Real Estate as Part of Your Portfolio

Nick Levinson Comments

We’ve written extensively over the last few months about inflation, interest rates, and how recent changes have impacted the stock and bond markets.

This month we take up the effects of inflation and interest rate increases on real estate, which, along with an investment portfolio, is one of the largest assets many of us own.

First, a little background:

We refer to the stock and bond markets as “liquid,” because stocks, bonds, and funds that own stocks and bonds are all inexpensive — a few dollars per transaction — and fast — cash proceeds can be available in a day or two — to buy or sell. This is a basic definition of financial “liquidity.”

Real estate, whether for personal or investment use, is an “illiquid” asset. Completing a real estate transaction can be very expensive — with broker fees and closing costs of several percent on properties worth hundreds of thousands or millions of dollars — and slow — closing periods typically start at two months.
moving out
There’s nothing inherently better or worse about liquid or illiquid assets in an overall investment portfolio. Long-term returns for stocks, bonds, and real estate have all been significant, and PPA typically recommends having some of both, to the extent possible, as part of a broadly-diversified asset allocation.

But there are some significant differences between the two types of assets that are important to understand.


As we saw through June of 2022 and in other recent periods (2000-2, 2008-9, early 2020), stock prices can decline by large percentages, and very quickly.

This measure of change in markets is known as “volatility.”

We typically think of bonds as being less volatile than stocks, but bond prices have declined very significantly in 2022 as well.

With the slower pace of real estate valuation, which typically requires a lengthy appraisal process, and transactions, large swings in the real estate market typically happen over longer periods of time than in the stock and bond markets.

Once declines start, however, they can still cause damage to your overall portfolio.

According to Conor Dougherty, a real estate reporter for The New York Times, “home prices are still at record levels, and they are likely to take months or longer to fall — if they ever do. But that caveat, which real estate agents often hold up as a shield, cannot paper over the fact that demand has waned considerably and that the market direction has changed.

“Sales of existing homes fell 3.4 percent in May from April, according to the National Association of Realtors, and construction is also down. Homebuilders that had been parsing out their inventory with elaborate lotteries now say their pandemic lists have shriveled to the point that they are lowering prices and sweetening incentives — like cheaper counter and bathroom upgrades — to get buyers over the line.”

Ronda Kaysen, Dougherty’s NYT colleague, reports that “prices are unlikely to take a nosedive, but cracks are showing. In the four-week period ending June 26, the median asking price for newly listed homes was down 1.5 percent from its all-time high this spring, and, on average, 6.5 percent of listings dropped their prices each week, according to a Redfin report.

“Demand is down, too. The same Redfin report found that fewer people were searching Google for homes and asking to tour properties. Mortgage applications were down 24 percent, and pending sales fell 13 percent from the same time a year earlier, the largest drop since May 2020, according to Redfin.”

Sensitivity to Interest Rates:

Mortgage applications have declined in large measure due to recent interest rate spikes.

While rising rates can lead to price declines for stocks and bonds, they can have particularly large impacts on housing demand and prices, since most people borrow significant amounts — typically 70-80% of the purchase price — to finance home purchases.

The US Federal Reserve has raised short-term rates in 2022 from basically zero to 2.25% currently. The 10-year Treasury note rose from 1.5% in January to 3.5% in June. The thirty-year fixed rate mortgage has skyrocketed in turn, from just over 3% at the start of the year to almost 6% in June.

Variable rate lending has also been affected, with the US “prime” rate, which determines pricing on many home equity lines of credit (“HELOCs”), rising from 3.5% to 5.5% in 2022.

Many of our clients have also started using Pledged Asset Lines (“PALs”) for short-term financing, and the Secured Overnight Financing Rate (“SOFR”) and 30-day London Interbank Offering Rate (“LIBOR”), which underpin PAL rates, have increased from 0.05% in January 2022 to about 2.3% today.

The key point is that all these increases happened very quickly. That has led to the signs of dislocation in the US housing market mentioned above.


Stocks and bonds can be purchased through mutual funds and exchange-traded funds, which gather many investments in one place in an attempt to reduce risk by “diversification.”

Funds can be extremely broad-based, including Total World Stock Market funds and Total Bond Market funds. They can also focus on different countries, different size companies and bond maturities, and niches such as alternative energy and infrastructure.

But the common denominator is pooling investments to mitigate risk. Individual pieces of real estate, whether homes or investment property, lack the moderating influence of diversification.

This doesn’t make them bad investments. As mentioned above, real estate can produce very strong long-term results, especially in desirable locations.

And there are ways to pool real estate investments, including syndication and, in the public markets, real estate investment trusts (“REITs”), which PPA includes regularly in clients’ portfolios.

But the geographic, economic, and emotional focus of the typical home, which comprises a large — if not the largest — percentage of many families’ overall financial situations, does create specific risks that need to be acknowledged and understood.

How to Proceed in Uncertain Times:

In terms of how to proceed in these uncertain times, if you don’t need to buy or sell real estate now, that’s probably a good place to be.

For buyers, according to Kaysen, “as the market cools, it could return to one that resembles a prepandemic normal, with homes that take a few months to sell and prices that increase gradually. Buyers may be able to start making a few reasonable demands — for appraisals, inspections and mortgage contingencies. And as inventory increases, they may even be able to compare a few options before making a decision.”

