need for cash, however, those funds should not be invested in the stock market. The best options in this case include very short-term bonds and money market funds.

See below for time capsules of our advice during difficult times in 2009 and 2020.

January 2009 – Advice Amid the Depths

In 2008, stock prices declined 38%, due in large part to a financial crisis caused by a collapsing housing and home loan market. The recovery started in March 2009 after the US Federal government began to institute several reforms and, according to many, bailed out large financial institutions. It took until 2013 for the S&P 500 to recapture the level from the end of 2007.

It is highly appealing to think that investors can simply exit the risky asset classes when they are going down and return when they are going back up. Exiting is in fact the easy part. The difficult part is knowing when to get back in, because if you are out when the market begins to rebound, you could miss much of the return from any recovery that occurs.

In one recent study, the investment firm Jennison Dryden (JD) stated that “fears of further declines and market volatility make investors skittish, with many pulling money out of the stock market after absorbing much of the decline. But then they risk missing the subsequent rebound after the bear market ends, which historically has been very robust. Over the past nine bear markets (starting in 1957, through 2000-2002) … once the stock market discounts economic recovery, stock market returns have historically been quite substantial in the following year, followed by lesser returns in the following two years. Thus, it is important to be in the market, and experience those returns, when the market does rebound.”

The average of the nine bear markets showed declines of 32% from high to low, with duration of a little more than one year, and then an average recovery of 36% in the first twelve months. (Remember, however, that a decline of 32% reduces $100 to $68, while a subsequent recovery of 36% raises the value to $92, still 8% below the starting value of $100.)

The current bear market, which started in October 2007, provides an excellent example of the difficulty of market timing. From the lows of late November 2008, the S&P 500 had a 25% gain through January 6, 2009. People who sold as the market was declining would have had to decide whether the rally from the November lows was the time to get back in. If they did, particularly late in that brief rally period, they would have been looking at significant additional declines by the end of January. And if they did stay on the sidelines, guessing right that time, when would they decide to get back in, assuming they want to at least try to participate in the price gains that come with a recovery?

Do not misunderstand that we know when the recovery is coming any more than the next person, or that it is a given that a recovery is coming. We only know that we do not know whether or when the recovery is coming, so we advocate maintaining some ongoing position in stocks and other risky assets to enable participation when and if the recovery does occur.

One last example of the difficulty of market timing was presented in Jason Zweig’s “Intelligent Investor” column in The Wall Street Journal, in which he cited a study of the Dow Jones Industrials from 1900 through the end of 2008. This study found that “the vast majority of the time, the stock market does next to nothing. Then, when no one expects it, the market delivers a giant gain or loss, and promptly lapses back into its usual stupor … If you took away the ten best days of the almost 30,000 days since 1900, the Dow would lose two-thirds of its cumulative gains over the past 109 years; conversely, if you took away the ten worst days, you would have tripled the actual return of the Dow.” Trying to pick any of those super-charged days certainly appears to us to be an exercise in futility.

March 2020 Observations on March Financial Markets

In early 2020, the beginning of the Coronavirus pandemic led to a worldwide economic shutdown and stock price drops of 33% in two months. Due to massive infusions of cash by the US and other national governments, the S&P 500 recovered to the level from the end of 2019 by September 2020, just six months after the lows. Many observers attribute at least part of the current high inflation to the stimulative policies of the past two years.

We first note the continuation of the extreme negative impacts of the coronavirus on people’s health and their ability to conduct normal activities. This in turn has created major economic issues, as businesses around the world have had to curtail or shut down their operations, generating high levels of unemployment and creating all sorts of problems for those consumers and businesses dependent on their goods and services. There is little doubt that the impacts of the virus have been a major factor in the current substantial stock price declines in the US and worldwide, as well as a reason for the Federal Reserve to take actions that have driven US Treasury yields to historic lows, with mixed impact on other bond prices.

From its recent February 19 all-time high of 3,386, the S&P 500 stock index has been as low as 2,237 (March 23), a decline of 1,149 points, or 34%. This means we are currently at the start of the thirteenth bear market (defined as a decline of 20% from a previous high) since the end of World War II. What is different about this bear market is how brief a time it took to reach this level, which in turn brings us to the idea of volatility. Volatility refers to the extent to which prices vary around an average, either up or down, in a given time frame.

The danger of extreme short-term price volatility in the markets is that it gives investors a reason to “do something.” If in fact your long-term goals have not changed, the likely best action is to do nothing, relying on the history of stock price recoveries from bear markets, some even deeper than this one.

Of course, a health pandemic with no clear finish line presents major uncertainties for all. But reacting to the risk by following and acting on the day-to-day extreme ups and downs in the stock market does not seem to us to be that useful. And remember, your asset allocation away from stocks to bonds, tailored to your particular situation, provides risk reduction and a source of money as needed so that stocks need not be sold during periods of steep declines.

