Money Market Funds as Part of a Balanced Portfolio

Nick Levinson Comments, Life with Money

Money market funds have displaced stock and bond investments in many portfolios, as a recent Wall Street Journal article discusses:

“With markets rocky and cash earning 5% or more, investors have boosted their holdings of money-market funds to a near-record $5.6 trillion, according to the Investment Company Institute. Both individuals and institutional investors are piling in – asset managers now have roughly one-fifth of their portfolios in money-market funds, State Street data show.”

Although the author doesn’t make the distinction explicitly, he’s referring to “purchased” money market funds (PMMFs), which are bought and sold like mutual funds. There are taxable and tax-exempt PMMFs, with the taxable type currently yielding in the 5.3% range and the tax-exempt yielding around 3.7%.

The other type of money market fund is the “sweep” variety, where dividend and interest income earned in brokerage accounts gets “swept” on a daily basis. Sweep MMFs yield about 0.5% these days.

The article goes on to discuss how money markets have “fees, taxes and inflation [that] all undermine those returns. And one of the biggest costs is opportunity: By pouring money into cash, investors miss out on potential gains from holding a broad portfolio of stocks, bonds and other riskier investments.”

Park Piedmont agrees that fees, taxes, and inflation are risks, but they’re present for most fixed-income investments, not just Purchased Money Market Funds (PMMFs).

One of the benefits of PMMFs not mentioned is that they typically don’t change in price from $1 per share, unlike bond funds, which have decreased in overall value this year, despite higher yields, because prices have declined.

This is also a benefit of short-term Treasury bills, which Park Piedmont has started using for client accounts as a complement to longer-term bond funds.

The T-bills also have high current yields, ranging from about 5.5% for 3-month bills to 5.6% for 6-month bills. And if you hold them to maturity, which is relatively easy given the short terms, there are typically no price changes, either up or down.

But the main point is that PMMFs and Treasuries should be part of a balanced, long-term oriented portfolio.

Moving all or even most assets into a “hot” fund or sector represents an attempt to time the markets, which most academic research shows is impossible to do successfully long-term.

Park Piedmont uses PMMFs and short-term Treasuries as potential substitutes for other fixed income investments like bond funds – not for stocks or other investments with different risk characteristics.

An example of changing the mix of the fixed income part of a portfolio is tax-loss harvesting, where bond funds are sold to realize tax benefits and the sale proceeds are invested in PMMFs and T-bills to maintain the overall asset allocation.

Park Piedmont helped many clients with such loss harvesting in 2022, and we will be checking in with clients regarding possible similar opportunities to maintain overall portfolio balance in 2023.

The Trouble with One-Size-Fits-All Investing Approaches

Nick Levinson Comments, Life with Money

The Wall Street Journal posted an interesting article yesterday – “The Trusted 60-40 Investing Strategy Just Had Its Worst Year in Generations” by Eric Wallerstein – that several Park Piedmont clients have already asked us about. Especially in this period of geopolitical turmoil and what appear to be fragile markets, we thought it would be helpful to consider the article in detail.

First, here’s some background on the “60-40” investing strategy:

As is typical in the financial world, when discussing portfolio allocations, the first figure represents stock holdings and the second stands for bond holdings. We often re-characterize stocks and bonds as “riskier/growth-oriented” and “less risky/income-oriented,” respectively, to make the unavoidable trade-off more explicit.

The article provides history:

“Investing in a mix of stocks and bonds is an idea rooted in the bedrock of Wall Street, the modern portfolio theory for which the late economist Harry Markowitz won the Nobel Prize in 1990. Among its biggest proponents: Vanguard founder John Bogle … [whose] aim wasn’t maximizing returns, it was allowing investors to sleep at night.”

(Park Piedmont note: John Bogle was a hero to our father Victor, who was an advocate of indexed investing and Vanguard mutual funds for about 50 years.)
The Trouble with One-Size-Fits-All Investing Approaches
In the broader financial community, the 60-40 portfolio has functioned as a rough guideline for investors. This is especially true for 401K plan participants who don’t have a specific idea of how they should be investing retirement funds.

The good idea here is that investors should own a mix of stocks and bonds, which often, although not always, perform differently in different market environments. A prominent example was the financial crisis of 2007-2009, when bond returns were positive while the S&P 500 index declined 45% in the same period.

In 2022, however, “the tried-and-true 60-40 portfolio lost 17% … its worst performance since at least 1937 … Even with a 14% gain in the S&P 500 helping the strategy recover in 2023, stocks and bonds have moved in tandem, more over the past three years than any time since 1997.”

The problem with 60-40 is that it’s a one-size-fits-all investing approach. A 60% allocation is likely too low for a 25-year-old just starting their career, while it may be too high for a 65-year-old on the verge of retirement.

As our clients know, Park Piedmont spends significant time working with you to develop an allocation appropriate to your situation. We don’t recommend changing the allocation in the context of short-term market declines; we refer to this as “market timing,” which typically involves selling the declining asset and/or buying the rising asset.

We do, on the other hand, advocate for re-balancing, or buying the declining asset at lower prices and potentially selling the rising asset as well. We also work with clients to adjust allocations when their life circumstances change significantly, due to the birth of child, divorce, or death of a spouse, for example.

For these reasons, the success or failure of the standard 60-40 portfolio isn’t really an issue for Park Piedmont clients, all of whom have customized allocations.