For sellers, on the other hand, “the time has come…to reset expectations. List your house today, and it is unlikely that 24 hours from now you will get to pluck an all-cash bid that’s $150,000 over list price from a sea of contingency-free offers.

“‘Those days are over,’ said Lawrence Yun, the chief economist for the National Association of Realtors. ‘Don’t expect multiple offers.’

“Your home may sit on the market for a few weeks and, if priced well, sell for around the asking price — which will be more than you would have gotten a year ago.”

Veronica Dagher, real estate reporter for The Wall Street Journal, quotes Benjamin Dixon, a real-estate agent in New York City:

“Several sellers he is working with would have sold their apartments in a matter of days if they listed earlier in the year. Now, some owners are considering a price cut, others are considering delisting until the fall and yet others have decided to rent out their homes to capitalize on the hot rental market.

“Renting, though, comes with its own challenges for sellers.

“‘Trying to sell a home with a tenant isn’t optimal for showings, and becoming a landlord isn’t much fun,’ said Mr. Dixon.”

Whatever your current real estate situation — from heavily-allocated in housing and/or investment properties to looking for your first home — please feel free to contact your PPA advisor to discuss how real estate might fit into your overall allocation, as well as how to finance any property you decide makes sense for you.


On the Trip of a Lifetime, How to Budget and How to Splurge

Tom Levinson Life with Money

Working remotely the past several years, our Park Piedmont team has stayed close in a number of ways – chief among them, team huddles over Zoom.

The huddles are our virtual water cooler: a space to convene, connect, and catch up.

As you’d expect, when any of us has a big plan on the horizon – say, a family move or a long-planned vacation – we revisit their progress regularly.

That was the case this past winter and early spring for our colleague Kathryn, who with her boyfriend was planning the trip of their lifetimes: a road trip across Iceland.
As you’ll read in Kathryn’s thoughtful essay below, money always had a seat at the table – both in the planning process and during their travels.

A big challenge: how to be thoughtful around budgeting and spending, without letting the ongoing money conversation overwhelm their fun?

• • •

“Do you have any idea how expensive that’s going to be?”

When my boyfriend and I booked our trip to Iceland in November of 2021, that was the most common feedback we received – closely followed by remarks about how exciting or beautiful the trip was going to be.

It was the trip of a lifetime for us, something we had dreamt about for years.

But when every conversation about it began with budget concerns, we started to get worried.

Could we afford this? Would we be able to experience Iceland to its fullest, or would we have to make some sacrifices?

In reality, most vacations require some sacrifices. It’s rare to be able to see and do absolutely everything on your bucket list in a single trip.

For us, it was time to have an honest conversation about how to prioritize our vacation spending.

When we travel, our expenses typically fall into the following categories: transportation, lodging, food/dining out, activities, and souvenirs or extras.

We knew immediately that we wanted to rent a camper van. With that decision we were able to take care of transportation, lodging, and most food expenses thanks to the van’s tiny kitchenette.

We saved some money by renting the smallest and most affordable camper van offered by the rental company.

In hindsight it would’ve been worth spending more money to get a bigger van – the one we rented was so small we couldn’t even sit upright in the back.

Overall, though, we loved our experience with the camper van and really felt like it was a good value.

To help manage costs, we agreed that we would cook breakfasts and lunches in our van and then go out for dinners. This ended up being a great arrangement.

Given our limited space, we stopped at local grocery stores every couple days to pick up fresh fruits, vegetables and other staples, rather than doing one massive shopping trip to stock up.

Allowing ourselves to dine out for dinners gave us the chance to try some classic Icelandic foods, like lobster soup, fish & chips, and Icelandic lamb. Everything we ate was delicious.

We consider ourselves foodies, so our one big splurge with food was making a reservation at a Michelin-starred restaurant in Reykjavik.
wine tasting
It was worth every penny, as we were treated to a 10-course tasting menu with wine pairings for each course.

The meal focused on foods that are either native or closely linked to Icelandic culture. Each course came with fascinating information about the origins and histories of the ingredients used.

Our next decision was how to budget for activities. There are so many options in Iceland!

From glacier hiking to whale watching to volcano tours and everything in between, the sky really is the limit.

Fortunately for us, we are nature lovers, so we knew most of our activities would be free, like hiking to waterfalls and beaches and dramatic oceanside cliffs to see puffins.

We did spontaneously book an ATV tour that took us across a black sand beach and through a river to the site of an old plane wreck. But we booked the shortest tour offered to keep costs low.

As far as souvenirs go, we brought a few small things home for our families (Icelandic chocolate, lava salt, etc.).

Still, there was one thing I knew I wanted to splurge on: a hand-knitted Icelandic wool sweater known as a lopapeysa. I found and bought one in downtown Reykjavik at a store that includes the knitter’s name on the sale tag.

Our week in Iceland was everything we dreamed it would be. And, deciding where to save and where to splurge really allowed us to make the most of an otherwise expensive destination.

By combining our lodging and transportation into one cost, and bypassing most of the expensive tourist activities to focus on the rugged wilderness of the country, we were able to comfortably spend on things like dining out and spontaneous experiences that really made our trip memorable.

