With just one week left in the quarter let’s talk about rebalancing.

First, I am absolutely not one to make market calls or suggest this or that day is the right time to buy or sell. However, it’s hard to overlook the dramatic price and valuation increase of companies related to artificial intelligence.

This has been going on for a while but really took off when ChatGPT was released. Nvidia is the most newsworthy as the company’s stock is up nearly 160% this year after a banner year in 2023. I mentioned these points in a recent post but the value of Nvidia has continued to rise along with a handful of other big names and that’s been pushing major indexes higher. It’s also likely created some imbalances in your portfolio.

As of last Friday the Tech and Communication Services sectors are collectively worth over 40% of the S&P 500 (from maybe 25% pre-Covid) and this has been leading the index’s performance all year. Of the top ten holdings in the S&P 500 eight are within these two sectors with the outliers being Berkshire Hathaway and Eli Lilly. The names are Microsoft, Apple, Nvidia, Amazon, Meta, Google (listed twice in the typical ETF for this space, ticker symbol SPY) and Broadcom. The S&P 500 weights its holdings by market size and this is the current order. These stocks now make up nearly a third of the S&P 500 by themselves and about 87% of the two sectors just mentioned. Year-to-date as of last Friday the typical Tech sector ETF, ticker symbol XLK, is up about 19% versus the S&P 500 up 15%. Compare this to a common S&P 500 index, ticker symbol RSP, that weights companies equally instead of by size. RSP is up a little better than 5% YTD. Talk about a top-heavy market!

Some compare this to the Tech Bubble and worry that a “pop” could happen any day. There are lots of reasons why this isn’t the case and I tend to agree with most of them, so anything you do with your investments shouldn’t be done out of fear. Instead, imbalances like this present opportunities for basic portfolio maintenance.

One idea is to take some profits. Not sell everything and head for the hills, just rebalance by trimming back a bit because the rest of the market is doing fine.

The easiest approach is to trim from common stock holdings in the companies listed if you have any. This can be taxable if these positions are held in a non-retirement account so you’ll want to be thoughtful about realizing capital gains. Ideally you hold some of these stocks in an IRA or Roth IRA where you can sell without tax concerns. How much to sell depends on your allocation plan, model portfolio, and so forth. In general you could cut 10% or perhaps trim by a position’s YTD performance and plan to repeat should prices continue higher.

If you’re like most people, however, you don’t hold common stock in these names but instead have indirect exposure via mutual funds and index funds. You can double check the holdings within your funds via Google and probably at your custodian. But since nearly 80% of the Tech sector and over 90% of Communication Services is primarily comprised of these companies, trimming from either sector fund, if you have one, should be obvious. Beyond that, a broad market stock fund or anything labeled “Large Cap Growth” in your portfolio should indirectly trim these names as well.

You can do other things to work around growing positions, such as buying non-correlated sectors and asset classes. You could also give appreciated shares to charity from your brokerage account or from your retirement account as part of your RMD, but those details are beyond the scope of this post.

Again, it’s been a good year so far for stocks. Who knows what the second half will bring but taking time to trim your winners and give to your losers (I hate phrasing it that way but it works…) or to generate excess cash for spending needs is the essential thrust of rebalancing.

What if you never rebalance? Are you missing out on anything by rebalancing? Typically, without rebalancing your portfolio grows more top-heavy over time. This makes you feel more of the sting when markets turn as they always do. You can miss out on some additional performance when you trim your winners. However, since none of us has perfect foresight we leverage processes like rebalancing instead of simply winging it. It’s counterintuitive and this makes it hard, but having practices like rebalancing really helps keep you on a good financial path over the long term.

I’m doing stuff like this for you already if I’m responsible for managing your portfolio, but feel free to ask questions. Otherwise, we’re all watching to see how AI shapes our world and our markets. Just don’t be too passive with your investments and allocation along the way.

Have questions? Ask us. We can help.

Okay, I’ll come right out and admit to being a little out of touch with the reality of social media. My (now young adult) kids sometimes chide me for this. I use Facebook only superficially. I’ve watched a few videos from a singer/songwriter I like on Instagram. And of course I’ll watch stuff on YouTube, but I don’t really surf around and I don’t follow anybody.

