At Waldron Private Wealth, we partner with individuals and families focusing on:

• Business venturers, asset gatherers and career professionals whose focus is on wealth accumulation and family protection
• Pre-retirees planning for a secure retirement lifestyle
• Retirees whose focus is on wealth preservation and building a family legacy
• Widowers who are seeking assistance with post-loss financial duties

No matter the stage of life, achieving a balanced financial perspective between current and future needs requires coordination. Without a trusted wealth advisor working in unison with your other financial experts (accountant, attorney, insurance agent, etc.), managing wealth can become disjointed and time-consuming, potentially leading to future regrets.

Below, we outline five considerations to address the question at hand, plus an additional set of insights. If you’d like to explore these further, our wealth advisor team is here to provide tailored guidance to both your current and future needs.  Please contact us for a personalized strategy session.

1. Coordination between my Financial Professionals
   • Your team may not be on the same page with another – I’m a passionate NFL fan and few things grind my gears more on a fall Sunday afternoon than seeing an avoidable but costly penalty resulting from a simple lack of communication.  Just like on the football field, those penalized yards can accumulate and move the needle for your financial picture.  One may have a professional team in place today, but if there’s a lack of coordination it can lead to inefficiencies and costly financial decision making for the “current and future you”. 
   • Example: You paid more in income tax and for Medicare than intended – If your portfolio manager incurs a significant amount of capital gains as part of their normal rebalancing, while your accountant separately recommends that you convert an amount of your Traditional IRA to your Roth IRA creating taxable income – this may unintentionally move you up into a higher Federal marginal income tax bracket while also leading to a potentially higher Medicare Part B and D premium down the road per what is called IRMAA tax brackets (source: Kiplinger).
2. Save versus Spend
   • Budgeting doesn’t have to be taboo – Budgeting may have a negative connotation for some individuals.  For others, it can provide a sense of comfort.  We find that some individuals may know what their income is today, but don’t necessarily track what they’re spending (and that’s understandable).  We help our clients with budget planning from high-level summaries to granular breakdowns, driven by your preferences to balance saving for the “future you” with not necessarily taking away from life enjoyment today. 
   • Using budgeting as a tool – Projecting the long-term implications of save versus spend, as well as for desired “big ticket” purchases such as funding for a new home, launching a business venture or covering your child’s wedding costs, is a valuable tool to address the title question above and help ensure those “investments” don’t veer you off path.
3. Pre- and Post-Life Planning
   • Proactive estate planning – We work with our clients to understand what it is that is most important for them, in terms of developing an estate plan designed for financial protection and legacy building for their family and other heirs.  As an example for parents with young children, establishing guardianship and trust accounts that can be designed with specific age-break provisions and delegation to trustees until minors reach adulthood can help direct traffic and clarity when it’s needed the most.
   • Post-life planning duties – We view ourselves as being a supporting partner for surviving spouses in the post-life planning process, so that they may focus their time and energy on their loved ones.  A timely and coordinated effort is essential in our opinion during the post-life planning process across your various professional experts. 
4. Aligning your Asset Allocation with your Cash Flow Needs
   • There’s been a recent shift between equity and bond returns – In 2024, broad U.S. equities gained +23.8% while U.S. tax-exempt bonds gained +1.1%.  For 2025 through March 7^th, U.S. tax-exempt bonds are up +1.0% while U.S. equities are down -2.1%.  Pockets of U.S. equity markets are down even more, such as U.S. large cap equity growth at -5.6% and U.S. small cap equities at -6.8% (sources: Morningstar, Russell 3000 Index, Barclays Municipal Bond Index, Russell 1000 Growth Index, Russell 2000 Index).
   • Income generating versus long-term growth assets – While U.S. equities are trailing U.S. bonds this year (as of the writing of this commentary), it’s important to note that U.S. equities have provided an annualized return that is over double that of U.S. bonds since 1950.  Also, there has historically never been a negative 20-year rolling annualized return for U.S. equities or U.S. bonds over this time frame (there’s a potential long-term reward for owning high risk assets).  However, over the past 30+ years U.S. equities have been positive in approximately 75% of those calendar years while U.S. bonds have been positive in approximately 90% of those calendar years.  For investors looking for tax-efficient income generation from their portfolio, current U.S. tax-exempt bond yields are at their highest level versus the past 15+ years (about 1%+ above the average over that time frame).  Point being, the “current you” and the “future you” may require different asset allocation mixes between these major asset classes and your portfolio should be periodically evaluated in line with your cash flow needs.  This can help mitigate temporary equity market fluctuations from derailing the “future you” plans (sources: J.P. Morgan Asset Management, Nuveen).