• • •

When we’re having a discussion about spending, either with our clients or as a team, one of the books we frequently revisit is Happy Money: the Science of Happier Spending.

Written by two academics, it’s a surprisingly breezy exploration of the research on what makes for fulfilling spending.

Not like her vacation is getting graded or anything, but by the standards of Happy Money, Kathryn kind of crushed it.

First, the entire trip emphasized “experiential purchasing.”

As Happy Money’s authors Elizabeth Dunn and Michael Norton write, studies repeatedly show that people are in a better mood when they reflect on their experiential purchases rather than on “stuff” – the experiences are generally regarded as “money well spent.”

When people have regrets about “experiential purchasing,” it’s generally about what they didn’t do.

By contrast, when people have regrets about “material purchasing,” it’s typically about what they went ahead and bought.

The trip was one big experiential adventure. And Kathryn and her boyfriend found plenty to do, from hikes to time with puffins, that they were thrilled to be doing – and free to boot.

One other finding spotlighted in Happy Money: one’s sense of satisfaction with experiential purchases tends to increase as time passes. The opposite tends to be the case with material purchases.
So Kathryn and her boyfriend will be able to revisit their Iceland trip for many years to come.

Second: when they splurged, they “made it a treat.”

Happy Money makes clear that when you’ve been eating out of a camper van, that restaurant dinner will be extra special.

Third: their satisfaction increased with their anticipation.

During the planning phase, Kathryn and her boyfriend had roughly six months to imagine their trip: What would the glaciers look like? How would that handmade sweater feel?

According to Happy Money, research shows we tend to derive more joy from things coming to us in the future than from things already received.

Anticipation “provides a source of pleasure that comes free with purchase, supplementing the joy of actual consumption.”

Using some of the lessons from Happy Money, life with money can become a kind of mini laboratory. Through micro-experiments and trial-and-error, you can figure out if these findings are consistent with your own experiences.

Let us know what you’ve found!

The Unwritten Rules of Money

Tom Levinson Life with Money

Not long ago, on our neighborhood’s email list serve, a family having their kitchen gutted and remodeled posed a question.

“Is it appropriate (expected/customary),” they asked, “to give the workers, not the contractor, a cash gratuity?”

Around the same time, a friend was recounting a recent family road trip in Montana. The parents and their high school age kids had gone whitewater rafting for the day.

The friend shared that he’d asked the rafting guide how much he typically gets tipped — was it a dollar amount? A percentage of the total? A “tip of the cap”?

These questions, prompted by curiosity, logistics, and budgeting needs, also illuminate a larger, more mysterious topic: how do we learn money’s unwritten rules?

From the time we’re little kids, money is complex. Most of us don’t learn the ins and outs of money in school.

And within families, money is often shrouded in secrecy, due to family preferences and/or wider cultural norms — among them, a widespread taboo against talking openly about money.

This disinclination to discuss money is itself complicated and has many possible sources. (A 2020 article from The Atlantic is thought-provoking and eye-opening on the topic.)

So how do we all learn about money, if we’re not actually taught?

In reality, all of us, in one form or another, absorb what educators call a “hidden curriculum.” This refers to the things we learn, even though they’re not being formally taught.

Consider how you have, and haven’t, learned about money in your own life.

Who and what have been your sources of information? Was it family? The daily paper? Shakespeare? Sitcoms?

What do you wish you knew more about? Budgeting? Saving? Borrowing? Splurging?

At what points in time do you wish you’d asked more questions? Prepping for college? Contemplating a career path? Estate planning?

We can all point to some moment in time – very likely more than one – when we relied on our “hidden curriculum” about money to guide us.

One countercultural antidote for gaps in one’s financial education toolkit is, as we saw at the outset, asking questions.

On topics where you’re confused, or unsure, or could use a refresher, asking questions of reliable sources — including PPA advisors and our outstanding team — is an important way to keep learning about money.

While we at Park Piedmont might not know the proper amount to tip a whitewater rafting guide (this particular guide recommended 20%!), we are here to help with investing and financial decision-making, and to demystify some more of the unwritten rules of money.

An Introduction to Life with Money

Tom Levinson Life with Money

Among the building blocks of our work as an investment and financial advisory firm, one is a prerequisite: an interest in money.

Now, what we’re calling this “interest in money” isn’t actually about accumulation. There’s nothing wrong in a prosperous life – indeed, there can be much good.

And the subject of wealth accumulation – for example, the question, “How much is enough?” and the more personal, “How much is enough for me?” – is fascinating and certainly worthy of exploration.

But when we write here about having a necessary “interest in money” to do this work, what we really mean is:

  • having a deep curiosity in how people live with and use money
  • how we talk about it – and avoid talking about it
  • how we think about, feel about, dream and dread the essential, unavoidable, complex topic of money

• • •

There’s an essay about money we recently came across.

It’s called “Money Off the Shelf” and, interestingly enough, it’s written by a minister. In this essay, Rev. Lillian Daniel describes her deep ambivalence about money, dating back to her childhood.

“In some ways,” she writes, “I came to this bipolar ministry of money naturally, for I was behaving as I had been taught as a child. When it came to money, you did not tell the truth” (our italics).