But what concerns us about the rest of the article are some of the conclusions drawn and especially the investing alternatives mentioned, along with the attempt by some financial firms to portray inherently risky (and often expensive) strategies as less risky or even safe.

The article goes on: “Some analysts say the crux of the [60-40] portfolio’s success—bonds’ tendency to rise when stocks fall—generally happens when inflation and interest rates are relatively low. They argue that expectations for a prolonged period of higher rates and lingering inflation will weigh on both stocks and bonds, fostering a market environment that looks much different than in recent decades.”

There are many factors responsible for stock and bond prices moving in the same direction, just as there are when they move in opposite directions. But these trends typically vary over time, as the first chart in the WSJ article shows, and market returns have been good and bad in both periods. There’s simply no way to predict how markets will react whether stocks and bonds move in tandem or not.

We tend to agree with Roger Aliaga-Diaz, global head of portfolio construction at Vanguard, who Wallerstein quotes as saying that “the problem isn’t higher rates, it is when they are rising rapidly like in 2022 … The central bank hiked rates 11 times since March 2022, the fastest pace in four decades, bringing them to a 22-year high. A gentle climb in Treasury yields can reflect a healthy economy and provide investors with more income. But when rates rise rapidly, it can destabilize markets, giving companies little time to adjust to elevated borrowing costs and spurring investors to rethink the value of stocks.”

Wallerstein then mentions alternative investing strategies. “Some financial advisers suggest being more deliberate about specific stock-and-bond holdings.” Picking individual stocks and bonds is referred to as “active management” in the financial advisory business and has historically been as difficult to do well over long periods as market timing has been.

“Others recommend looking beyond stocks and bonds altogether to more complex investments, often ones that are riskier and charge higher fees. Real estate has long been a popular option for individuals with some spare cash. Some advisers have suggested adding exposure to commodities or corporate loans.”

Park Piedmont doesn’t oppose investments like these, and in fact includes small allocations to real estate (through real estate investment trusts, or REITs), commodities, and corporate loans in lower-cost funds. The distinction is that we include them in broadly-diversified, long-term-oriented portfolios, not attempts to predict whether they will perform well over some short timeframe. We also label them as riskier assets, making no attempt to portray them as less risky in certain market environments.

“Another popular twist is the risk-parity portfolio. The strategy … tweaks its stock-and-bond holdings based on how volatile each asset has been recently, putting more cash toward whichever one is less erratic. The idea is that the asset that is less volatile is therefore less risky, and should be a better bet going forward. That approach still struggled during last year’s lockstep moves in stocks and bonds.” Wallerstein’s last sentence in this section makes our point for us.

Finally, the article mentions that “many hedge-fund strategies have performed unevenly since 2008 … [but] managers of these funds say their benefits will be starker as markets become more turbulent.” [Park Piedmont note: Hedge funds started as an effort to reduce portfolio risk, but in many cases have morphed into massively risky bets.]

Our final point is that many of these alternatives come with very high expenses; hedge funds often charge 2% annual management fees in addition to taking 20% of any gains investors earn. While investors can’t control market returns, they can control the cost of their investments, which is one of the reasons why PPA primarily uses low-cost index funds to implement client allocations.

So there’s no need to bemoan the recent challenges to the 60-40 portfolio. Except for people who had every dollar in cash last year, all portfolios declined in 2022. But that’s no reason to abandon a well-diversified, low-cost portfolio designed to accomplish your long-term financial goals, which is what we at Park Piedmont focus on every day.

Understanding Long-Term Care

Nate Levinson Life with Money

For many, considering the need for life insurance happens around the time they have their first child. This makes sense, as having children is often the first time that people have another person depend on them financially.

A lot of new parents purchase term life insurance, which is designed to last for a specific period (20 years, 30 years, etc.), because it can be a solution to this financial dependence and is the least expensive form of life insurance. When that term is coming to an end, those parents are typically now in their 50s or 60s and often begin to think about their own needs for later in life, one of which is long-term care (LTC).

What Is Long-Term Care?

The term encompasses a range of services that individuals may need when they are unable to care for themselves. This need may result from a chronic or disabling medical condition such as an illness, disability, or cognitive impairment. Therefore, LTC needs can arise at any age due to an illness or injury, or simply due to the effects of aging.
Understanding Long-Term Care (LTC)
Many Park Piedmont clients seek our guidance in making sure that they can cover their own costs of care and that the burden of these costs doesn’t fall on their children or other relatives. We’ve been working with a number of clients recently who are thinking about their LTC planning, and we thought it would be helpful to share information on this topic more broadly.

To clarify, LTC is not the same as medical care. The goal of LTC is to help people function independently in their everyday lives and manage their activities of daily living (ADLs), which include eating, using the bathroom, bathing, getting dressed, etc. Medical care, on the other hand, seeks to improve the recipient’s medical condition through treatment received in a hospital, emergency room, or other medical facility.

LTC also differs from medical care in how it is funded. The costs of medical care are typically covered by health insurance, including private insurance and government programs like Medicare. LTC, however, is generally not covered by private health insurance or Medicare.

Risk Factors for Long-Term Care

The biggest risk factors for LTC are age, gender, and medical history. As you might expect, as people age, the probability that they will require some form of LTC increases. The chances of a person in the US over 65 years old needing LTC at some point is now 70%.

Regarding gender, women have longer life expectancies on average and are therefore at greater risk for needing LTC. In the US, women account for about two thirds of all LTC insurance claims.

