JULY 2023 Market Update

Have you ever heard the phrase “what got you here won’t get you there.”? I have found that, more often than not, this is true. 

Emily, a seasoned executive in the construction industry, seamlessly transitioned between the office and construction sites, donning her hard hat and boots.  With a successful career spanning decades, she retired at 65, relocating to sunny Stuart, Florida.  Trusting her retirement accounts to sustain her, she remained invested in stock funds, convinced that the strategy that worked so well while working would do the same in retirement.  Initially, all seemed well until unexpected hurdles emerged, taxes were higher than expected, Medicaid was more complicated and expensive than she expected, and inflation skyrocketed.  The stock market turned lower simultaneously, and suddenly, she needed to liquidate more of her 401k assets at diminished values.   Emily contemplated returning to work, but her prolonged absence hindered opportunities in her field.  Disheartened, she looked into lower-paying jobs, but it hardly seemed worth it after taxes and commuting costs.

Unfortunately, this is a common story.  Just as Emily and her company used different tools, materials, and methods for different stages of the building process, she needed to have started planning and executing differently as she got closer to retirement and then adjusted again once she entered her retirement years.  Just as she used different people with different skills to build her buildings, she needed to have sought the counsel of a team of professionals before retirement to lower her tax burden, plan her cash flows and lower her medical and insurance expenses through proper Medicaid planning.

Conventional retirement investment wisdom has been to move into more bonds.  Unfortunately , that would have lowered your investment return significantly during the most recent decade. As we entered this most recent bear market in stocks, bonds fell in value just as fast as equities. Once again, conventional “wisdom that got you to one point may not get you where you need to go.

Understanding and adapting to the changing world around you and being able to design, implement and consistently execute a plan to thrive is increasingly complex.

This month we will talk mainly about practical tips for retirees and near-retirees. For those of you wanting to know my thoughts on the broader markets for the next month or two, I think we are headed into one of the most important earnings seasons I have seen in my 30-plus years.   What we hear from companies large and small over the next several weeks will tell us if earnings numbers are officially trending lower, which I expect to be the case for many companies.  Also, as we have already seen, the earnings may be “good,” but the future guidance may cause downside movement in some stock prices.  While many indicators, such as job numbers and consumer spending, have remained strong, others continue to show significant weakness, such as home prices, tighter lending standards, skyrocketing bankruptcy, and delinquent accounts.  Investors enjoying what is now officially a new bull market must remain disciplined in maintaining the appropriate weightings and diversification that align with their long-term goals.

What are some things you need to understand in today’s marketplace, at least for this month?

1. What does inflation really mean to YOU?

2. How does cash flow management factor into potential long-term investment success?

3. What role might insurance play in your ability to maintain your lifestyle in retirement?

Inflation:

Inflation worries are over, right?   I doubt it, and so does the Fed.  Simply looking at the math, even if we suddenly saw zero inflation starting in July, this year’s inflation would still be over the Fed’s target rate of 2% for the year.   Digging a little deeper, the inflation increase last July was zero, so even being slightly higher this July results in what may appear to be a scary number.  Any exogenous event could easily shock the system, whether geopolitical or natural.

It is safe to say that the FOMC (Fed or Federal Open Market Committee) has told us that more rate increases are coming to continue to combat inflation.  This means longer-term bonds are likely to decrease in value at some point which is likely why the severe yield curve inversion (longer-term interest rates being higher than shorter-term interest rates) has persisted much longer than at any time in history as we near a full year.

Retirees and investors need to understand that keeping income-producing bonds only on the short-duration side opens them up to reinvestment rate risk, which can be a problem for cash flow management which we will discuss next.  Further, longer-duration bonds may remain volatile to the downside while not providing as much income as shorter-duration bonds.

Conclusion: while bonds are more attractive than they have been in over a decade in my opinion, investors may still need to adapt from old, outdated strategies.  Furthermore, inflation is likely to persist, driving costs higher, potentially increasing your cash flow needs.

Cash Flow Management:

What is cash flow management?

When you need the cash to pay your liabilities (your bills) is the basic concept of cash flow management, but it goes further than that when you are in retirement.  You are providing your paycheck, paying for your benefits package, and ideally still setting aside additional cash to fund future unknown needs or wants.

Anyone who tells you that it doesn’t matter where your cash flow comes from, capital gains, dividends, or interest in retirement is, in my opinion, simply incorrect.  (Sorry if I made any enemies out there with that comment.)  Emily’s conundrum above was that capital gains are not guaranteed.  Her capital gains turned into capital losses, while her income needs to be increased.  Further, it seems that cash flow could have been managed better to control taxes since not all income in retirement needs to be taxable, and the timing of when those cash flows are taken can also reduce taxes. I like to point out that it isn’t how much you have. It’s what you keep.  Which brings us to our final point for this month.

What role might insurance play in cash flow management?

Isn’t insurance an expensive waste of money?

I hope I don’t lose any insurance friends here, but it can be.  In my experience, being overinsured is nearly as big of a problem as being underinsured.  Additionally, over time your insurance needs change, but rarely are those policies adjusted because it requires a bit of work.  Having an insurance expert and a competent investment advisor in your corner can save you money in taxes and unnecessary premiums.

Annuities and Life Insurance policies can be a blessing and a curse.  Just like some tools are dangerous to use but doing the job without them may mean the job is simply never done or it is not done well.  Annuities and life insurance tend to get a bad rap; when used properly and in the proper proportions for your situation, they can be just the tool you need to accomplish your objectives.

This note is not investment guidance for you; it is information and opinion only.

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Please remember that this note is our opinion from a broad perspective based on over three decades of money management experience and is not personal investment advice.

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Talk soon,

John

Phone: (561-) 327-4646

Email: info@advocacyinvesting.com

John Browning, MBA, and CSA®

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