Skip to main content

Questions You Were Afraid to Ask #4

Written by Minich MacGregor Wealth Management on . Posted in Uncategorized.

A few months ago, we started a series of  posts called “Questions You Were Afraid to Ask.”  Each month, we look at a common question that many investors have but feel uncomfortable asking.  Because when it comes to your finances, the only bad question is the one left unasked! 

In our last post, we looked at the differences between stocks and bonds.  But these days, most “regular” investors – i.e., non-professional – have neither the time or expertise to research and select individual stocks.  (Or bonds, for that matter.)  Furthermore, doing so can subject your portfolio to increased risk and unexpected tax consequences.  That’s why investors usually rely on a different method: Putting their money into some type of fund. 

An investment fund is when a group of investors pool their money to invest in the same portfolio of stocks or other securities.  There are two major advantages of funds: Cost and simplicity.  By pooling your money with other investors, you can gain access to a diverse basket of stocks for less than if you bought each stock individually.  Funds also make it simpler for investors to get started, since they don’t have to research and select each individual company. 

These days, most people invest either through an employer-sponsored retirement plan, like a 401(k), or an Individual Retirement Account (IRA).  Either way, this usually involves selecting between one or more funds to invest in.  But here lies the problem for many people, even the financially savvy: How do you know which funds to choose?  And what’s the difference between them, anyway?    

Both in this post, and in next month’s, we’re going to address that issue.  We’ll start with one of the most common questions I get, especially from beginning investors:

Questions You Were Afraid to Ask #4:
What’s the Difference Between Passively Managed and Actively Managed Funds?

If you’re investing in, say, an IRA, most of the fund choices you’ll see will fall under one of two categories: Passive vs Active. 

Let’s start with the latter.  An actively managed fund is exactly what it sounds like: A fund where a manager takes an active role in selecting which securities to buy or sell, and when. 

Different managers have varying styles and philosophies.  For example, some may specialize in finding companies they believe are undervalued, which means they can be bought at what is believed to be a good price. 

Others may try to find companies they think are likely to grow by a significant amount.  Some managers may specialize in certain industries or market sectors.  You get the idea.  Either way, with active management, you are paying for one of two things:

  • The possibility that the fund will “outperform” the market.  This means the fund could do better over a specified period than a benchmark index – like the S&P 500 – that it measures against. 
  • The possibility that the manager will be able to protect you against undue risk or limit losses during times of market volatility.  (Note that this idea more generally fits the purpose of hedge funds than the standard mutual funds you’ll usually see in your IRA or company 401(k).  We’ll cover these types of funds next month!) 

The possibility of outperforming the market comes with some tradeoffs, however:

  • Actively-managed funds often come with more – and higher – fees than passively managed funds.  That’s because the manager must charge for his or her services. 
  • While it’s possible for a manager to outperform, it’s also possible to “underperform.”  When that happens, you are essentially paying more for less. 

Now, let’s look at passively managed funds.  Here, there is no “active” or research-based management decisions to the buying or selling of holdings.  Instead, the fund invests in a specifically designed portfolio and then stays put.  The fund may “rebalance” at some other set time frame, often quarterly or annually. This is to reset to its original objective or to match its index better. Otherwise, everything is held for the long-term. 

These days, many passive funds are index funds.  This is when the fund’s portfolio is built to try to match a target index, like the S&P 500.  So, if you essentially want to replicate a broader stock market, again like the S&P 500, index funds could be the way to go. 

Passive funds come with the following advantages: 

  • Typically, much lower cost, especially with index funds.  Because there’s nobody actively picking stocks, the fund could come with fewer expenses, and thus, lower fees. 
  • However the target index performs, with occasional variances, that’s how you’re likely to perform, too.  Given that indices like the S&P 500 have historically risen in value over the long-term, that could make index funds a good option for those who want to invest and forget it for a long period of time.

On the other hand…

  • There’s little chance of outperforming the market.  That’s an issue if you need more aggressive returns.  In addition, index funds come with no specific protection against extreme volatility.