Lastly, having a more serious personal or family medical history typically means a higher chance of needing LTC. Examples of medical issues that most commonly require LTC include strokes, injuries as a result of a fall, dementia, Alzheimer’s, obesity, and Parkinson’s.

Types of Long-Term Care

There are many kinds of long-term care that an individual can receive, including:

  • Home care, in which a nurse or other home health aide provides care in an individual’s home during the day or around the clock. In a home care setting, many people also end up relying on a spouse or other family member to serve as a caregiver, which may be a perfectly good solution but can also cause emotional and financial strain on the caregiver.
  • Skilled nursing care refers to services that can only be performed by a licensed nurse, doctor, or therapist. Skilled care is usually provided in hospitals, assisted living facilities, and nursing homes.
  • Custodial care is provided by non-medical professionals and usually involves help with ADLs only. Custodial care can take place in the home, assisted living facility, or nursing home.
  • Adult day care provides support in a non-residential facility during the day while an individual’s primary caretaker, typically a family member, is at work.
  • Hospice care addresses the needs of terminally ill patients and is a separate type of LTC.

To clarify, assisted living facilities provide a more social lifestyle for seniors who are generally active but require assistance with everyday tasks. Nursing homes, on the other hand, provide LTC and medical care for adults with serious health issues. Nursing homes usually cost more than assisted living due to the higher level of care.

Long-Term Care Costs

As life expectancies have increased, so have the costs of LTC services. (For more information on the average costs of LTC in your area, please refer to the Genworth Cost of Care Survey, which tracks the cost of long-term care services nationwide, broken down by region and care type. This website provides valuable insights into how much LTC costs today and might cost in the future, which can help you and your family understand and plan for LTC needs.)

As of 2021, the annual median cost in the US is $62k for home care, $54k for an assisted living facility, and $108k for a private room in a nursing home. The costs are, on average, much higher in large cities than in rural areas.

Because of these high costs, long-term care has become one of the most significant health care issues for older people and their families, and one of the most common catastrophic health care expenses. So, if LTC isn’t covered by health insurance, how do people typically pay for these services?

Paying for Long-Term Care

There are many methods of paying for LTC if needs arise. The primary approaches include Medicaid, self-insurance, and private LTC insurance plans.

As mentioned previously, Medicare, the federal program that provides healthcare coverage for people who are either 65 years old or have certain chronic medical conditions, provides very limited LTC coverage and should not be relied on for this type of care. Medicare is primarily designed to provide medical care but will cover up to 100 days of LTC if very specific conditions are met. Most individuals who require LTC need it for much longer than 100 days and will not meet the Medicare criteria.

Medicaid is a state and federal program that provides medical assistance to low-income individuals and their families. Medicaid covers a wide range of services, including LTC, but a person typically must have very few assets and little income to qualify. Eligibility requirements regarding income and assets vary by state.
Another funding strategy for LTC is self-insurance, which is the concept of relying on one’s personal savings, investments, home equity, reverse mortgages, etc. to pay for LTC expenses. The problem here is that LTC can be extremely expensive, and no one knows exactly what kind of care will be needed and for how long. This strategy is only appropriate for people with significant liquid assets that extend well beyond anticipated needs during their working years and in retirement.

Medicaid and self-insurance are therefore for people on opposite ends of the wealth spectrum, and Medicare doesn’t sufficiently cover LTC. For people who have too many assets and income to qualify for Medicaid and too few to self-insure, the solution is generally private LTC insurance. This type of insurance involves paying premiums to an insurance company, which will then pay out a benefit in the case of a covered LTC claim.

Types of LTC Insurance

Stand alone, or “traditional,” insurance covers LTC services only. These policies have a specified maximum monthly and lifetime benefit amount, a maximum period over which benefits can be paid out, and can include inflation protection so that the benefit limits increase every year by a fixed percentage.

Another advantage is that the premiums paid may be tax deductible. However, the premiums are not fixed and can increase in the future. Additionally, because these policies only cover LTC, if the insured individual doesn’t end up needing LTC, no benefits will be received.

“Hybrid” products combine LTC with permanent life insurance. Essentially, these policies offer a pool of money that can either be accessed during life for LTC, at death in the form of a death benefit paid to the insured person’s beneficiary, or a combination of the two.

The initial premiums for these policies are typically higher than those of an equivalent standalone policy, but the premiums are fixed and cannot increase. Therefore, if standalone LTC premiums increase enough over time, as they have in the past, a hybrid policy may actually cost less in the long run.

Another benefit of this type of coverage is that if the insured person doesn’t need LTC, there will be a death benefit from the life insurance component paid to the beneficiary at death. So, regardless of whether there is an LTC need or not, the insurance company will pay some kind of benefit.

When to Consider LTC Coverage

While many people first start to think about LTC in their 50s or 60s, we’ve seen a number of clients cover this risk earlier as well.

Many young professionals in their 30s and 40s identify a need for permanent life insurance, as opposed to term insurance. In these cases, it’s often prudent to purchase a hybrid life and LTC policy that accomplishes their life insurance goals while also covering the risk of LTC.

With life and LTC insurance, the younger and healthier a person is when purchasing a policy, the less expensive the premiums will be. So, it can be beneficial to seek coverage earlier, especially for people who know that they are at a higher risk for eventually needing LTC.