5. Building a Tax-Free Bucket for Retirement
   • The Roth account, a tax-free bucket – According to a study conducted by Russell Investments, investors may be losing up to -1.8% in portfolio returns per year due to income taxes.  We believe that what your portfolio earns from an after-tax perspective is paramount and there are various strategies to mitigate this burden (prudent asset location, usage of tax-exempt bonds, the Roth account, etc.).  The Roth account is a bucket that can be withdrawn during retirement income tax-free.  Funding a Roth IRA can be done via direct contributions or backdoor Roth contributions (depending on your income level), contributing to a Roth 401(k), or by converting Traditional pre-tax IRA or 401(k) assets to the Roth form (source: Russell Investments).
   • The “current you” pays the income tax now, while the “future you” enjoys the tax-free benefits – When converting assets from a Traditional IRA to Roth IRA, the income tax is paid in the current tax year.  Or, when you make contributions to a Roth 401(k) instead of the Traditional 401(k) those deferrals are subject to income tax in the current tax year whereas the Traditional 401(k) deferrals would not be subject to income tax.  For the backdoor Roth contribution, there is a nuanced pro-rata rule that should be evaluated.  The added bonus here is that the Roth IRA or Roth 401(k) does not require you to make required minimum distributions, so you control the cadence later in life (unlike a Traditional IRA or Traditional 401(k) which does have that requirement once you’re in your 70’s) (source: Investopedia).
6. Bonus – Funding for Self-Employed Income, Retirement, Health and Educational Expenses
   • Tax Credits available for Self-Employed Retirement Funding – Solo 401(k), SEP IRA and SIMPLE IRA are common retirement plans utilized by self-employed individuals.  There are several income tax credits available for starting up these plans that self-employed individuals should evaluate, including Federal income tax credits worth up to a total of $5k (source: Internal Revenue Service).
   • “Super” catch-up contributions for 401(k), 403(b) and 457(b) Retirement Plans – New for 2025 and resulting from the Secure Act 2.0, individuals who will turn age 60 to 63 in 2025 can make an extra contribution to these retirement plans.  Individuals age 50 and up can contribute the base amount permitted of $23,500 plus an additional $7,500 (a total of $31,000).  For those whose age is between 60 and 63, they can contribute a total of $34,750 which is known as the “super” catch-up contribution (source: Lord Abbett). 
   • Don’t overlook the income tax savings of an HSA – Otherwise known as a health savings account, which can be used to cover medical expenses.  There are requirements for a high- deductible health insurance plan to qualify and the annual maximum contribution is typically below $10k, while those aged 55 and up can contribute an additional $1k.  You generally cannot use an HSA to cover Affordable Care Act health insurance premiums; however, it can cover payment of Medicare premiums.  Contributions are made on a pre-tax basis, grow tax-free and can be withdrawn tax-free meeting certain requirements (source: Morgan Stanley).
   • Funding my child or grandchild’s education – 529 plans are educational savings vehicles that can have triple tax benefits.  Depending on your state of residence a portion of contributions can be state income tax deductible, assets grow tax-free and can be withdrawn tax-free if used for specific educational purposes.  A portion of 529 plans can be used for certain K-12 expenses yearly even for private schooling and when meeting certain rules, can be transferred income tax and penalty free to the child’s Roth IRA to help catalyze their own retirement savings (this can help mitigate “over-funding” 529 plans).  When a 529 plan is owned by a grandparent, those assets are not counted for FAFSA eligibility, which was a new rule as part of the 2024 FAFSA form update.  UTMA’s are not as tax-efficient as 529 plans broadly speaking and are counted against FAFSA; however, this account type is less restricted in terms of future spending usage.  When the child reaches their age of majority (18+ depending on the state of residence), a 529 plan is not owned typically by the child while the ownership of the UTMA would transfer to the child at the time of reaching their age of majority.  A combination of the two can be an impactful tool when developing an educational savings plan and target funding level for your child or grandchild (source: savingforcollege.com).