I also don’t use Twitter (I refuse to call it “X”). I tried some years ago but quickly gave up. Since I’m self-employed and thankfully not looking for a job I also don’t use LinkedIn much. And I’m certainly not on TikTok. I’ve tried a couple of times but TikTok’s format and explosion of short videos just isn’t my cup of tea.

That said, I do read about what’s happening on TikTok and the rise of “finfluencers” offering quick and casual videos about personal finance. It’s troubling or at least unsettling. Some of these people have millions of followers and pull down $100,000, even $300,000 a year, sometimes much more. They do this indirectly through paid ads within their TikTok, Instagram, and YouTube videos via algorithms at Google, brand sponsorships, and by directly selling products.

I’m sure that structure isn’t news to you because it isn’t to me, but what I don’t appreciate is the lack of disclosure on all this stuff when it comes to people providing financial advice, education, or whatever they might choose to call it. I want people, and especially younger people, to get educated about how the financial world works. Personal finance isn’t taught in schools very much anymore, so people need to get the information wherever they can and that’s fine. However, I question how much value can be found in videos lasting a minute or two. Granted, some of these link to longer videos on YouTube, but how many people make it that far?

After reading more about this in recent days I spent some time looking at finfluencer content on TikTok and was reminded of just how scattershot the information is. It’s also really hard to locate meaningful disclosure about the finfluener’s credentials and how they’re paid. It was also interesting to see the fluid nature with which content creators move between providing information and infomercial. At times it seemed like the sales pitch was more natural than the primary content and I wondered how much the person actually knew about the topic. I mean, these days you can just ask ChatGPT and pretend to know a bunch of stuff.

For example, one creator extolled the virtues of a credit card as part of a life hack process while leaving out a bunch of fine print. I understand adding more detail would make the video too long, but he left out quite a bit. The viewer was then directed to a list of favored cards below which linked to an affiliate program, which eventually linked to the credit card company and the relevant details. Does the viewer have any recourse against the finfluencer for providing incomplete or otherwise bad information? Was the credit card being touted actually “the best right now” for the viewer or the finfluencer?

Now, I don’t want to seem overly stodgy. People need to learn and the end can justify the means, I get that. Many of these creators are well-intentioned and their content is often interesting. If it’s sometimes a little basic and lacking in detail or risky to apply in the real world, maybe we can blame the short-form nature of the delivery platform. Or maybe it’s the short attention span of the viewer – which came first, I’m not sure. Either way, the result is something that’s common in my industry: often inexperienced people providing advice that’s really just a sales pitch.

So the main issue I have with finfluencers today is a lack of disclosure that would lift the veil, at least a little, on why they chose to discuss topics, if they have any expertise or training in the topic, and how they stand to benefit. I have to do this in my work. I have to tell you my background, training, and if I’m selling you something. I have to stay current with contuing education requirements. I have to tell you who my regulator is. And I have to tell you about conflicts of interest that impact our work together. I don’t see why finfluencers, who often provide advice with real-world consequences, don’t need to disclose similar information. Some do and that’s great, but most don’t. This is unfortunate because upgrading the professionalism of these folks would probably benefit a lot of people.

If you’re interested, here’s a great video on this topic from the CFA Institute. There are a few different things on this page so scroll down to the video from Richard Coffin.

https://rpc.cfainstitute.org/en/research/reports/2024/finfluencer-appeal

Have questions? Ask us. We can help.

I hope you and your family enjoyed Memorial Day and held in reverence, if only for a moment, the ultimate sacrifice made by so many who served in our Armed Forces. As I typically write these posts on Mondays and since yesterday was a holiday, I slowed my routine down a bit. The result is this shorter but still important post.

I say important because today, Tuesday May 28^th, marks an improvement in the behind-the-scenes complexity of my industry. Starting now you can access your investment dollars a little faster as we’ve moved to a T+1 settlement period.

This is one of those things most people never think about until it gets in their way. Imagine you sell a stock in your brokerage account. When can you get the cash? Or say you just bought a share of stock. When do you fully own it? The answer to both questions is when the transaction settles, the date when ownership has formally transferred and payment needs to have been made. This may seem like it’s immediate, or at least should be, but it isn’t. After you click “sell” or “buy” there’s infrastructure working for you although you rarely see it. As of last week this settlement process typically happened within a regulated period of two business days following the trade date but now it will take only one.