Note that when you make your selections in a 401(k) or IRA, you can tell whether a fund is active or passive by reading its summary.  (More on that in a future post.)  We should also note that passive vs active doesn’t have to be a binary choice.  Many investors take advantage of both options in their portfolio! 

While most funds are either active or passive, there are many types of funds within those two categories.  Next month, we’ll look at a few of those types, including mutual funds, hedge funds, and exchange-traded funds. 

Have a great month!

River water flows through valleys

Investing Like Water

Written by Minich MacGregor Wealth Management on . Posted in Uncategorized.

Lately we’ve been thinking about water.  There are water problems everywhere – too much in the southeast and not enough out west.  Our thoughts are with you.

We know thinking about water might seem like an odd thing for financial professionals to think about. Especially during times like these, with interest rates on the rise, inflation remaining stubbornly high, and volatility dominating the markets. 

But, as investors, this is exactly the time to think about water.

To illustrate what we mean, consider this quote, usually attributed to the great Chinese philosopher, Lao Tzu:

“Consider that nothing is softer or more flexible than water, yet nothing can resist it.” 

Even in the best of times, many investors are rigid and inflexible in their approach.  It’s in the hardest of times that this rigidity comes back to bite them.  For instance, many investors take the approach that they must stay invested all the time.  Since the whole point of investing is to grow your money, they are constantly in growth mode. Though, investors like this simply fear missing out on future growth.  As a result, they are constantly climbing towards the top of the mountain, even when the cliff becomes straight and sheer, without a single ledge or toehold to cling to. 

As of this writing (9/30/2022), the S&P 500 is down 24.8% for the year and the NASDAQ is down 32.4%. For the first time since 2009, the first three quarters of 2022 have all been negative. It’s been a very challenging year!

Perhaps that slide will continue, perhaps it won’t.  We don’t know; no one does.  What we do know is that, when the cliff gets sheer, it can be a long drop down to the bottom. 

Other investors, perhaps burned by this approach, become inflexible in another way.  They sit out the markets permanently, or invest only in bonds, or some other approach that makes them feel “safe”.  Better to risk gaining nothing than to risk losing anything.  As a result, these investors never move at all.  They simply stay where they are…even if where they are isn’t where they want to be. 

Despite the volatility we’ve seen this year, the S&P 500 is up nearly 60% since March of 2020.1 Perhaps that number will go up, perhaps it won’t.  We don’t know; no one does.  What we do know is that we’d hate to miss out on that kind of journey. 

Now consider water.

Have you ever seen a major river from above?  If so, you’ll have seen how it always takes the easiest course.  Sometimes it flows straight; sometimes it bends and curves back on itself.  Sometimes it flows fast and strong; sometimes, it barely moves at all.  It cannot fight against gravity, so it never tries to go uphill.  But it always keeps moving, from source to destination. 

When you think about it, our entire investment philosophy here at Minich MacGregor Wealth Management is based on emulating water.  As you know, we use a combination of technical and fundamental analysis to help us find and follow market trends.  Sometimes, the markets trend up.  Sometimes, the markets trend down. Sometimes, the trend is short; other times, it’s long.  Sometimes, different sectors of the markets will trend in different directions.  (This is why we don’t try to invest in everything, but choose our investments based on their relative strength compared to other, similar investments.) 

Whichever way the trend goes, though, we don’t fight it.  Like water and gravity, we know that you can’t fight it.  Instead, we adapt to it.  When the trend is down, we may move into cash to protect against undue risk.  When the trend is up, we do the opposite.  Sometimes, this shift may occur month to month or even week to week.  But we are always on the lookout for opportunities to invest your money where it will do the most good.  Like water, we try to follow the path of least resistance, adapting our approach to the lay of the land.  Sometimes we will be in growth mode; other times we will be defensive.  Just as water will speed up or slow down, flow straight or curve backward, sometimes we will, too. 