Waldron Private Wealth (“Company”) is an SEC registered investment adviser with its principal place of business in the Commonwealth of Pennsylvania. Company may only transact business in those states in which it is registered, or qualifies for an exemption or exclusion from registration requirements. For information about the Firm’s registration status and business operations, please consult Waldron’s Form ADV disclosure documents, the most recent versions of which are available on the SEC’s Investment Adviser Public Disclosure website at www.adviserinfo.sec.gov.

This material is for informational purposes only and is not intended to be an offer, recommendation or solicitation to purchase or sell any security or product or to employ a specific investment strategy. Due to various factors, including changing market conditions, aforementioned information may no longer be reflective of current position(s) and/or recommendation(s). Moreover, no client or prospective client should assume that any such discussion serves as the receipt of, or a substitute for, personalized advice from Company, or from any other investment professional. Investing involves risk, including the potential loss of money invested. Past performance does not guarantee future results. Asset allocation and diversification do not guarantee a profit or protect against loss. Company is neither an attorney nor an accountant, and no portion of the web site content should be interpreted as legal, accounting or tax advice. 

Disclaimer

The private investment market is gaining attention from sophisticated investors due to its potential to outperform public stock and bond markets. It provides access to a significantly larger number of companies with annual revenues of $100M+ compared to public markets (according to Hamilton Lane). However, the selectivity of private investment managers is often overlooked, leading to subpar investment experiences.

The private investment market grants access to privately owned companies not listed on public exchanges, covering various asset classes such as stocks (private equity), bonds (private credit), and real assets (private real estate and infrastructure). Eligibility to participate in the private investment market varies, and there are liquidity, tax reporting, and performance reporting nuances. More traditional investment vehicles (such as  mutual funds or exchange-traded funds) offer improved eligibility and liquidity, along with straightforward tax reporting and daily pricing.

One notable characteristic of the private investment market is its track record of outperforming the public investment market, at times. Over a period from 2018 to 2022, private equity significantly outperformed public equity, with a growth of approximately $2.24 compared to $1.23 per $1 invested (according to Hamilton Lane and Cobalt). From 2000 to 2022, more than 50% of private equity investment managers consistently outperformed their public equity counterparts (according to Hamilton Lane and Bloomberg). While the private investment market offers higher growth potential, not all investors have positive experiences due to the wide performance disparity among private investment managers (as shown below according to J.P. Morgan Asset Management).

To navigate the complexities of the private investment market, careful consideration is required. Factors such as access to proven managers, thorough due diligence, manager alignment with investors, investment strategy philosophy adherence across varying market environments, fund deployment, tax considerations, investor liquidity, and portfolio sizing should be prudently vetted. For example, an investor that is currently subject to estate tax may benefit from positioning a private investment manager within a specific entity to provide for growth outside of their taxable estate. Our team can assist in understanding these details and determining suitable strategies for your investment portfolio. Contact us for more information on this topic and our investment philosophy.

Waldron Private Wealth (“Company”) is an SEC registered investment adviser with its principal place of business in the Commonwealth of Pennsylvania. Company may only transact business in those states in which it is registered, or qualifies for an exemption or exclusion from registration requirements. For information about the Firm’s registration status and business operations, please consult Waldron’s Form ADV disclosure documents, the most recent versions of which are available on the SEC’s Investment Adviser Public Disclosure website at www.adviserinfo.sec.gov.

This material is for informational purposes only and is not intended to be an offer, recommendation or solicitation to purchase or sell any security or product or to employ a specific investment strategy. Due to various factors, including changing market conditions, aforementioned information may no longer be reflective of current position(s) and/or recommendation(s). Moreover, no client or prospective client should assume that any such discussion serves as the receipt of, or a substitute for, personalized advice from Company, or from any other investment professional. Investing involves risk, including the potential loss of money invested. Past performance does not guarantee future results. Asset allocation and diversification do not guarantee a profit or protect against loss. Company is neither an attorney nor an accountant, and no portion of the web site content should be interpreted as legal, accounting or tax advice. 