This might sound like a small change and I suppose it is in the grand scheme of things. However, being able to access your money faster is always good news, right? Back in 2017 trade settlement on most investments was T (the trade date) plus three business days and this had been the case since the 70’s or 80’s, I think. Before that it was T+5 and not all stock exchanges had the same settlement periods.

Going back to the early days of the stock market here and abroad in places like Amsterdam and London where public stock markets began, settlement was measured in weeks. That makes sense given how delivery of paper stock certificates and money as payment were transferred via ship and horseback. But these days paper certificates are anachronisms you have to special order and usually pay a fee for. It’s all digital now so trade settlement should be fast! Of the hundred-plus-million trades placed each day in the US, most don’t even need a human to touch the settlement process. Eventually, through advancements in blockchain technology, the settlement period could be instantaneous, or T+0.

While there’s always more to it than what I’m mentioning here, the important takeaway is the practical impact of this change. Many mutual funds and government bonds already had T+1 settlement, but now pretty much everything does. This means if you’ve hooked up your brokerage account or IRA to your bank account, you can sell shares today when the market is open and be able to move or otherwise access the cash tomorrow (assuming the market and banks are open). Wires could go out then as well or, via the ACH system, you’d have money at your bank the following day. On the buy side you’ll have to pay for the purchase by the next business day, but this won’t necessarily impact most investors. So, faster is better.

I love this change because I’ve always operated with a sense of urgency when it comes to helping you with your investments and I absolutely can’t stand unnecessary delays or restrictions when sending money to you. It took seven years to go from T+2 to T+1. Who knows how long it will be before T+0, but I’ll take one day faster all day long until then.

Have questions? Ask us. We can help.

Your beneficiary designations matter and are easily overlooked, sometimes for years. You list them on your retirement accounts and life insurance contracts, and maybe on your bank and brokerage accounts. If you skip this step, perhaps assuming you’ll handle it later, the default option is often your “estate”, meaning your accounts have to go through probate.

We’ve discussed this in prior posts over the years but this concept is worthy of repetition.

The paperwork for some accounts, such as Schwab’s IRA application, often has a predetermined order of priority if you forget to name your own beneficiaries. First it’s your spouse and then your kids (natural or legally adopted) but the form doesn’t automatically include stepchildren. Third comes your estate as beneficiary and that usually means probate.

Is that what you want? Would you instead prefer to list your own beneficiaries to avoid ambiguity? Or do you have beneficiaries whom you’d like to receive an uneven portion of your account? Maybe charities? Or as is the case with the story I’m linking to below, did you list someone during what’s now a prior life and want to update that to your current situation?

Here are a few important points to remember when thinking about beneficiary designations.

• They’re per account and designations on one don’t apply to another. There’s nothing stopping you from listing your spouse on all of your IRAs, your grandchild on your Roth IRA, and charities on your life insurance, whatever you want. Your spouse typically has to agree by signing a form if someone else is a primary beneficiary, but you can get creative.
• Lots of account types can have beneficiaries. IRAs, Roth IRAs, your plans at current and former workplaces, even bank accounts, and of course life insurance. Adding beneficiary designations wherever possible is cheap estate planning.
• Beneficiary designations can override your will. Just because your will or trust lists your current spouse as beneficiary of “everything”, that usually has no bearing on an old 401(k) still held with a former employer that lists your ex-spouse as beneficiary.
• Accounts with named beneficiaries usually bypass probate. In my experience most beneficiaries (spouses, adult children, and so forth) get access to the funds in a week or two after signing some paperwork and submitting a death certificate. Compare that to probate in CA taking a year or more. Your beneficiaries can accelerate the process if your estate is small (less than $185K in CA currently) but avoid this if possible. And probate is expensive. Some sources suggest that 4% to 7% of an estate can go to various costs.
• Your beneficiary designations are revocable but durable – nothing changes without you! You should review your designations periodically to ensure they look right. For most people this is simple because you probably listed your spouse as primary beneficiary and maybe your kids as equal contingents. But I ask again, are you sure this is what you want? Do you want to equalize a financial gift for one kid by increasing another’s share of a retirement account? Have your balances grown and you want to shift who gets which account and how much, maybe considering tax consequences? Lots of options to personalize your beneficiaries if you think about it…