Experience has convinced us that this approach – being flexible and adaptable – is the surest way to your destination.  By not trying to constantly scale the cliff, we do not risk the fall.  And by not being afraid to move, we do not risk forever staying in one place.  By being like water, we stay soft, flexible…and irresistible. 

The reason we’re telling you all this, is because investors have so much noise to contend with right now.  On Tuesday, September 13 alone, the news came out that the inflation rate for August was at 8.3%, higher than many experts hoped for.2 This means it’s even more likely that the Fed will continue to raise interest rates, which is hardly welcome news for most companies.  The result?  The Dow fell over 1100 points.2  For rigid, inflexible investors, numbers like this represent a major obstacle.  Some will crash into it in their attempts to plow through.  Others won’t even bother trying.  For us, however, it’s merely another data point. 

Over the coming weeks, it’s possible we’ll have more days like September 13. We don’t know how long this volatility will continue; no one does.  Either way, our strategy will help us get around it.  So, while the headlines might seem scary, we hope you take comfort in the fact that we’ll continue adapting to changing market trends with great flexibility, all based on your needs and goals.

We’ll be like water. 

1 “S&P 500 Historical Data,” Investing.com, https://www.investing.com/indices/us-spx-500-historical-data

2 “Stocks Fall on Hotter-Than-Expected Inflation Data,” The Wall Street Journal, https://www.wsj.com/articles/global-stocks-markets-dow-update-09-13-2022-11663065625

S&P During Rate Hike Chart

Summer Rally Over

Written by Minich MacGregor Wealth Management on . Posted in Uncategorized.

What’s going on with the markets?

We’ve got some thoughts to share.

Higher-than-expected inflation data slammed investor expectations and rippled through markets, causing a broad selloff.1

We definitely expect to see more volatility in the weeks to come.

Want a deeper dive into what’s going on and what could happen next? Keep reading.

(If not, scroll down to our P.S. for something delightful.)

Why are markets selling off?

Folks were hoping that tamer inflation would cause the Federal Reserve to pull back on its interest rate hikes.

Unfortunately, the hot inflation data means the Fed is likely to continue aggressive rate hikes in the months to come, spooking investors who expected a pivot away from higher rates.

When the Fed sets higher interest rates, it increases the cost of credit across the entire economy, making mortgages, car loans, credit cards, business financing, etc. more expensive.

Investors worry that those higher rates will slow the economy (and maybe tip it into recession) and ding company performance.

Higher interest rates could also make investors less willing to accept steep valuations amid risks to future earnings growth.

What could be the longer-term impact of rate hikes?

Whenever we want to understand what could happen, it’s useful to go back in time and take a look at what’s happened before. While the past can’t predict the future, it’s often a useful guide.

An analysis of 12 previous rate hike cycles shows that, overall, equity markets handled tightening reasonably well. Across these cycles, the S&P 500 averaged a total return (including interest, dividends, etc.) of 9.4%.2

So, what can history teach us?

  1. Stocks tended to take rate hikes in stride over time.
  2. However, those historical gains didn’t come in a straight line. They included dips, shocks, selloffs, and bear markets. They even included a few recessions.
  3. Folks who bailed on the ride down probably missed a lot of the ride back up.
  4. Predictions are a murky business. While what happened in the past is useful to a point, it’s not a map of the future.

What’s the bottom line?

We think more volatility is definitely in the cards in the days and weeks ahead. As investors digest the Fed decision, economic data, and Q3 corporate earnings, we’re going to see some reactions, positive and negative.

However, we don’t think it’ll all be gloom and doom. We think markets are overreacting and forgetting that there’s a lot of uncertainty and margin for error in economic data.

Statistical agencies have to walk a thin line to get data out quickly (so it’s useful to decision makers) while being transparent about how much error is baked into their estimates.

Bottom line, we’re keeping an eye on markets and the economy, and we’ll reach out with more insights as we have them.

P.S. Need a distraction? Here’s a live kitten cam from an animal sanctuary.