Disclaimer

Yields on Series I savings bonds have captured market headlines this year, given the bonds are currently paying 9.62% (for bonds issued between May and October of 2022).  This compares favorably to the national average bank account yield of 0.06% (according to Bankrate) and less than 3% for pockets of high credit quality bond funds.

In short words, Series I savings bonds are issued by the U.S. Treasury and backed by the U.S. government meaning that the bonds can be considered as being relatively low risk.  The inflation rate yield on the bonds is reset twice annually, adjusted for varying U.S. inflation levels which have recently been elevated to their historical norm.  The bonds can be purchased either online on the U.S. Treasury website or with U.S. taxpayers’ Federal income tax refund amounts.

We believe there are several aspects of Series I savings bonds that should be considered, despite the appealing yield:

• The fixed rate on the bonds is 0.00% and does not change throughout the life of the bond, while the inflation rate (currently 9.62%) resets every 6 months with current levels of CPI. As U.S. inflation levels moderate, the yield on the bonds will decrease.
• Investors are limited to purchasing a maximum of $10,000 of the bonds. Essentially, a $10,000 investment would currently yield $962 in annual income at current yields.
• The bonds contain a 30-year maturity and must be held for at least one year, but can be redeemed after 5 years without a penalty. The penalty for redeeming within 5 years (but after 1 year) is 3 months interest.

Disclaimer

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Year-end is a natural time for investors to review their portfolio’s performance and while it’s a good idea to check in on your portfolio, mutual fund shareholders who are not monitoring for the potential tax impact of year-end mutual fund capital gains distributions may be caught off guard.

A mutual fund is an investment vehicle that pools together monies from multiple shareholders to purchase securities, typically stocks or bonds. Shareholders receive benefits such as diversification, as the fund will hold many securities for which it can be unrealistic for an individual to conduct due diligence on, professional expertise provided by the fund’s managers and technological resources leveraged by the fund’s technicians.  Throughout the year, mutual funds will make buys and sells to ensure that their strategy remains in line with their stated objectives and to take advantage of any market dislocations.

Depending on how long these assets were held by the mutual fund, profitable trades may fall into one of two taxable categories, short-term and long-term capital gains. Short-term is applicable for investments held for less than one year and is generally taxed as ordinary income, while long-term applies to positions held for longer than one year and is taxed at the long-term capital gains rate (the distributions are taxed only within taxable accounts such as a trust, joint or individually held investment account). Mutual funds are mandated by law to distribute at least 98% of their net capital gains (after “netting” out trades with losses and gains) to shareholders once per year.  Typically, mutual fund distributions are paid out in November or December and can consist of both short-term and long-term capital gains.

Given mutual funds may execute hundreds or thousands of trades each year, estimating your resulting tax liability can be quite challenging, but failure to do so can leave you susceptible to significantly underestimating what you owe in April, and can even result in moving you into another tax bracket.  It is also important to weigh the difference in taxes between selling the fund prior to the distribution date or holding onto the fund and taking the distribution.  Without properly estimating the tax implications, mutual fund distributions can represent lost opportunities to offset losses or execute carryforwards, and in some circumstances, can leave an investor wide open for headaches come April.

Mutual funds can be a practical part of one’s investment allocation and our Investment Management process includes evaluating all mutual fund distributions, no matter the size.  And for each client we serve, we monitor and estimate the tax implications from all such distributions. This allows us to make investment trades throughout the year to minimize the tax bill, and to more efficiently rebalance and align each client’s portfolio to support their unique goals.

Disclaimer

The term LIBOR (which stands for the London Interbank Offered Rate) may not be a mainstream acronym.  However, if you have ever borrowed money for an investment collateral line or for consumer debt such as for a student loan, LIBOR may have affected your borrowing rate.

LIBOR has been the primary benchmark for interest rates utilized by the loan market for the past several decades.  Many loans have used the LIBOR rate as a foundation for establishing the borrowing rate for trillions of dollars of debt (according to Virtus Investment Partners).  In 2017, the Alternative Reference Rates Committee (a committee established by the Federal Reserve, the U.S. central bank) announced that LIBOR would be replaced by the SOFR (the Secured Overnight Financing Rate) at the end of 2021.  The key reasoning behind the switch was to enhance the regulation of the interest rate.  By the end of 2023, all aspects of the LIBOR (across a multitude of time ranges the rate covers) will be eliminated meaning that LIBOR will no longer be as representative in loan documents.  Also, there are alternative reference rates being considered in addition to the SOFR.