How Park Piedmont Can Help

Park Piedmont frequently helps clients in this area of planning, including working with vetted outside insurance firms that coordinate the process of acquiring LTC insurance. As fiduciary advisors, we often prepare quotes, evaluate different policy options, provide second opinions on coverage, and analyze how LTC fits into the broader financial plan.

For clients who decide to pursue LTC and/or life insurance through Park Piedmont, our team acts as a primary point of contact throughout the entire application process. Please reach out to your advisor if you have any questions about Long-Term Care planning.

Important Additional Disclosures

As your investment advisor, Park Piedmont is a fiduciary. Whenever making recommendations – on investments, insurance, or any other financial life planning topic – Park Piedmont’s focus, first and foremost, is on what’s in your and your family’s best interest.

Disclosing potential conflicts of interest is an important part of being a fiduciary. Nick Levinson and Nate Levinson, as licensed insurance agents, earn commission-based compensation for selling insurance products to our PPA clients. Park Piedmont receives 50% of the commission payable on the sale of any life, disability, or Long-Term Care insurance product to Park Piedmont clients if purchased through Quantum Insurance Services or RIA Insurance Solutions. Insurance commissions earned by Nick Levinson and Nate Levinson are separate and in addition to our advisory fees.

Park Piedmont clients are under no obligation to take PPA’s recommendations or implement any insurance policies, even if they have already applied for policies and/or been approved for coverage.

Bonds and Fixed Income Alternatives

Nick Levinson Comments, Life with Money

We’ve discussed the August stock market update, but what about the bond market, or “fixed income,” as it’s also known in financial industry jargon?

Interest rates have risen significantly over the past year and a half, as the US Federal Reserve and central banks around the world have worked to contain inflation. When interest rates rise, bond prices decline, and when rates fall, prices increase (we’re happy to explain this relationship in more detail to anyone who’s interested). This is why bond prices declined so much in 2022 (down 11% for Vanguard’s intermediate-term bond fund), when the benchmark 10-year Treasury rate increased from 1.5% to 3.88%.

This year has been a somewhat different story. Rates have risen further, to 4.09% as of the end of August. So prices have declined, but the offset is that investors are now earning interest at the higher rates. The combination of more interest and slightly lower prices has resulted in gains of about 2% for Vanguard’s short-term and intermediate-term bond funds, and more than 5.5% for the high-yield bond fund.

There are, however, fixed income alternatives that are not subject to price declines as rates rise. These include “purchased” money market funds (PMMFs), which maintain a steady $1 per share price and currently yield in the 5.25% range. You can also buy short-term Treasury bills, which are yielding about 5.45% (for three-month terms) and 5.5% (for six-month terms). As long as you hold these Treasuries to their short “maturity” dates, there are no price declines. By contrast, the yield on the Vanguard bond funds are currently in the 5% range.

At the beginning of 2022, when PMMFs and short-term Treasuries had rates close to zero, there was no question for PPA that the fixed income portion of a diversified portfolio should be invested in bond funds, which were yielding 2-3%. Now, with short-term rates higher than longer-term ones (a situation known as an “inverted yield curve,” which we’re also happy to discuss further if you’re interested), it’s a tougher call. As you know, we never recommend trying to time the markets (in this case, selling all your bond funds to buy PMMFs). But if you have cash available for investment in fixed income, it’s likely to make sense to consider, in consultation with your advisor, a mix of PMMFs, Treasuries, and bond funds.

We will continue to monitor these changes in the markets and are always happy to discuss how they relate to your specific situation.

August Stock Market Update: More to the Story

Corenna Roozeboom Comments, Life with Money

Maybe you thought the August stock market update would be dismal. To be fair, there’s some truth to that.
August Stock Market Update
US stocks, developed international stocks (from countries in Europe and Japan), emerging international stocks (from countries including China, India, and Brazil) … markets from literally all over the world were down during the month of August.

And yet if we widen the time frame a bit, we discover that this year has been quite favorable so far.

Rather than zeroing in on a single month, let’s take a look at 2023’s returns through the end of August. Furthermore, let’s compare them to 2022’s returns through the same point last year.

YTD 2022 YTD 2023
S&P 500 Index -17.0% 17.4%
Dow Jones Industrial Average Index -13.3% 4.8%
NASDAQ Composite Index -24.5% 34.1%
Vanguard Total Stock Market Index Fund -17.2% 18.0%
Vanguard International Index Fund -19.7% 10.0%
Vanguard Emerging Markets Index Fund -15.4% 4.7%

Even with August’s declines, compared to last year’s returns during the same time frame, stocks were up by the end of August – and in some cases, significantly.

It’s important to note that this year’s gains began at the end of last year’s losses – in other words, there was lost ground to make up for.

Yet it’s also worth pointing out that anyone who decided to exit the market during last year’s downturn would have missed out on the gains we’ve seen in 2023.

The danger of selling while the market is low is that nobody knows when stock prices will increase again. So, in addition to losing out by selling low after buying higher, you also run the risk of later missing out on any recovery.

So, how do we help our clients avoid the risk of over-inflating the impact of a downturn – or worse yet, making decisions you’ll regret?

For one, perspective.

We can help you maintain focus on the big picture and your longer-term goals. Markets will fluctuate, and there will be down days and months – even years. But by taking a step back and focusing on the long term, however you define that term, we can maintain greater perspective.

More tangibly, we help our clients cushion volatility through a customized asset allocation. As you know by now, it’s your specific goals, timeline, and risk tolerance that informs the combination of assets (stocks, bonds, high yield bonds, and cash) selected for your portfolio.