Okay, so on to the story that started the wheels turning this morning…

The following link goes to The Wall Street Journal and details a legal battle between brothers fighting to keep their deceased brother’s old 401(k) from going to a girlfriend he had decades ago. Her claim is clear – she’s listed as the 100% beneficiary of a specific account and there’s paperwork to prove it. The brothers’ claim is ambiguous – we don’t think that’s what our brother intended. Who knows what can happen in the legal system and I’m not an attorney, but everything I’ve learned over the past 20+ years in this business indicates that the former girlfriend is the decedent’s lawful beneficiary. Is that what the brother actually wanted? Who knows because apparently the only document he left behind was the beneficiary form he completed decades ago.

Don’t let that be you. Don’t let this happen to the person or people you feel should inherit your remaining assets. Don’t make them go through probate unnecessarily and help them avoid the legal system if at all possible.

You can check your account statements to see who you’ve listed as beneficiaries. If it’s not there, check your online portal. If you can’t find them anywhere, call the company! Or if we’re managing your accounts, reach out to us and we’ll tell you exactly how you’re set up and can assist with updating as needed.

One of the issues in this lawsuit was the former employer not making information from “old” paper documents viewable online. I’ve seen this before. Your beneficiary listing will say something like “on file” versus showing specific names. Trust but verify, as the saying goes. Doing so could save your beneficiaries a lot of trouble.

Here's the link to the story I mentioned.

https://www.wsj.com/personal-finance/inherited-retirement-savings-beneficiary-breakup-divorce-849e3ff2

Have questions? Ask us. We can help.

We’re in the final month of the quarter so let’s take a few minutes to review how markets have been performing and what’s been driving them.

The shifting sands of the inflation outlook and Fed policy continued to provide headwinds and tailwinds, depending on the day and sometimes the hour. Expectations have gone from multiple rate cuts this year to maybe one but probably none. The reasons why have been the same for months. Inflation has remained stubbornly high and overall economic activity has been chugging along nicely, which doesn’t provide any cover or impetus for the Fed to reduce interest rates.

However, a lot of these numbers are backward-looking. My research partners at Bespoke Investment Group regularly update a matrix of economic indicators and current numbers show momentum slowing down a bit. Maybe this matches up with inflation falling as well, only time will tell. If so, the Fed could lower rates later this year but then Election Day is coming up and the Fed has tended to hold firm on rates around general elections to stay out of politics. As of now the CME FedWatch Tool shows nobody expecting a rate change this Summer but this shifts to maybe 50/50 for the rest of the year. Investors expect the Fed will start cutting rates by early 2025, but not with much conviction.

This rate uncertainty has been moving stock prices and has helped cash to outperform bonds, which isn’t very fun for most investors. The Barclays Aggregate Bond Index (a good index for medium-term bonds) has been down almost a percent so far this quarter and about 1.6% this year. Longer-term bonds are down more. While there have been positive glimmers the situation with bonds doesn’t seem to be changing anytime soon, given the rate situation already mentioned. However, bond prices can turn quickly and that’s one of the reasons we still want to own bonds. On the positive side, money market funds are still paying good rates with no volatility and bank CDs offer about 5% for a year. However, money market rates aren’t guaranteed for any length of time as they are with CDs, so at least in theory those rates will change along with Fed policy.

The rise of AI and popular publicly traded companies in that space has also driven markets so far this quarter. And just like with the Fed, the AI boom has been with us for a while, often measured since the release of ChatGPT by OpenAI in late-2022. Nvidia Corp is definitely top of the popularity heap with year-to-date returns of over 120% and about 27% in the past month! Nvidia manufactures hardware and software used in AI infrastructure so the company being a proxy for the emerging industry makes sense. Distant (in terms of short-term performance) but popular seconds include Microsoft and Alphabet (Google’s parent company) with returns of about 11% and 23% this year and mid-single digits over the past month, respectively. These three companies are each worth around $3 trillion in market capitalization (share price X number of shares publicly available), with Microsoft leading at $3.2 trillion. That Nvidia is even close to that after such a short timeframe speaks to how aggressive the AI race has been.