In our February 27,, 2020, Special Comments, we referenced a New York Times article by Ron Lieber advising people with long term investment goals to try to avoid taking action based on short-term fluctuations. Lieber wrote again on the same subject as follows:

“Current stock market activity [is] driven in part by out-of-control algorithms and professional traders with wildly different goals from everyday investors like you … Have your long-term goals changed today?  If not, there is probably no reason for your investments to change either … Your actual asset allocation may mean that the declines in your portfolio aren’t as bad as those flashing red numbers.”

The economic damage done by the “stay at home” policies being implemented to slow the spread of the virus seems certain to result in a recession (defined as two quarters of negative GDP growth). But the question remains whether current stock price levels already reflect this widespread expectation, so that when glimmers of good news appear about slowing the spread, providing reasons to think some relief is in sight, the stock market might be poised to recover.

Stock prices reflect investors’ and traders’ views of the future, both short and long term, which is perhaps a reason for ongoing price volatility, both up and down. Further, how long a recession lasts, and how much economic growth declines during the recession, are always crucial variables. At this point, it is anyone’s guess what the future holds on these matters.

Bonds are designed to provide a buffer for your investment portfolio, normally generating income and much lower price volatility as compared to stocks. Typically, the older people get, the more their investment portfolio allocation should be tilted towards bonds, even with some stock allocation providing a potential for growth in case they live a very long time.

Currently, bond price fluctuations are considerably lower than they are for stock prices. But interest rates are also very low for bonds, so the tradeoff between price stability and price volatility is particularly stark. Bond prices have come under pressure recently, even as interest rates have declined, because of perceived credit risks with bonds. The Federal Reserve has made it clear, however, that it is ready to support the bond market in a variety of ways (NYT, 4/1/20, page B1).

Bonds also provide a source of funds for everyone who needs to be using money currently, so that stocks need not be sold in periods of decline. This is a very brief discussion of a complex topic, but we believe the allocations away from stocks and into bonds, established in more normal times based on each client’s particular situation, are doing their job as intended.

To repeat our recent conclusion: We should all be aware that history may not repeat itself, and that the history we know is only one description of events that have happened, as compared to all those other versions that could have happened. PPA’s view is that the history we present to support a point of view is at least worthy of consideration. In the absence of better indicators, we repeat our consistent bottom line suggestion: stay the course and think long-term.

As always, please feel free to contact your advisor for additional discussion.

Reflecting on Time as an Asset

Tom Levinson Life with Money

When you think of your most valuable assets, how much thought goes into your time?

For many of us – myself included – there is an automatic quality to time, an assumption that the rhythms of our life will, going forward, look and feel much the way they have.

September contributes to this. We live close to a college campus, and while the pandemic tinted the past two Septembers, the current back-to-school – unmasked students walking across campus in the crisp air and changing light – is familiar.

Of course, as the old song goes, it ain’t necessarily so. Our time may seem like it’s moving in predictable cycles, but that’s an illusion. Our time is finite, and precious – an extraordinarily valuable asset.
time as an asset
So – how best to spend it?

A wide body of social scientific research suggests that paying attention to time can help us spend that time better. And the better we spend our time, the greater a return we can get from that investment. In other words: time, like money, is an asset whose value can appreciate over time – if we spend it wisely.

Some takeaways from the research:

  • Pay attention to spending time with family, friends, and people you enjoy: research indicates that “socially connecting activities … comprise the happiest parts of the day.”
  • Having spare time, along with the perception of some control on how to spend it, “has been shown to have a strong and consistent effect on life satisfaction and happiness, even controlling for the actual amount of free time one has.” The research points to a benefit in increasing “discretionary time,” even if you have to pay some money to do so. Interestingly, though, research also points to a diminishing return on spare time: some is good; too much isn’t. Note how this may have implications for the traditional model of retirement.
  • Think about how valuable your next hour or two might be, and how the value can extend beyond that hour: so-called “prosocial” behavior, like volunteering, tends to make people happy. Research has also found, somewhat counterintuitively, that giving away time, as with volunteering, can actually help people feel they have more time. Focusing more on time (vs. money) seems to make individuals more self-reflective, compelling them towards behaviors that are highly aligned with their ideal self.”
  • Simply being reflective about time seems to contribute to people’s happiness. That may have something to do with a recognition of time’s limited nature. “Awareness that one’s overall time in life is limited improves subjective well-being by encouraging people to find greater enjoyment in life’s ordinary pleasures and close relationships.”

I (Tom) found myself reflecting more on time a few weeks ago, in the stretch leading up to the Jewish “Days of Awe,” the period from Rosh Hashanah, the Jewish new year, through Yom Kippur, the Jewish “Day of Atonement.”

It turns out this 10-day stretch (we’re in it now) is a 3,000-year-old cognitive reframing technique. During that time span Jewish people take a break from work, gather as a community, and consider time with one another.

These “High Holidays” ask: What have you done this past year? And what can you do to improve your life, and that of others, in the year to come?

As the contemporary research emphasizes, simply considering the question can have a positive, even a transformative, impact. If time is a precious, finite asset, how will you use it?