If you’re risk-averse or working with a shorter time frame, one’s asset allocation will typically include fewer stocks – which generally mitigates the impact of downturns on an overall portfolio.

If you’re more comfortable with risk, or your timeline is longer, one’s asset allocation will typically include more stocks. Increased risk tolerance and/or a longer time frame can help prevent you from making emotional decisions that might trigger regret later.

It’s our job to get to know you, listen carefully, and design an asset allocation that suits your particular needs.

So as long as your time frame remains the same, and there haven’t been any major life changes that would require a change in asset allocation, there’s likely no need to make major changes to your portfolio.

You can move forward with August’s declines in your rearview mirror – and take time to appreciate (at least momentarily) this year’s stock market gains.

• • •
Read our August update on bonds and fixed income alternatives.

The Value of Play

Tom Levinson Life with Money

For the past 15 years or so, I’ve had a very important hold on my calendar on Wednesdays at 5 pm. If I’m in Chicago, I make it there, with surprisingly few exceptions.

My appointment is at the basketball court in our local neighborhood Jewish Community Center. There, 8-10 middle-aged men gather to stretch, play, sweat, hydrate, rinse and repeat until our access to the gym wraps up at 7 o’clock.
The value of play
I first got invited to the game by an older friend. At the time, my wife Elizabeth and I had two kids under five. We both had demanding jobs. We both had to commute, 5 days a week, at the start and end of each workday. Our pace of life felt breakneck. When I look back now, I’m amazed and grateful we held it all together.

If you ask me how we – and more specifically, I – made it through that stretch in one piece, playing basketball is near the top of the list.

Now, I get it – you might be thinking, “Tom, so glad you’re having fun re-kindling your junior varsity glory days, but isn’t that just an escape from the demands and responsibilities of real life?” [Author’s note: my younger glory days on the basketball court were few and far between.]

So why do I give such high marks to what’s really the equivalent of adult recess?

It turns out, play is important for everybody – no matter the age or life stage.

What is “play”? The examples are just about unlimited, but it can be boiled down to something you do because it brings you joy or pleasure, without promising a particular outcome.

As a New York Times article phrased it, “A lot of us do everything hoping for a result … It’s always, ‘What am I getting out of this?’ Play has no result.”

According to scholar Peter Gray at Boston College, there are a few key ingredients of “play”:

  • Play is something you do because you want to, not because you have to.
  • Play is done for its own sake, not for a reward or prize.
  • Play has structure – but importantly, it still leaves ample space for creativity.
  • Play always involves some element of mentally removing oneself from the “real world.” While players have to be thoughtful about their activity, “the person at play is relatively free from pressure or stress.”
  • As a result, the person at play is frequently able to accomplish a mental state called flow. “This state of mind has been shown, in many psychological research studies, to be ideal for creativity and the learning of new skills.”

All of this resonates for me. If you asked me, “Tommy, what do you love about playing basketball?” I’d tell you: I love that when I’m playing, everything else melts into the background. All I’m thinking about is making good passes, hitting open shots, setting good screens, and not getting beat (too often) on defense. Even though we keep score, the focus is always more on process than outcome.
crossword puzzle
One of the really energizing things about play is that it has so many ways to fit different people. Board games are a way to play. Same with practicing music, or woodworking, or building a sandcastle.

For my wife Elizabeth, who studies and teaches about “play” in her work as a psychiatrist and medical educator, making pottery has been a huge source of fun, escape, and community-building over the years. It’s brought her a lot of joy – and our cupboards, a lot of mugs!

Play has residual benefits, too – we learn new skills, explore areas of interest, build relationships, and get re-energized for the everyday.

It’s interesting that play represents a part of our lives where earning money isn’t really a factor. After all, play isn’t a job. And it’s not a hustle, or something you do for pay or for profit.

On the other hand, it often costs a lot to play: big trips offer one notable example. Do you work, save, and invest in part so you can build time and opportunities for play?

At its bedrock, play connects us with our authentic selves – which in turn allows us to make grounded, thoughtful decisions – particularly with our money.

As we launch Year 2 of our “Life with Money” series, we invite you to consider – and share – the ways you play. When you think about what your money is for, is carving out opportunities for play one of the answers?

Drop us a line and let us know about the relationship between money and play in your own life.

And if you’re in our neighborhood some Wednesday at 5 pm, let me know – you can join my game.

A Season of Transitions

Corenna Roozeboom Life with Money

For many of us, Labor Day Weekend indicates a transition.

The unofficial end of summer; the herald of fall activities; a new school year for kids, grandkids, or even ourselves; the subtle shift in nighttime temperatures; the sudden ubiquitous pumpkin spice everything.
season of transition
Within the last few weeks at Park Piedmont, one of us announced a pregnancy. One of us dropped off a kid for her first day of preschool. One of us settled a kid into his first dorm room. One of us helped a kid move cross-country for his first full-time job.

Transitions can be exciting, and they can be difficult. New beginnings, inherently, also signify endings.

One of the joys of our work here at Park Piedmont is both celebrating and supporting others in the many transitions that life serves up. We’re blessed to witness these transitions in each other’s lives, and also in yours.

As we head into Labor Day Weekend, we wish you the very best in whatever season of transition you’re currently living. And, as always, we’re here to both celebrate and support you in it.