From the market’s perspective, change can catalyze uncertainty and given the magnitude of the LIBOR to SOFR switch, there can be volatility in the loan markets as the transition progresses.  The two rates are structurally different (for example, LIBOR is an unsecured rate while SOFR is a secured rate and LIBOR has various term structures while SOFR currently does not) which can create dispersion between the pricing of the LIBOR and SOFR.

While the transition has been well communicated for a number of years and seemingly there are sufficient resources for the transition to be successful, it is a material “changing in the guard” of how various loans are priced and we remain watchful of the shift away from LIBOR.

Disclaimer

Over the past several months, the Chinese government has captured market headlines with its litany of legislation aimed at companies in the technology sector.  There are various aspects of the regulations that are contentious, such as the Chinese government’s new rule to limit weekly video game time for children, however the legislation is mostly focused on anti-monopoly and data security regulations.  The regulations have weighed on Chinese technology equities and broadly on emerging markets equities, as one of the most popular benchmarks for the emerging markets equity asset class (the MSCI EM Index) contains nearly 40% exposure to Chinese equities currently.  We believe active emerging market equity investment managers can be favorable to utilize, which can have lower relative weightings to China during this environment.

Earlier this week, global equity markets have traded lower following the increasing concern over the strength of the Chinese real estate market.  The Chinese real estate market has been under pressure for some time; however, the situation has become more acute as the country’s second largest property developer Evergrande is nearing default with over $300B in debt.  The headline was a key catalyst for the global equity market performance on Monday, as the MSCI All Country World Index declined by -2.3% which was one of the most material daily global equity market declines in nearly a year.  One of the primary concerns is the potential for contagion into other property developers and the broad Chinese economy which is the second largest economy globally.  Ultimately, the importance of the property sector within the Chinese economy (direct effects on property contribution to construction and indirect effects on the construction on upstream sectors such as steel and cement, according to Goldman Sachs Global Investment Research) points to a consensus expectation for the Chinese government to intervene with fiscal policy shifts to help ease potential property market declines.

As of the writing of this article, Evergrande is expected to meet its interest payments on its domestic bonds on time which may provide alleviation. We remain watchful of the negative headlines for attractive global equity market opportunities for long-minded investors given the headline volatility.

Disclaimer

The two questions posed above are not that unordinary when we think of how we deal with uncertainties.  At the root of it, we are acknowledging a risk to our (financial) well-being, contemplating which actions we should take to mitigate that risk (the markets may temporarily react unfavorably to the election environment) and narrowing our focus to what can immediately provide comfort (going to cash could protect one’s portfolio from potential market downturns).  This appears to be a reasonable thought process, applicable in many facets of our lives.

However, as investors our emotions can be our worst enemy when riding out the ebbs and flows of the market.  Focusing on the ebbs and flows of the U.S. stock market since 1926 (as measured by the S&P 500 Index; a widely used benchmark for U.S. large cap equities), the months of October and November tend to underperform during election years versus non-election years.  This is where our focus can naturally narrow, to how can we mitigate the pain of potential market losses by “getting out” of the market, while re-investing at a later time.

In our view, the solution involves the distinguishing qualities of an investor contrasted to a speculator. 

Oftentimes, the decision to implement no material portfolio allocation changes can benefit the patient investor.  While was down in excess of -30% (as measured by the MSCI All Country World Index; a widely used benchmark for global equities) from mid-February to late-March of this year, it has mostly rebounded since then (as of the writing of this article) benefitting investors who maintained their investment fortitude.  Those investors who decreased their equity holdings after the early year market challenges may have missed out.  This is an outlier example as the market recovery this year since March has been the swiftest on record.  Over multiple market cycles since 1980 through September 30^th, 2020, the U.S. large cap stock market has on average fell by nearly -15% within each calendar year and despite this, has generated positive calendar year results nearly 75% of the (according to FactSet, Standard & Poor’s and J.P. Morgan Asset Management).  Leading up to election time frames, the stock market can react unfavorably in the short run; however, it tends to be resilient over the long term (over multiple market cycles).