1 https://www.cnbc.com/2022/09/12/stock-futures-are-higher-as-wall-street-awaits-key-inflation-report-.html

2 https://www.truist.com/content/dam/truist-bank/us/en/documents/article/wealth/insights/market-perspective-03-18-22.pdf#page=2

recipe image

A Tricky Recipe

Written by Minich MacGregor Wealth Management on . Posted in Uncategorized.

You’ve probably noticed the volatility wreaking havoc in the markets over the past few weeks. To understand what’s going on, let us tell you a story.

Imagine you are inside a fancy restaurant, waiting for your meal to be prepared. While you wait, you can watch the chefs as they work. Suddenly, though, you notice there seems to be some uncertainty going on in the kitchen. By listening closely, you can just barely make out what the chefs are arguing about: Does the recipe call for two teaspoons of salt, or two tablespoons? Or is it even two cups?

One by one, the other diners start paying attention to the debate, too. Each voices their opinion to the other. Some diners want the chefs to add two teaspoons of salt. They rationalize that, while you can always add more salt later, but you can’t ever un-salt your food. Too much salt will ruin both the meal and everyone’s night. Others point out that there are no salt shakers on the tables, meaning if more salt is needed, the chefs will have to do it themselves. That will delay the meal, and people need to eat now. Better to just use two tablespoons. Sure, maybe the food will end up a little too salty, but that’s better than overly bland food — or no food at all.

As the wait drags on, the diners start getting nervous. They decide to amend their order and ask for less food. Other diners decide to leave the restaurant entirely. Finally, the head chef announces the restaurant is committed to adding just the right amount of salt, so they will add it gradually, little by little, until they know they have it right.

Unfortunately, this little speech, while providing clarity as to the chef’s intentions, does nothing to quell the concerns of all the diners. Some applaud loudly, others boo. Some rush to order more food, while others ask for the check. Before long, the noise is deafening.

Maybe, you think, we should have just ordered a pizza.

Crazy as it may seem, this little play actually describes some of what’s going on in the markets right now. (Except that the chefs are the Federal Reserve, the food is the economy, the recipe is for bringing down inflation, and the salt is interest rates.)

For the last nine months, the Federal Reserve has been trying to follow an incredibly tricky recipe: Bring down inflation without bringing down the economy. Just as chefs use salt to flavor food, our nation’s central bank uses interest rates to help moderate runaway consumer prices. The problem both face is it can be difficult to know how much of that magical ingredient to use. Just as too much salt can make food unbearable to eat, raising interest rates too high, too fast can trigger a recession. Raising interest rates too little, however, might do nothing to quell inflation. And like those diners in the story who needed to eat, consumers need relief from inflation now.

Those diners, of course, are investors. Every investor has their own opinion on what the Fed should do. More importantly, every investor is trying to guess what the Fed will do. That guessing is the prime reason for all this volatility. Investors who believe rising interest rates will hurt corporate earnings and trigger a recession decide to eat somewhere else, bringing the stock market down. Investors who still see the restaurant as the best place in town – regardless of interest rates – order more food and drive the markets back up.

Remember in the story how the head chef came out and made a big speech? Well, that’s my attempt at describing what Fed Chairman Jerome Powell did two weeks ago. Every year, Powell delivers a speech in Jackson Hole, Wyoming where he reveals the Fed’s views on the economy. In the days leading up to his speech, some investors thought he might announce the Fed would look to dial back on hiking rates much further. Their reasoning? Some data suggests inflation is peaking, so there’s no need to keep raising interest rates.

Powell wasted no time in dashing those hopes, however. In his speech, Powell said that this is “no place to stop or pause.”1 Fighting inflation will remain the Fed’s number one priority for the foreseeable future. That means the Fed will continue to gradually raise interest rates, likely around 0.5% to 0.75% every few months. He further said:

“While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses. These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain.” 1

In other words, bringing down inflation is simply more important than stimulating economic growth right now. (Or propping up the markets.)