The Futility of Predictions

Nick Levinson Comments, Life with Money

As you know, we avoid making predictions about where the stock and bond markets are headed. There are simply too many factors that impact the markets – economic, political, atmospheric too – over the short and long terms.
predicting the future
On the other end of the prediction spectrum, a Morgan Stanley analyst recently made the sheepish admission that “we were wrong. 2023 has been a story of higher valuations than we expected amid falling inflation and cost cutting” (The Street, 7/24/23).

The article goes on to say that the “admission is somewhat surprising given he repeatedly warned this year that the stock market rally would reverse. For example, he told Bloomberg in May, ‘We would characterize this as the bear market is continuing … The fundamental case does not support where stocks are trading today.’

“Those comments were made days before the S&P 500 broke out to a new year-to-date high, rallying by over 8%. The mea culpa hasn’t changed [Morgan Stanley’s] view, though. He remains ‘pessimistic on 2023 earnings.’”

He might be right about earnings, and that stock prices will decline as a result. But he also might be wrong again, multiple times. Why bother?

It’s not just inherently unpredictable factors – like wars, political coups, fires, and earthquakes – that make prediction so difficult, if not impossible. Even when we know something has happened, the markets can react in unexpected ways.

A recent example involves the question of when good economic news translates into good or bad news for the markets.

Jenna Smialek and Ben Casselman wrote about this in The New York Times in an article entitled “Maybe, Just Maybe, Good News Is Good”:

“It had been the mantra in economic circles ever since inflation took off in early 2021. A strong job market and rapid consumer spending risked fueling further price increases and evoking a more aggressive response from the Federal Reserve. So every positive report was widely interpreted as a negative development.

“But suddenly, good news is starting to feel good again … Recent data have been encouraging, suggesting that consumers remain ready to spend and employers ready to hire at the same time as price increases for used cars, gas, groceries, and a range of other products and services slow or stop altogether – a recipe for a gentle cool down.

“Economists and investors are no longer rooting for bad news, but they aren’t precisely rooting for good news either. What they are really rooting for is normalization, for signs that the economy is moving past pandemic disruptions and returning to something that looks more like the pre-pandemic economy, when the labor market was strong and inflation was low …

“One reason economists have become more optimistic in recent months is that they see signs that the supply side of the supply-demand equation has improved. Supply chains have returned mostly to normal. Business investment, especially factory construction, has boomed. The labor force is growing thanks to both increased immigration and the return of workers who were sidelined during the pandemic.

“Increased supply – of workers and the goods and services they produce – is helpful because it means the economy can come back into balance without the Fed having to do as much to reduce demand. If there are more workers, companies can keep hiring without raising wages. If more cars are available, dealers can sell more without raising prices. The economy can grow faster without causing inflation.”

This story appeared just after the S&P 500 index hit 4,589 on July 31, the highest level since the all-time high of over 4,800 in December 2021. The index was up 19.5% for the year, recovering much of the more than 20% declines from 2022.

But since August 1, the stock market has declined significantly, down about 4.5% through August 16. What changed?

On the bad news side, “Fitch ratings lowered the credit rating of the United States one notch to AA+ from a pristine AAA. The firm, citing a ‘deterioration in governance,’ along with America’s mounting debt load, suggested that it could be a long time before that decision was reversed.

“The move – like the drop to AA+ in 2011 by S&P Global, which has kept its US rating there – followed partisan brinkmanship over America’s debt ceiling, which caps how much money the government can borrow” (The New York Times, 8/2/23).

But then came further good news about inflation: “Fresh inflation data offered the latest evidence that price increases were meaningfully cooling, good news for consumers and policymakers alike more than a year into the Federal Reserve’s campaign to slow the economy and wrestle cost increases back under control.

“The ‘core’ inflation index, which strips out volatile food and energy prices … picked up by 4.7% from last July, down from 4.8% in June.

“The upshot was that inflation continues to show signs of seriously receding after two years of rapid price increases that have bedeviled policymakers and burdened shoppers – and the details of the July report offered positive hints for the future. Rent prices have been moderating, a trend that is expected to persist in coming months and that should help to weigh down inflation overall. An index that tracks services prices outside of housing is picking up only slowly” (The New York Times, 8/11/23).

It’s also possible that many market participants simply thought that stocks had risen too far, too fast, and started taking some of the profits earned earlier in the year.
The Futility of Predictions
Whatever the reasons for the market rise through the first seven months of the year, and the decline over the past three weeks, the main point is that we don’t know what will happen at any time in the future. So the attempt to interpret events as good or bad seems futile.

Instead, as we have emphasized in the past, Park Piedmont continues to advocate for clients to develop an allocation between stocks and bonds that’s appropriate for their specific, long-term situation. We recommend making significant alterations to that allocation only based on major life changes, not short-term price changes or news reports, whether they appear good or bad.

Does ESG Investing Have the Impact We Think It Has?

Sam Ngooi Life with Money

I’d like to divest from oil and gas,” I said firmly. My request felt urgent. The world itself was at stake.

It was 2015, and my answer wasn’t what the financial advisor was expecting when he asked how he could help. Todd, who worked at a large investment firm, was assigned to work with me.

This was his introduction. Basically, “Hi, my name is Corenna, and can you help me pull my money out of anything environmentally problematic?”

I had recently earned my master’s degree through a program focused on conservation, and I had spent a fair amount of time thinking about climate change.