Conversely, the speculator believes in the fallacy of timing the market.  To our earlier question, why not sell risk assets such as equities and go to cash before a potential market drawdown caused by the election, and later get back in?  This is no longer investing from our perspective, this is speculating via a three-part parlay wager:  Precisely predicting when to exit the market, when to get back in and which asset classes to re-invest into.  There are stories of those who have successfully timed the market; however, we advocate against speculating as it can be predicated on correctly predicting all three moving parts previously listed.

By example, a study conducted by the University of Michigan in 1994 found that 95% of the U.S. large cap stock market’s gains were concentrated in 1% of all trading days over a 31 year period (this was an average of three days per year, albeit an example ending in 1994).  More recently, an investor who stayed invested in the S&P 500 Index for the 15 years ending in 2019 earned nearly double than someone who missed out on the market’s 10 best days (missing out on the market’s 30 best days would have resulted in a negative return while the market was up nearly +10% per year over this frame) – according to a study conducted by Putman Investments.  This reflects the value of staying invested and not jeopardizing your family’s long-term wealth goals.  The market’s best and worst trading days tend to be clustered which creates tricky navigation for the speculator.  Not to mention, the investment fallacy that there is a consistent link between political party victories and market outcomes.  We are not dismissive about politics mattering; however, the stock market has gained on average +9.2% during Democratic Presidential terms and +9.1% during Republican Presidential terms from 1965 to 2019 (according to Thomson Reuters, Bloomberg and Alliance Bernstein).

We believe in remaining watchful of the candidates’ proposed policies.  However, in our view making significant portfolio risk profile changes based upon speculation (speculating on the election outcome and/or speculating on which proposed policies may be implemented), can be a tempting, yet flawed approach that runs counter-intuitive to productive wealth management success.  Even the most well-designed investment portfolio can be derailed if our emotions are allowed to be in the driver’s seat.  Rather, we advocate with our clients the importance of practicing stoicism and adherence to their financial goals.

Disclaimer

“The investor’s chief problem and even his worst enemy, is likely to be himself” – Benjamin Graham, economist and author of The Intelligent Investor (published 1949).

While we would emphasize that a hierarchy of factors contribute to skilled investment decisions, such as assessing risk attitude and capacity, understanding necessary cash flow and tax implications, and developing and rebalancing an appropriate asset class and investment manager mix, Graham’s quote on the heels of the Great Depression resonates just as profoundly today as it did then. Those complex and technical investment management components can be rendered meaningless if one’s investment behavior is not adequately addressed. As illustrated above, investors’ “gut” reactions to the headline du jour throughout a market cycle (which typically lasts 5+ years from peak to trough and back to its peak) can swing wildly.

Even if one’s financial objectives remain constant, we are programmed to make knee-jerk decisions based on gloomy headlines which can jeopardize our wealth in the long run. The temptation to time the markets (a speculative attempt to avoid market downside or capture upside) is a natural impulse, as most individuals experience the pain of an investment loss compared to the joy of an equivalent gain on a 2:1 basis (as reported in A Survey of Behavioral Finance, conducted by the National Bureau of Economic Research). But contrary to our natural inclinations, time in the market (long-term time horizon to support your goals) has proven to be a far more beneficial strategy than timing the market (succumbing to our irrational reactions, most commonly greed and fear). I would like to emphasize that we are programmed to act irrationally, and that it is not a character defect!

These are the most common investment behavior pitfalls to be aware of (and shut down!)

Self-attribution/asset class performance chasing – Investors may attribute positive returns to factors they can control (such as emphasizing security selection) over more impactful performance drivers like asset allocation (appropriate balance between major asset classes such as equities, fixed income and alternative investments). Particularly in a bull market (we are currently in the longest bull U.S. equity market in history), overconfident investors may be tempted to chase returns and over-budget their total portfolio risk to outperforming asset classes.