This is why there’s been so much volatility in the markets lately. It’s also why we can expect volatility to continue, at least in the short-term. Many economists expect the Fed to hike rates by another 0.75% later this month. So, don’t be surprised to see more volatility before and after that announcement, if it comes.

The reason we’re telling you all this is to assure you that, while volatility is never fun, it is not unexpected. It has not taken us unawares. Nor, frankly, do we feel it’s something you need to stress over. You see, here at Minich MacGregor Wealth Management, we act more like “financial dietitians” than anything else. (This is the last food metaphor, we promise.) A dietitian focuses on using the fundamentals of good nutrition to help people eat better, healthier foods so they can achieve their health goals – regardless of what’s “in style” or what celebrity fad-diet is trending. As your financial advisors, our job is to help you achieve your financial goals, in part by making sound, long-term decisions, not overreacting to what the Fed does – or says – or what the market thinks about it.

To put it simply, the volatility we’ve seen lately is the same old story we’ve been reading about all year long. It’s the same story we’ll probably continue to read about moving forward. For that reason, our advice is to enjoy the end of summer rather than stressing about market headlines. Our team will continue to monitor your portfolio. And of course, if you ever have any questions or concerns, please let us know. That’s what we’re here for!

1 “Powell warns of ‘some pain’ ahead as the Fed fights to bring down inflation,” CNBC, August 26, 2022.  https://www.cnbc.com/2022/08/26/powell-warns-of-some-pain-ahead-as-fed-fights-to-lower-inflation.html

Happy Labor Day Flag

Strength Prosperity and Well-Being

Written by Minich MacGregor Wealth Management on . Posted in Uncategorized.

Whether we can believe it or not, Labor Day is here.

Kids are about to go back to school. The hotter days of this summer are (hopefully) moving past us. And, supposedly, we are now to avoid wearing white.

This holiday is often the last big opportunity to invite family and friends over to grill some food and enjoy the day outdoors. To us, it also marks another day to be grateful to those who have paved the path before us and to those who work hard to make our country better tomorrow than it is today.

Since Labor Day was declared a holiday, the purpose has been to take a day to celebrate the great workers across America who contribute to our country’s strength, prosperity, and well-being.

In fact, it’s often when we are in our most dire situations these great workers step in to help. They lift you back up to health. They help you find stable ground to stand on. In truth, they save lives.

In these past few years, we have celebrated those who have worked in healthcare. Stories of endless days helping countless patients and families deal with the suffering caused by the pandemic has led to most healthcare workers being declared heroes.

Do they feel heroic?

According to Mansi Patel at Johns Hopkins Hospital, “Honestly, I don’t think so. [Nurses have] been taking care of people forever…This is what I do. This is what I love doing.”1

How could we not celebrate the care and hard work of all healthcare workers? They have made a significant contribution to the strength, prosperity, and well-being of our country.

Social workers are often an overlooked miracle worker. They help when individuals and families are in crisis. We’ve known several of these hard-working people over the years, and they are all amazing.

We read one story of a social worker who was helping in a case of dementia. They went above and beyond to ensure great care and reassure a daughter who couldn’t be there physically. As Ming Ho, the daughter said, “I knew my mum was in crisis, but I couldn’t get her to either see it or accept it, so she was hostile to any professional intervention. The social worker understood that she had to work with me in doing whatever worked for my mum, rather than what fitted into their system…I wasn’t able to meet [the social worker] face to face, but I just appreciated that she treated us like human beings. We weren’t just people in a system.”2

You better believe social workers are helping provide strength, prosperity, and well-being to our country.

Sometimes, these great workers do even more when they are “off the clock” so to speak.

Firefighter Felix Marquez visited a home in the line of duty to install a free smoke detector. The area had been hit hard by Hurricane Irma, and when Felix arrived at the home, he found the 70-year-old homeowner dragging a piece of plywood in his front yard with nearly no hope of getting it in place on the roof.