As a child, she had been directed by her mother never to tell her father what things cost, because the information – that is, the truth – would upset him.

But as a young minister, struggling to make ends meet with student loan payments and full-time child care, Rev. Daniel opted, quite deliberately, to break her pattern of silence.

“I decided it was time to start telling the truth about money.”

As Rev. Daniel begins to speak openly about her relationship with money in what she calls “stewardship sermons,” she makes a confession to her assembled congregation.

Just as she feels called to donate time and money to worthy causes, so too, she admits to loving cars, clothes, dining out, and travel.

“But in telling the truth,” she continues, “I got a strong response. We started talking together about money.”

“I did not need to be a perfect, altruistic role model for God to use me in a ministry of money. We were all there to work on each other, and telling the truth, being authentic, was just the beginning.”

• • •

Welcome to the inaugural edition of Park Piedmont Advisors’ “Life with Money” newsletter.

Every Friday we’ll share some of our original thinking about the multi-faceted world of money, work, and wealth.

We’ll also share other sources – articles, podcasts, art, history, and culture – that illuminate something helpful, or valuable, or intriguing about our topic.

Let us say: we recognize money conversations are, for many, a no-fly zone.

Our goal at PPA – as a team that works with and explores the ins and outs of money all day long – is to create a space that’s comfortable for you, regardless of your background or experience with financial topics.

It’s a similar goal, perhaps surprisingly so, to Rev. Daniel’s work.

We hope you come to consider this a place where we can openly talk together about money and its role in our lives, communities, and society.

To that end: if you have topics you’d like us to explore – or if you want to weigh in – please do! We would love to hear what you’re thinking.

• • •

Back to Rev. Daniel.

Eventually, after something approaching a religious epiphany in a traffic jam on a Hartford, Connecticut, highway, Rev. Daniel and her husband meet with a financial advisor.

They talk about their jobs, their salaries, and their spending. Together, they come up with a roadmap for their financial lives moving forward.

Her advisor’s practical guidance, she comes to feel, is a gift.

In the process, what she describes as her ministry around money stands out as some of “the most important work clergy do.”

As she puts it, “We talk about money not because it shouldn’t mean anything to us, but because it obviously means so much.”

• • •

“Money Off the Shelf” is one of several essays found in This Odd and Wondrous Calling: The Public and Private Lives of Two Ministers by Rev. Lillian Daniel and Rev. Martin B. Copenhaver.


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Bonds and Stocks Tumble Together

Nick Levinson Comments

You’ve probably seen the headlines about how badly the stock market has performed so far in 2022.

“Bear market.”

“Worst first half of a year in the last fifty years.”

The broadest index of world stocks declined over 21% through June 30, 2022, caused in part by the highest inflation in 40 years and the largest land war in Europe in 80 years.

And the outlook for the rest of the year appears similarly bleak, with many predicting worldwide recession as the US Federal Reserve and other central banks raise interest rates quickly in an effort to stem inflation.

Less publicized, but in many ways much more surprising, has been the decline in bond prices, with the broadest index of US bonds down over 10% through June 30th.

This is the largest drop for bonds since 1994. And it has reversed a trend from recent periods of stock market declines, including 2000-2002 and 2007-2009, when bond prices rose and were widely viewed as a buffer against stock volatility.

Here’s a summary of how bonds work and what it means for you.

Bond Basics

Bonds are one of the main ways companies and governments raise funds to do their work. Stocks are the other.

Bond issuers borrow money from investors over a period of time (the “term”), promising to pay the investors periodic interest and return the money at the end of the term (or “maturity”).

This is why bonds are considered debt for companies and governments, while stocks are considered “equity,” or ownership stakes, in companies. Governments generally don’t offer stock.

The interest rate that bond issuers pay to investors is typically determined in the bond market (the Fed sets short-term rates for banks).

Very stable issuers, like the US federal government and well-established corporations, generally pay less in interest than local governments or less successful companies, because the risk of default on the interest payments and/or principal repayment is lower. This factor is often referred to as “credit quality.”

Shorter-term bonds typically pay less interest than longer-term bonds because the investor has an opportunity to reinvest funds more quickly after the bonds mature.

Another key concept for bond investors is that there are two components of total return for bonds: one is income, represented by the interest rate the issuer pays out, and the other is price change, which can be positive or negative.

This is also true for stocks (and almost all other investments), where income is earned as dividends. Stock price changes typically have wider ranges, both up and down, than for bonds.

Interest income typically represents the main part of total bond returns and is fairly straightforward: for most bonds, issuers pay investors the stated interest rate a few times each year.

Price changes for bonds are less intuitive: as market interest rates rise, typically due to factors such as positive economic growth and rising inflation, the prices of existing bonds, with lower fixed rates, decline.

As market interest rates fall, typically due to factors such as negative economic growth (i.e., recession) and lower inflation, the prices of existing bonds, with higher fixed rates, rise.

This “inverse” relationship between rates and prices causes much confusion but is very important in understanding your bond investments.

The latter scenario (i.e., lower rates/higher prices) characterized the bond market for most of the past three decades. Interest rates stayed relatively low, and bond prices rose.