As a result, I tried to be intentional in my daily decision-making, including being cognizant of where my dollars were going and what they were supporting. I was far from living a carbon-free life, but I felt good about trying to reduce my footprint when I could.

But one day, a guilty realization struck me. Are any of my efforts worth anything at all if I’m simultaneously investing in the oil and gas industries? I’m literally profiting every time they are.
cognitive dissonance
Like many people, I didn’t really know much about the stock market. I had no idea what I was invested in, or – to be honest – how investing in the stock market really works. So, when I declared that I wanted to divest from oil and gas, I thought it would be as easy as simply declaring my wishes and then someone – in this case, Todd – making it happen.

I don’t remember exactly how our conversation went, but I do remember Todd gently explaining that it wasn’t as straightforward as picking a few companies to avoid. Which companies don’t rely on oil and gas to do business? Hmm. I admitted I didn’t know, but wasn’t it someone’s job to figure it out?

Perhaps even more interestingly, he said that as a fiduciary, he wouldn’t – couldn’t! – let me divest from oil and gas. It was just too early for that. The world still depended too heavily on both.

I remember hanging up the phone feeling exasperated, disappointed, even angry. How would the world avoid climate crisis if investor – myself included – continued to pour money into oil and gas?

I tried not to think about the gap between my values and my investments. It didn’t feel good.

Years later I started working at Park Piedmont, and I thought, “Here’s my chance!” But through ongoing learning from PPA advisors, I’ve come to realize that it still isn’t that straightforward.

PPA Financial Advisor Sam Ngooi explains why.

• • •

Like Corenna, others may also struggle with how best to express one’s values through money. Why can it feel so challenging to achieve? For one, money is emotional. Feeling powerless or overwhelmed by how we use money can be uncomfortable and can cause us to question our identities and how we move about the world.
How do we express values through our money?
Luckily, things have progressed since 2015, and there are an increasing number of options for expressing values within one’s portfolio. For one, ESG investing focuses on environmental, social, and governance data about a company.

Company metrics around carbon emissions, worker safety, leadership diversity, and the like are rolled into a comprehensive score to help guide investors on whether a company is a sound investment. Climate-conscious investors like Corenna might seek out “green” companies that scored high on environmental measures, reallocating their funds away from “brown” companies with high greenhouse gas emissions and low environmental scores.

Alignment between money and sustainability values achieved, right?

Not necessarily. There are more than 600 rating agencies and systems, each with their own methodology that can lead to a single company earning a range of scores. A single numerical score, while easy to digest, combines a range of variables at the expense of nuance.

According to The Atlantic, “A company that has high carbon emissions and an ordinary record on diversity, but excellent corporate governance, can end up with a very high overall ESG score.” For someone who supports diversity and inclusion efforts but prioritizes sound environmental practices above all, a flattened ESG score can obscure the very details that help discern how a company’s values measure up next to their own.
ESG Investing imperfectly aligns portfolios with values
It’s also easy to assume that a high ESG score means a company is proactively progressing towards better practices with a net positive impact. The Atlantic writes, “MSCI, one of the most influential ESG-rating firms, describes itself as ‘enabling the investment community to make better decisions for a better world’ and declares, ‘We are powered by the belief that [return on investment] also means return on community, sustainability and the future that we all share.’”

In actuality, an MSCI ESG rating measures a company’s exposure and resilience to financially material environmental, societal, and governance risks. This means a company might be a big carbon emitter, but if climate change doesn’t pose a big danger to its operations, it might have a higher ESG score.

Some academics and analysts have also questioned whether the E in ESG is useful as it’s currently defined. Recently, Yale Professor of Finance Kelly Shue and Boston College Finance Professor Samuel Hartzmark launched a research project to measure the impact of sustainable investing on “brown” and “green” firms’ environmental impact. Shue and Hartzmark found that green firms with increased investment capital don’t see a huge change in their environmental impact.

As Shue notes in a recent Freakonomics episode, “[Green firms are] mostly services firms that already don’t pollute. So, when they get more money, they continue not polluting. And they’re also not the best candidates for developing green technology because it’s not part of their business model.”

In contrast, brown firms tend to respond to reduced investment capital by becoming more brown, either by cutting back on pollution-abatement efforts or by reducing spending on green initiatives and investments.

Thus, although it’s counterintuitive, divesting from brown firms might be counter-productive. It raises the cost of capital and forces short-term decisions focused on survival, rather than allowing for longer-term decisions focused (we would hope) on more sustainable innovation. This often leads to more pollution rather than less.

It’s important that brown firms have enough capital to innovate. Shue says, “The brown firm typically pollutes 260 times as much as a similarly sized green firm. So, if that brown firm were able to cut its emissions by just a mere one percent, that is actually way better for the environment than the green firm cutting its emissions by 100 percent.”

Shue also points out that brown firms exist in sectors critical to a well-functioning society (e.g., energy, transportation, agriculture, and building materials). “Punishing” these companies through financial failure is not only counterproductive to their progress but also might have unintended negative consequences on society as a whole.

This realization has given rise to investment options and initiatives that engage with brown firms to make them greener, such as by using ESG data and shareholder voting to encourage more sustainable policies.

So, avoiding companies with low-ESG scores might not have the impact we expected. Maybe you’re surprised by that too.

Does that mean ESG investing is pointless, or that it won’t continue to improve? Should we give up altogether?

Not at all.