The home had a blue tarp flapping on the roof and inside the home there was mold from leaks. When Felix let his fellow firefighters know of the scene, they were all in. They spent $3,500 of their own money on supplies and gathered at the home. That Sunday afternoon they hammered boards in place to provide a more secure roof.

Firefighters like this work hard every day across our nation providing strength, protecting prosperity, and promoting well-being.

We see it every day as we go about our lives. Great workers doing their best. Are there concerns in our workforce? Yes. But that doesn’t seem to stop good people from going out there every day and doing good.

So, this Labor Day, we are grateful. We live in a great country where every single day individuals, often receiving no recognition, provide strength, prosperity, and well-being to me. And to you. Happy Labor Day to you and your family!

1 https://www.hopkinsmedicine.org/news/articles/one-year-later-are-front-line-workers-still-heroes

2 https://www.theguardian.com/social-care-network/2015/mar/17/the-social-worker-who-changed-my-life

Bonds

Questions You Were Afraid to Ask #3

Written by Minich MacGregor Wealth Management on . Posted in Uncategorized.

A few months ago, we started a new series of posts called “Questions You Were Afraid to Ask.”  Each month, we look at a common question that many investors – especially new investors – have but feel uncomfortable asking.  Because when it comes to your finances, there’s no such thing as a bad question!

In our last post, we looked at why some stock market indices – like the Dow – are valued much higher than, say, the S&P 500.  But what is a stock, exactly?  How does it compare to other kinds of investments?  Even folks with a lot saved for retirement aren’t always sure.  You see, many Americans build wealth and save for retirement through their employers.  Maybe they take advantage of a company 401(k) or are awarded company stock as part of their compensation.  Either way, they don’t spend much time thinkingabout their investment options, because it’s simply not required in order to start investing. 

As a result, many Americans may have heard of different investment types – or asset classes, as they are also known – without truly knowing how they differ, or what the pros and cons of each type are.  So, over the following three months, we’ll break down some of the most important investment types, starting with the two most well-known.  Without further ado, let’s dive into:   

Questions You Were Afraid to Ask #3:
What’s better, stocks or bonds?

When you purchase a bond, you are essentially loaning a company, government, or organization money.  When you buy stock, you are purchasing partial ownership in a company.  For this reason, stocks are equity investments while bonds are debt investments.  Before we answer Question #3, let’s examine how each type works.   

How Stocks Work

When you buy a company’s stock, you buy a share in that company – and the more shares you buy, the more of the company you own.  Generally speaking, stocks can be held for as short or long a time as you wish, but many experts recommend holding onto your shares for longer-term if you anticipate their value will rise over time. 

For example, let’s say ACME Corporation – which makes roadrunner traps – sells their stock for $50 per share.  You invest $5000 into the company, which means you now own 100 shares.  Now, fast forward five years.  ACME’s business has grown, investors like what they see, which consequently puts their stock in higher demand.  As a result, the stock price is now $75 per share.  Because you own equity in the company, you benefit from its growth, too – and your investment is now worth $2,500 more, for a total of $7,500.    

The Pros and Cons of Investing in Stocks

Every investment has its strengths and weaknesses, and stocks are no exception. The single biggest benefit to investing in stocks is that, historically, they outperform most types of investments over the long term. Because stocks represent partial ownership in a business, finding a strong company that performs well over the course of years and decades can be a powerful way to save for the future. Additionally, stocks are a fairly liquid investment. That means it can potentially be easier to both buy and sell them whenever you need cash.  Many other investment types, like bonds, can be more difficult or costly to sell, in some cases locking you in for the long term.

But these pros are just one side of a double-edged sword. You see, with the possibility of a higher return comes added risk. While the stock market has historically risen over the long-term, individual stock prices can be extremely volatile, climbing and falling daily, sometimes dramatically. For example, if a company underperforms relative to its expectations, the stock price can go down. Sometimes, companies can even fail altogether, and it’s possible for investors to lose everything they put in. As the saying goes, risk nothing, gain nothing — but it’s equally true that if you risk too much, you can leave with less.