Fear of loss – As previously mentioned, most investors weigh losses twice as heavily as gains. Answer this question for yourself, would you rather risk losing $20 with $10 of potential upside, or completely avoid the chance of losing $20 and incur no change? We certainly acknowledge the importance of wealth preservation and establishing a prudent asset allocation strategy to help minimize sensitivity to market drawdowns; however, engaging in risk avoidance behavior due to news headlines (which are often unrelated to long-term market and economic fundamentals, and instead focus on immediate emotional engagement) can be a major contributor to long-term underperformance.

Disposition effect – The disposition effect was coined by two economists, Hersh Shefrin and Meir Statman, to describe the propensity of investors to hold onto assets that are losing value for too long and to sell assets which have appreciated too quickly. Such behavior is particularly pronounced following a period of market volatility. We would emphasize that periodically rebalancing one’s portfolio asset allocation in line with their targets (reducing outperformers and adding to underperformers) as well as reviewing available tax loss harvesting opportunities and dollar-cost averaging (committing to investing a portion of cash at scheduled intervals) helps to reduce the anxiety commonly felt following a market downturn.

What happens if I allow my emotions to rule my investment decision-making?

Material reduction in long-term performance – According to the DALBAR Quantitative Analysis of Investor Behavior Report, the average equity fund investor over the past 20 years underperformed the S&P 500 Index (a widely-used benchmark for U.S. large cap equities) by approximately -2% per year. Over the same time frame, the average fixed income investor underperformed the Barclays Aggregate Bond Index (popular gauge for U.S. taxable bonds) by roughly -4% per year. The report cited irrational attempts to time the market as well as individual fund manager performance as key drivers for the negative results. The average investor retains equity mutual fund managers for approximately 3.6 years and fixed income mutual fund managers for 3.1 years, which is a fraction of the typical market cycle length (5+ years).

As well as significant reduction in short-term performance – Attempting to time the market should be viewed as a three-part parlay wager: correctly predicting when the market will begin to descend, when it will bottom out and which market classes will outperform on the upturn. Conversely, by staying invested, an investor in U.S. large cap equities over the past 20 years through the end of 2018 would have gained +5.6% per year, compared to +2.0% (by missing out only on the market’s 10 best days), -0.3% (missing out on the 20 best days) and -4.2% (missing out on the 40 best days). The market’s worst and best days tend to be clustered, which makes missing out on a handful of those days a common occurrence for those attempting to guess when trends will begin and end. And missing those important days can have a severe effect on one’s wealth in the long-run.

You will likely miss out on a portion of the market recovery, which can be short-lived – On average, for the year following the end of a bear market, U.S. large cap equities have provided a return in excess of +38%. Ten years following a bear market, the recovery has historically been +14% per year. Equities tend to appreciate over the long-term (positive in 29 of the past 39 years), even accounting for average intra-year declines of nearly -14%. Since the 1930s, U.S. large cap equities have endured, on average, a -10% pullback at least once per year and -5% pullbacks around 3 times per year. Simply put, it is normal for markets to pullback and subsequently recover over longer time frames. While it may feel painful to endure the market declines, it’s much worse to miss out on the recoveries. In a study conducted by the University of Michigan (Stock Market Extremes and Portfolio Performance), 95% of the market’s gains were concentrated in 1% of all trading days (merely 3 trading  days per year) over a 30 year window.

Being self-aware of our unique investment behavior pitfalls and actively suppressing our “gut” reactions is certainly a demanding task. But the facts bear out that over time, succumbing to your emotions during periods of market volatility can have a profound impact on your wealth. Even the most high-flying investment portfolio can be derailed if we allow irrational impulses to direct our behavior. Rather, we advocate to our clients stoicism in the face of volatility and adherence to an investment strategy which supports their long-term goals.

If you have any questions about your portfolio, please reach out to your wealth counselor or a member of our investment team – we would be happy to take a look at your specific situation.

For many equity investors, 2018 has felt like riding a roller coaster, with more significant market declines than they’ve experienced in years.

However, we are still in the longest bull equity market (positive gains) in the history of the U.S. stock market.  This may come as a surprise in light of the market’s tumultuous October performance, which was the worst month for U.S. equity returns in nearly seven years. The result of these two seemingly contradictory realities is that investors may be in a precarious situation, including those with positions in mutual funds.