Since the start of 2022, on the other hand, interest rates (represented by the 10-year US Treasury bond, which often serves as a benchmark for the broader bond market) have risen from 1.5% to almost 3.5% in mid-June.

This very rapid increase has led to the severe bond price declines through June.

Implications and Advice

Interest rates have fallen back to around 3% from the 3.5% high, and bond prices have recovered somewhat, especially in comparison with stock prices.

While bonds and stocks declined by almost equal amounts through March 31, 2022 (with bonds down 6% and stocks 5.5%), stocks had fallen twice as much as bonds through June 30th (down 20% and 10%, respectively).

For the longer-term, rising rates generally have positive implications since they are usually associated with periods of economic growth. Higher rates also typically offset bond price declines over time, providing a “self-correcting” mechanism for bonds that stocks lack.

But all of this is cold comfort for most bond investors, who have come to expect the “fixed income” part of their portfolios to churn out regular interest income with little or no volatility, especially on the downside.

Despite these short-term setbacks, for bonds as well as stocks, we continue to advocate for broadly diversified portfolios for long-term investors.

As Jeff Sommer, a New York Times business columnist whom we regularly cite, put it recently:

“A period of wrenching volatility is inescapable. This happens periodically in financial markets, yet those very markets tend to produce wealth for people who are able to ride out this turbulence.

“It is important, as always, to make sure you have enough put aside for an emergency. Then assess your ability to withstand the impact of nasty headlines and unpleasant financial statements documenting market losses.”

(PPA note: We use the word “declines” to describe reductions in the value of your portfolio on monthly or quarterly statements. “Losses” only come when you’ve actually sold an investment for a lower price than you originally bought it.)

“Cheap, broadly diversified index funds that track the overall market are being hit hard right now, but I’m still putting money into them. Over the long run, that approach has led to prosperity.

“Count on more market craziness until the Fed’s struggle to beat inflation has been resolved. But if history is a guide, the odds are that you will do well if you can get through it.”

As always, please don’t hesitate to contact us with questions or comments about these and other financial topics.


Tom Levinson Comments

Gas prices above $5 and $6 per gallon. Spiking costs for airfare, cars, rent, and groceries.  Significant declines in the stock and bond markets.

Earlier this month, the Department of Labor reported that in May, the Consumer Price Index (CPI) had surged 8.6% from May 2021. This marks the highest inflation rate in the U.S. since December 1981. (CPI is an index measuring what consumers pay for goods and services.)

What is causing the surge in inflation?

Perhaps needless to say, over the past year inflation has become a major economic and political issue. Both domestically and around the globe, rising prices have made a big impact on households and businesses alike.

There are a number of causes: Russia’s invasion of Ukraine and the continuing war there have interrupted the global supply chain, which had already been severely strained during the global pandemic and China’s recent Covid-related lockdown.

At the same time, there has been strong demand among consumers, who have more spending capacity due to low unemployment and wage growth, as well as emergency pandemic support.

Inflation more generally

High inflation is the unfortunate flipside of economic growth.

Recall that inflation, at baseline, means a loss of purchasing power over time. You can think of inflation as the annual change in prices for goods and services like food, clothes, travel, etc.

The Federal Reserve has a goal to maintain the inflation rate at around 2% annually. So the most recent rate of 8.6% is historically quite high and merits intervention by the Fed.


Unfortunately, there’s no pain-free path to easing this period of high inflation.

The main governmental tool for lowering inflation is the Federal Reserve’s ability to raise its benchmark short-term interest rate. After raising rates by 0.5 percentage points in March and May, the Fed raised rates by 0.75 percentage points in June.

It’s quite likely, over the coming months, that the Fed will raise interest rates again, with the objectives of reducing inflation and “cooling the economy,” if possible, without triggering a recession.

How long will this high-inflation period last?

It’s hard to say.

Even government economists and members of the Federal Reserve are reluctant to offer predictions. But there will be a sustained effort to reduce inflation.

More inflation means greater uncertainty for the economy. Businesses you’ve invested in might cut back on hiring or expansion plans. Households might reduce their spending.

These responses, naturally, can lead to reduced activity in the economy. And, as we’ve seen over the first several months of 2022, as interest rates rise quickly, the prices of stocks and existing bonds tend to go down.

What can help reduce the impact of inflation for your portfolio?


Stocks have historically been an important part of investment portfolios, as a means of increasing your purchasing power over the long-term.

As for bonds, rising interest rates do reduce the value of existing bonds. But, the higher rates mean bondholders will receive the benefit of more interest income over time. This can be a long-term benefit for savers.

Stay calm:

Headlines are blaring about inflation. This will likely be a major topic for the news media to cover over the months to come.

Generally speaking, the financial industry benefits when you feel panicked and pressured to do something, which often results in a transaction fee. But doing something, especially when asset prices have declined, tends to lock in losses.

And since timing when to re-enter the market after sales is exceedingly difficult, if not impossible, investors who sell often miss out on the recoveries that, at least historically, have followed.

Retain perspective:

As noted by The Wall Street Journal’s Jason Zweig in his “Intelligent Investor” column, “U.S. stocks, even after this year’s setbacks, have still gained nearly 13% annually over the past decade.”