This performance helped the tech-heavy NASDAQ index hit 17,000 for the first time this month and the Dow Joes Industrial Average briefly touch 40,000 in recent weeks. AI-driven performance has also helped the S&P 500, the typical stock benchmark, rise about 11% this year and about 1% this quarter, almost triple the Dow’s performance. This is due to the good luck of the S&P 500 in having more of these popular companies and bad luck for the Dow in having higher weightings to AI-related names like Intel, IBM, and Salesforce that have been getting trounced lately. I mention this because there’s a major dislocation in terms of where broad market performance is coming from. If you had picked the “wrong” individual stocks or were overly focused on the wrong part of the market this quarter and the past year or so, that could explain some underperformance.

Now, I’m not suggesting that you follow trends and fall prey to the so-called Greater Fool Theory. Instead, you should focus on being well diversified with the bulk of your investment dollars, especially what you have in your long-term retirement-oriented accounts. One could argue that certain stocks are overvalued but not that the whole market is overvalued. There’s lots of value out there if you know where to look. And diversification allows you to get some performance lift from the day’s popular stocks while limiting your exposure to being wrong.

Have questions? Ask us. We can help.

Election Day is coming up fast and I’ve been getting questions again about which party is best for the markets. This happens every cycle and, as is the case with a lot of questions like this, it’s good to revisit the answer. And while there’s lots one could discuss, analyze, and worry about, there is only one answer. Simply put, in the longer-term Mr. Market doesn’t really care who sits in the Oval Office.

We’ve seen many examples in recent years of the stock market continuing to rise amid social turmoil and other cultural upheavals. Higher returns during these events can seem wrong or otherwise disconnected from reality. Protests and riots in the streets and the stock market rises. Wars overseas with all the horrific imagery and the stock market rises. But markets are firmly anchored in one reality: money. Mr. Market can and does respond to news in the short-term but always comes back to his primary concern. We saw during Covid how markets lurched when news directly impacted the economy but prices recovered quickly as things calmed a bit and uncertainty waned.

Quite frankly, I find this singular focus comforting in an otherwise topsy-turvy world.

So again, what political party occupying the White House makes for happy markets? As luck would have it one of my data vendors, YCharts, recently came out with a series of charts addressing this question from a variety of angles. Here are a few that I found most interesting.

The first chart shows the performance of the S&P 500, the primary stock market benchmark tracking the 500 largest publicly traded companies in the US, beginning with the Kennedy administration in 1961. Only two administrations since, those of Nixon and George W Bush, suffered overall negative performance for the S&P 500. There certainly were cultural and political issues at play in both administrations with consequences that still linger today. But both also suffered major economic issues. With Nixon it was inflation, stagflation, and the beginnings of one of the longest bear markets in history. With Bush it was the tech bubble bursting just prior to his election and then recession, followed by the Great Recession (call it unlucky or otherwise, but that’s a rough way to begin and end an administration) but the stock market recovered fully and then some as the economic issues improved.

The second chart looks at investing along with changes in which political parties hold power. While this might seem obvious, you would have wildly underperformed the stock market if you sat on the sidelines while “the other party” held office. Still, and as you can see in the chart, Republican administrations generated lower returns than Democrats but that was heavily impacted by the Nixion-era and Bush-era issues mentioned above.

Our third chart looks at investing amid a divided, opposing, and friendly Congress. You might think the market prefers one party or the other, but what Mr. Market really prefers is gridlock unless he can get the changes he likes: lower taxes, less regulation, and more government spending. (Markets have historically liked the Republican tag team when we look back to 1950, as shown in the chart below.) This primarily has to do with investors valuing the certainty, or at least less uncertainty, that comes from a divided government. This allows investors to feel more confident in their assumptions about the trajectory of regulations, government spending, and how both impact the fair value of stock prices. Toss politicians promising (and being able to act on) sweeping change into the mix and investors tend to worry, get defensive, maybe sell shares, and so forth, again unless it’s changes preferred by Mr. Market.

Ultimately, the question about which party does better for markets is sort of a political red herring. No politician or political party should say they’re better for markets. There are far too many variables impacting this issue, some of which play out over years, to say that definitively. So instead of worrying about this question it’s better to focus on having a plan and sticking to it, pivoting when needed, but remaining invested throughout all political administrations.

Have questions? Ask us. We can help.