As we have previously written, mutual funds are required by law to distribute at least 98% of their net capital gains (after “netting” out trades with losses and gains) to shareholders once per year. These distributions usually occur in November and December, and will be taxed either as ordinary income or as capital gains income (depending on whether they are short-term or long-term positions). If they are held in tax advantaged accounts, such as an IRA or a 401(k), the distributions are not taxable. The unusual circumstance investors may find themselves in, is that their portfolio may be flat or down for the year, yet they may still face significant income taxes for distributions from their mutual fund holdings. In one example that our team is tracking, we found a fund which is down -14.1% for the year, but partly because of its historical performance, it will still be paying out a distribution of 38.1%, which of course, will be taxable income.

The good news is that this may be entirely preventable. The rough month we experienced in October provided investors with some unique opportunities. With diligent tracking of mutual fund performance, our investment team has been able to identify many instances where tax-loss harvesting can be employed to offset the potential taxes resulting of capital gains distributions.

So, while an investor’s portfolio may be down for the year, there may be opportunities for those losses to become a strategic asset. In addition, funds which are poised to pay distributions can also be sold before those distributions are paid out. What’s required to take advantage of this unique market environment is a dedicated team, and a long-term goals-based investment management approach.

If you have any questions about your portfolio, please reach out to your wealth counselor or a member of our investment team.

Disclaimer

A shares, Z shares, R shares, B shares… A degree in cryptography might seem necessary to crack the code of mutual fund share classes.

There are roughly two dozen classes available; however, I’ll spare you the headache and provide a brief rundown of the most noteworthy.

Taking a quick step back, a mutual fund is an investment vehicle that pools together monies from multiple shareholders to purchase securities, typically stocks or bonds. Shareholders receive benefits in the form of diversification, exposure, professional management and technological resources. The value afforded by utilizing mutual funds within one’s portfolio is deserving of its own blog post.

Within this overview, I will isolate pertinent details of the most commonly used (and often-times, detrimental) share classes in the marketplace. The mutual fund share classes you may hold in your portfolio can be problematic without an awareness of the cost implications.

The most commonly used (and potentially harmful) mutual fund share classes

Class A

• Class A shares typically contain what is called a front-end sales load
• This is a commission that is charged when you purchase shares and commonly ranges from 4.75% to 5.75% of the purchase amount
• The following illustrates how the front-load fee is paid: You contribute $5,500 to your Roth IRA and invest the entire amount with a front-end load of 5.75% ($316), only $5,184 of your $5,500 contribution will be invested

Class B

• Class B shares commonly employ a back-end load
• A back-end load is a commission for selling your shares within a certain time frame (usually up to 7 years) and can be as high as 5.00%
• Back-end loads are designed to encourage a longer-term investment in the fund, and typically decrease over time, oftentimes reducing to zero if the specified term is reached
• For example, if you had invested $5,000 in a class B fund and sold it later that year when the value reached $5,500, with a back-end load of 5.00% ($275) you would receive $5,225

Class C

• Class C shares typically enforce a back-end load of around 1.00% if you sell your fund within one year of the initial purchase
• Following our example above, when you sold your shares valued at $5,500 you would receive $5,445

The lowest cost mutual fund share-classes

Class R

• Class R shares do not contain a front-end load or a back-end load, but are typically only available in retirement plans such as a 401(k) plan

Class Z

• Similar to Class R shares, Class Z share do not contain a front-end load or a back-end load
• Z shares are typically available only to employees of a mutual fund company, and are offered as part of their compensation package

Class I

• Also known as Institutional shares or Class Y shares, Class I shares do not contain a front-end load or a back-end load
• Class I shares are generally only available to institutional investors and typically contain the lowest cost of any share class
• In order to purchase Class I shares, a mutual fund company may require a minimum purchase amount of $25,000 or even greater

As part of our independent investment philosophy as well as our fiduciary responsibility, we research and identify the lowest cost share class vehicles for our clients, many of which are generally not available below large investment amounts. As we are not affiliated with any mutual fund company, we continuously evaluate the value-add for each mutual fund manager we include in our clients’ portfolios. Without proper oversight or understanding, over time, the unnecessary costs from using non-institutional, commission-based share classes compound and can erode your wealth.

Disclaimer