“Invest like clockwork”:

Dollar cost averaging is another strategy that helps diminish the possibility of remorse about bad timing and/or subpar returns.

As Zweig writes, “Those who invest like clockwork tend to worry less about buying at the wrong time, making it easier for them to stay the course” and avoid selling at the wrong time.

Stay flexible:

When portfolios decline, some adjustments may be necessary.

For those nearing or in retirement, reducing spending, maintaining some continuing work and income-producing activity, and delaying Social Security until age 70 are all strategies that can help avoid the negative impact of selling during market declines.

Remain focused on goals:

The key priority is to stay focused on your goals.

If long-term, then the longer time horizon is likely to smooth out these inescapable rough patches. If shorter-term, then it’s important to ensure that your asset allocation reflects the shorter time horizon, with more bonds and fewer stocks.


As always, please reach out to your Park Piedmont advisor with any follow-up thoughts or questions.

Stock Price Declines as of Friday, May 20, 2022

Victor Levinson Comments

Given the continuation of S&P 500 stock price declines in 2022, which briefly touched a new “bear market” on May 20, 2022, we are sharing another set of our Special Comments.

As the financial media has been emphasizing recently, bear market means a decline of 20% or more from a previous high.

While infrequent, these substantial down markets do happen; since the 1970s, there have been five such down markets before 2022, with declines averaging close to 40% and lasting approximately 1.5 years.

Remember, history is only a reflection of what has happened; it may not be repeated in the future.

Of course, the most recent three full years of stock market results, from 2019 through 2021, were very rewarding, as the S&P 500 rose from 2,507 to 4,766, a gain of just short of 100%. (This is inclusive of a tumultuous period, with the pandemic and the 2020 election and its aftermath.)

Measuring from the same 2,507 starting point, the May 20, 2022, figure of 3,901 still leaves a 56% gain over three years and nearly five months.

Further, stock prices did reach very high levels in 2021 relative to Price/Earnings ratios (almost 25, compared to the historic norm of 15-18), as the stock market presented almost the only opportunity for portfolio gains in a financial market environment in which interest rates reached historic lows following the pandemic.

Since increasing interest rates are cited as a major factor for stock declines, and typically lead to declining bond prices in the short term, it is worth noting that bond yields (i.e., interest rates) have stabilized for the most recent ten days. The 10-year Treasury yield is lower than at the end of April, after peaking at 3.13% in early May.

While we have no doubt there are real economic issues for the financial markets to deal with, perhaps some of this volatility is caused by traders and gamblers seeking to benefit from each day’s back and forth activity. They are not long-term investors looking to benefit from the long-term economic growth represented by stocks.

In sum, there is no telling how long current declines are likely to continue. Prices reflect all current and anticipated bad news, making accurate predictions a seemingly impossible task.

Our advice remains to rely on your previously established allocation of stock and bonds, unless your goals, time horizon, or risk tolerance have changed. In that case, a conversation with your Park Piedmont advisor is appropriate.

How the Boston Celtics Saved Their Season

Tom Levinson Comments

Late in the evening of January 6, 2022, Tom sent a text message to a friend. This friend lives in Boston, follows the NBA closely, and is a lifelong Celtics fan.

Earlier that evening, after trailing by as many as 25 points, the New York Knicks (a grim, unfortunate passion of Tom’s) had staged a stunning comeback, beating the Celtics on a desperation, last-minute shot.

Tom texted his friend to console and, it must be acknowledged, to taunt, as well.

Tom’s friend replied that the Celtics were “done.” They had blown a winnable game the night before, against the mediocre San Antonio Spurs, and these two losses had brought Tom’s friend to the point of surrendering the season.

As casual NBA observers know, the Celtics are now one of four teams remaining in the playoffs.

Following that dispiriting loss to the Knicks, the Celtics went 33-10 the rest of the season – including a 9-game winning streak and another stretch where they won 11 of 12 games. They are favorites to win the NBA championship this year.

What happened? How, exactly, were they able to turn it around?

Well, part of the explanation is that they had a new coach, and it can take time for a coach and players to mesh. The coach began experimenting with new players and varied lineups, and the Celtics built the best defense in the league.

At the same time, their two-star players bought into the team concept, sharing the ball unselfishly and getting other players involved in the offense.

The Celtics’ season is a helpful reminder that positive and negative developments can and often do take place at the same time.

Surveying the current financial and economic landscape, we can see this clearly. Some illustrations:

  • While market returns were strongly negative in April, April was, at the same time, another month of solid job growth. US employers added 425,000 jobs in April, matching the previous month, with broad-based growth across every major industry, and the unemployment rate remained at 3.6%, just a touch higher than its level right before the pandemic (NY Times, 5/7/22, page A1).
  • Strong economic growth is usually favorable, but not if it gives rise to undesirably high inflation.
  • Undesirably high inflation can cause the Federal Reserve to raise the short-term interest rates it controls, in larger amounts and at a faster pace than would be preferable to the financial markets.
  • The Fed needs to control inflation so that the purchasing power of the US dollar remains stable; otherwise, prices in the economy can rise too quickly.
  • Rising prices can of course be a boon to businesses. They receive the extra revenue, which can in turn help increase profits, and workers can receive extra money in terms of higher salaries and wages. But since this extra money also represents higher costs to these same businesses and workers, the overall impact can be harmful, taking all the data in aggregate. The impact on people with fixed incomes is even worse.
  • Since the pandemic started in March 2020, economic activity and stock and bond market prices have experienced a number of unusual periods. During the pandemic, the Fed kept interest rates at historic lows, which presumably helped reinvigorate economic activity and financial market prices. Of course, no one wants a pandemic to recreate those conditions. Now that interest rates are rising, and quickly, is economic activity going to slow down meaningfully and adversely impact financial market prices? This is the key issue as near-term events unfold.
  • The terrible war in Ukraine presents another example of the highly unexpected. Its ongoing impact on the economy and financial markets is also unclear.
  • It is to be expected that bond prices decline when interest rates rise substantially and quickly. Even so, the extent of the price declines, particularly on the longer end of maturities, is always an uncertainty, as it is never known when the actual and expected bad news has been priced into current prices (see Jeff Sommer, NY Times, 4/17/22, section BU, page 3).
  • One important relationship is that as interest rates rise, bonds become more attractive as an asset class, because (a) their prices have declined, (b) they historically decline much less than stocks in the same time period, and (c) the higher interest rates end up being paid to the bond investors as time passes. In this way, the benefit of higher interest rates will happen for bond investors over time, even as they experience price declines over the short term.
  • Finally: while rising interest rates have a clear and direct impact on bond prices, their effect on stock prices is much less clear and direct, given the many other factors that influence stock prices.

An important part of weathering periods of uncertainty lies in recognizing that even as certain trend lines look negative, there are countervailing trends happening simultaneously.

Another important part: remembering that your goals and your time horizon – not what’s happening over the short-term – are most essential for you.

Our narratives frequently can’t capture the world’s complexity. A period of recent negative performance doesn’t necessarily signal what’s to come.

Good luck to the Celtics – and whoever else your team is. As Cleveland Browns fans are accustomed to saying: “There’s always next year!”

Stock Price Declines as of Friday, April 22, 2022

Victor Levinson Comments

Whenever the financial markets experience unusual declines, Park Piedmont Advisors has made it a practice to write Special Comments to supplement our regular Monthly Comments. During 2022, we have already written two such Special Comments, the first as of January 21 and the second as of February 24.

The S&P 500 stock index closed at 4,272 on April 22, after a two-day decline of 187 points from 4,459 (or approximately 4.5%). The year-to-date decline from a high of 4,796 is now 524 points (or approximately 11%).

Note that Wall Street refers to a stock market “correction” as a decline of between 10% and 20%. There have been eleven corrections since the turn of the century – how many do you remember? “Bear” markets, declines of 20% or more, also occur from time to time, especially after periods of large gains.

Perhaps most remarkable, however, is the fact that the S&P 500 value of 4,272 for April 22 is only 16 points below the February 24 value of 4,288 (or less than half of one percent).

You may recall February 24 as the date of our most recent Special Comments and the start of Russia’s war against Ukraine. It is PPA’s guess that most investors think the April 22 level would be considerably lower than that of February 24.

We should also recall that as recently as March 2020, a few months into the pandemic, the S&P 500 had declined to 2,237. The April 22, 2022, level of 4,272 therefore represents a gain of approximately 90% since the pandemic low.

As PPA readers know, it is our view that no one can consistently and accurately predict whether declines have further to go before prices become attractive again to buyers. In an almost perfect example of this thinking, we quote from Jeff Sommer’s April 17 New York Times article:

“The bad news has already been incorporated in stock, bond and commodity prices. The headlines about inflation have once again been awful… Stocks and bonds have been shaky since the start of the year, and the tragedies of the larger world are profound and proliferating, including a lingering pandemic and Russia’s assaults on Ukraine…

“This is all terrible. Yet precisely because so much awful news has already been incorporated in stock, bond and commodity prices, there is reason for suspecting that market conditions may not get much worse, and may even get better before long. When the consensus is this glum, it may be time for cautious optimism.”

Sommer’s timing is obviously terrible given the declines from last week, but his larger point may still be true, at least over some period of time.

The whole concept of asset allocation, which PPA emphasizes at all times, is to allow you to retain your stock positions during the inevitable rough periods, by allocating only a portion of your overall investment portfolio to stocks.

Thus, if your allocation is 50% stocks and 50% bonds, a 10% decline in stock prices results in closer to a 5% portfolio decline. And although the extent of the recent bond prices declines has been significant, these declines have historically been far less than those for stocks.

The financial media has most recently focused on the likely quickened pace of the US Federal Reserve raising the short-term interest rates it controls as the likely villain for declining longer-term bond prices set by the buyers and sellers in the bond market.

(Remember: bond prices decline when interest rates rise, and prices rise when rates decline).

This is happening currently, as ten-year US Treasury bond yields have increased rapidly from the year-end 2021 rate of 1.50% to the current rate of just under 3%.

Indeed, there is some current discussion of the Fed raising rates too high and too fast, giving rise to the next economic recession. Of course, this is all part of the unknown future.