The key is to shift our thinking and expectations. We can recognize that relying on an ESG ranking or score to guide investment/divestment choices is certainly a convenient option, but not a perfect solution for clear conscience investing either.

That said, a significant benefit of ESG data is the increased transparency and detail it provides about a company. More than ever before, investors have information at their fingertips to guide their decision-making.
Aligning finances with values
And if the journey feels overwhelming – as it did for Corenna in 2015 and, as she’d admit, it still sometimes does – remember, you don’t have to travel it alone.

Our job as advisors is to walk alongside you, to share new information as it becomes available, and to help you align your finances with your values and goals – whether you’re focused on the short-term, the long-term, or generations into the future.

June Market Activity: Stocks and Bonds Continued Their 2023 Recovery

Nick Levinson Comments, Life with Money

Stocks and bonds continued their 2023 recovery in June from the dismal results of 2022. Broad-based US stocks rose 16% through the end of June, while developed country stocks increased 11% and emerging markets stocks were up 5%. The tech-heavy NASDAQ index climbed almost 32% through half of 2023.

Bonds also had positive returns through June 30. With the benchmark 10-year Treasury remaining relatively high at 3.81%, down slightly from 3.88% at the beginning of the year, income has increased while prices have remained stable. US bonds rose 2.6% in the first half of 2023, while high-yield bonds increased 4.4% and inflation-protected bonds were up 1.8%.
Stocks and bonds continued their 2023 recovery in June
Interest rate increases by central banks around the world, attempting to contain inflation without causing recession, remain among the most closely watched economic indicators. The US Federal Reserve is focused on engineering a “soft landing” from the historic inflation in 2022, but opinions differ as to whether that will happen.

As Talmon Joseph Smith writes in The New York Times, “For a year or more, worries about an impending recession have dominated discussions about the economy. Most economists expected a recession to hit the US by now – in part because of the rapid escalation of interest rates. That increase in the cost of credit has caused shocks in the banking sector and, for a while, put a lid on the housing market.

“But the dampening effect of higher rates has confronted the robust income and spending of many households and the staying power of businesses – both buttressed by emergency pandemic support from Congress and the Fed. Though families, business managers and investors alike have had to contend with the frustrating realities of inflation and economic uncertainty, growth has continued, almost defiantly.”

“[But] a growing cohort of investors believes that sustained growth could plant the seeds of its own destruction, as the Fed reacts by keeping borrowing costs higher for much longer than businesses have anticipated. That could make some debt burdens unsustainable for businesses, especially those that rely on loans or lines of credit from banks or that may need to seek new funding from investors.”

Matt Grossman, writing in The Wall Street Journal, suggests the possibility that rates need to be even higher than they are now, possibly beyond the one or two additional rate increases expected from the Fed later this year:

“Investors generally expect higher interest rates to cool the economy, as part of the process known broadly on Wall Street as “tightening financial conditions”—a constellation of higher mortgage rates, rising bond yields and generally lower asset prices. Together, these factors tend to reduce the amount of money coursing through markets, for instance by making it harder for people and businesses to get loans.

“But one complication is that it is hard to know in real time whether conditions are actually tight or whether they just look that way, particularly when inflation… hit its highest level since the early 1980s.

“Understanding whether financial conditions are tight or loose is challenging because a key variable is hidden from view, economists say. What matters isn’t the absolute level of the Fed’s target rate, but rather whether it is higher or lower than a hypothetical “natural” rate that would neither slow nor stimulate the economy.

“Economists say that financial conditions only tighten when market interest rates rise firmly above the natural rate. The natural rate can’t be measured directly, and it changes over time—rising when demographic or technological changes improve the economic outlook, and falling when underlying prospects dim. If it has risen considerably over the past two years, it is plausible that the Fed hasn’t tightened monetary policy as severely as its dramatic rate-hike campaign would suggest.

“Scott Sumner, a monetary economist who recently retired from George Mason University, thinks that the natural rate has climbed sharply—pushed higher by the Fed’s monetary stimulus during the pandemic—muting the effects of the Fed’s 5-percentage points of rate increases over the last 18 months.

“’Most people would interpret higher rates as tighter policy, but you can’t necessarily jump to that conclusion,’ Sumner said. ‘If it were truly a tight monetary policy, I’d expect stocks to be depressed.’”

As always, we will continue to monitor the markets, but still recommend a long-term perspective with diversified allocations to stocks and bonds based on your specific financial situation.

One other important recent piece came from Jeff Sommer in The New York Times. He discusses the current attractiveness of bonds and cash, even as the stock market has made a strong recovery so far in 2023:

“Amid all the hoopla [surrounding a possible Artificial Intelligence-driven stock bull market], you can easily miss the solid returns being posted by far less glamorous but always important and, at the moment, compelling asset classes: fixed income investments, including bonds and cash.” [PPA note: The highest-yielding cash investments these days are referred to as “purchased” money markets funds.]

“Especially for those with short time horizons – whether you’re in retirement or close to it, or saving for a house, education, a car, a vacation or any other worthwhile purpose – those lower-risk investments are worth a close look. They provide solid income with much less risk than stocks – in theory, anyway.”

After a terrible 2022 for bonds, when prices declined in the range of 15%, “bonds are more reliable than they were last year because yields are already high. Even if they elevate further, there is a plush cushion now, and any potential price declines should be offset, and then some, by the income that bonds are generating.”

Please don’t hesitate to let us know if you’d like to discuss these or any other topics in additional detail.