As always, PPA encourages our clients to remember that declines do occur from time to time, in stocks and bonds, but that historically markets also recover. We will continue to provide historical context and help all our clients focus on specific long-term goals.

Casey Stengel, Crystal Balls, and the Movement of Stock Prices

Victor Levinson Comments

Hall of Fame baseball manager Casey Stengel is reported to have said, “Never make predictions, especially if they’re about the future.”

Stengel’s quip helps us pose our question this month: let’s say you had a crystal ball – and assume for the purpose of this hypothetical it is a functional crystal ball – would knowing the outcome of key events before they actually occur help you predict the future direction of stock prices?

The answer would seem obvious… of course that knowledge should be useful. If you know what’s going to happen, the market’s response should logically follow from there.

But as it turns out, the real world is frequently far more complex than the projections and predictions of even the best-informed experts.

Think back to early November 2016, in the days and hours before Donald Trump was elected President; or to late 2019 and early 2020, when you first heard news stories about a mysterious virus emerging from China.

It’s surprising but true: advance knowledge of key events is often not a helpful forecaster of market movements – specifically, the future prices of stocks and bonds.

In a NY Times “Outlook” column dated Feb 27, 2022, Jeff Sommer writes,

“Global markets usually weaken as wars approach, strengthen long before wars end, and view human calamity with breathtaking indifference…The recent stock market has been afflicted by multiple troubles [in addition to the war in Ukraine]: fears of rising interest rates, sizzling inflation, and continuing supply chain bottlenecks.”

(PPA note: no mention of problems associated with the ongoing pandemic, now at two years and counting.)

So even assuming investors knew in advance that all these problems would continue, the month of March showed monthly gains over 3% for US stocks, making a meaningful reduction in the YTD 2022 declines.

It is therefore worth asking what benefit investors would have realized knowing the problems in advance.

Sommer writes that “long-term investors with well-diversified portfolios of stocks and high-quality bonds–whether held directly or through low-cost mutual funds and exchange-traded funds (ETFs)–will probably be likely to ride out this crisis as they have so many others.”

Sommer also makes a case for owning bonds, even if their prices decline during certain time periods as interest rates rise, as a “buffer against major stock downturns.”

Another more recent article, with a similar point of view, appeared in The Economist magazine:

“A lot of bad stuff is happening just now, most notably a war in Europe, but also inflation and growing fears of recession.”

(PPA note: these recession fears are based on the Federal Reserve raising the short-term rates it controls and thereby slowing the economy to try to contain inflation.)

“Stocks are surprisingly buoyant, with the S&P 500 only 7% below its all-time high around the end of 2021… There are lots of plausible explanations for the resilience of stocks, one is that there is no good alternative to owning them… Ten-year yields are still below the rate of inflation… stocks may offer some protection against inflation if companies can raise their prices… Underlying all these rationalizations is a sense that equity investors do not quite believe the Fed will follow through on all the interest rate increases the bond market is pricing in.”

Here again we ask how investors are well served, even if they were correct in their knowledge of the outcome of current problems, since stock prices are “surprisingly buoyant.”

Just to show that there are also many times when knowing the outcome of future events would indeed be helpful in ascertaining future market direction, look no further than bond prices in March.

Since the rate of inflation did continue to rise in March, and the Federal Reserve did begin to raise its short-term interest rates, bond prices did in fact fall.

A few points to the bond pricing decline are worth noting:

1) While overall inflation went above 8 percent, “core” inflation, which excludes highly volatile food and energy prices, rose less than one percent.

Even though inflation definitely affects food and energy, which are important daily expenses for consumers, various financial institutions, including the Federal Reserve, do pay attention to the “core” rate as well.

A key question to answer now is whether a few more inflation readings like the one in March may result in a decline in the ten-year Treasury yield and an increase in bond prices, because the Fed may see less need to aggressively raise the short-term interest rates it controls.

(Note that longer-term rates, like that of the ten-year Treasury, are set and reset each day by the buying and selling of bonds in the marketplace, not by the Fed.)

2) The extent of bond price declines is typically measured by the amount and pace of the interest rate increases.

In this current environment of unusually large bond price declines, the anticipated quarter point Fed rate increases would likely not produce these kinds of price declines unless the market believed that the pace of these rate increases would be unusually rapid.

If the actual future pace of rate increases is slower than currently anticipated, it may well be that current prices are as high as they will get in this period.

3) History indicates that at some point in a market cycle, interest rates stop rising and bond prices stop declining.

Bond investors then receive the benefit of the higher interest rate payments associated with the bonds they own, thereby offsetting the price declines over time.

Long-term investing has two basic principles:

1) As Casey Stengel recognized, the future is inherently unknowable. Analysts and pundits and gurus may pore over their assorted crystal balls to accomplish this task, but it simply cannot be done.

2) Trying to time the direction of market prices is very difficult to do with any degree of consistency – even when you know the outcome of events before they happen. Market timing is defined as the effort to be in the markets when prices are rising, and to be out of the markets in advance of serious declines.

If the future is unknowable, and guessing at the market’s price movements is unlikely to succeed, what is left for investors to do?

Stay focused on your asset allocation and time horizon, be in touch with your advisor if you have any questions, and leave the crystal ball where it is.