Furthermore, to actually realize any gains you’ve made (or cash out a potential increase in value), you must sell your stock, which can trigger a significant tax bill. 

How Bonds Work

Bonds potentially rise in value and might be sold for a profit, but generally speaking, that’s not what most investors are looking for.  Instead, bondholders are hoping something a bit more predictable: Fixed income in the form of regular interest payments. 

As previously mentioned, bonds are a loan from you to a company or government.  That loan might last days or years – sometimes even up to 100 years – but when the bond matures, the company pays you back your initial investment.  In the meantime, the company typically pays you regular interest, just like you would when you take out a loan.  Depending on the type of bond you buy, these payments can be annual, quarterly, or monthly.  Interest payments are why investors often look to bonds as a source of income.

The Pros and Cons of Bonds

Income isn’t the only “pro” when it comes to bonds.  Bonds tend to be less volatile than stocks.  Also, since the company that issued the bond is technically in your debt, you would be among the first in line to get at least some of your money back even if the company enters bankruptcy.  That’s not the case with stocks. 

But just because bonds are less volatile doesn’t mean they’re risk-free.  Bonds may rise or fall in face value as interest rates change.  Face value is typically calculated by seeing what others would likely be willing to pay to take over that debt from you. So, for example, if you bought a bond in Year 1 only to see interest rates go up in Year 2, the value of your bond will likely fall.  That’s because you are missing out on the higher interest rate payments you would have had if you bought the bond in Year 2 instead.  That’s important, because if you wanted to sell your bond before it reached maturity, you would probably have to settle for a lower price than what you initially paid.         

Stocks and Bonds Together

As you can see, stocks and bonds each have different advantages and disadvantages.  That’s why neither is “better” than the other.  It’s also why, for many investors, the real answer is, “Why not both?”   

Far from being competitive, stocks and bonds are actually considered complementary.  That’s because each brings things to the table the other doesn’t.  Furthermore, stocks and bonds are what’s known as non-correlated assets.  That means they don’t necessarily move in tandem.  For example, say the stock market goes down.  Just because stocks are down doesn’t mean bond values will fall, too. In fact, it’s possible they go up!  And of course, the inverse is also true. 

(Understand that this kind of non-correlated movement is not guaranteed.  The point is that allocating a portion of your portfolio to both stocks and bonds is a good way of not keeping all your eggs in one basket.) 

Obviously we could go on for pages and pages on the ins and outs of stocks and bonds.  This post just scratches the surface.  But hopefully it gives you a better idea about how these two important asset classes work and why people should consider both when it comes to investing for the future. 

Of course, choosing which stocks and bonds to buy is an entirely different subject…and it’s why next month, we’ll break down how some investors get around this problem by putting their money in funds.    

In the meantime, have a great month!      

Bull over?

Bulls back in town? (Is it over yet?)

Written by Minich MacGregor Wealth Management on . Posted in Uncategorized.

Is the bear market over?

Let’s discuss.

Good news first: inflation might be cooling off. Maybe.

The latest inflation data suggests we could be moving past the peak in some areas.

  • Gas prices are down1
  • Freight prices are down2
  • Overall measures of inflation are off their highs3

Great, right?

The data is certainly pointing in the right direction, but it’s too soon to celebrate.

Why? Well, it’s just not enough data yet to call it a sustained trend.

We’re also seeing signs that persistent inflation has led consumers to shift their spending.

That could make inflation improvements uneven AND result in some winners and losers across different sectors.4

Winners could be travel and auto companies benefiting from pent-up demand.

Losers could be homebuilders and luxury brands hit by higher interest rates and shifts in shopping trends.

Have you changed any of your habits because of inflation?

Are the bulls back in town?

Markets rallied for weeks on optimism about data and possibly FOMO – fear of missing out on the action.5

Can we trust a summer rally? Is the bear market over?

Probably not. There are a lot of hurdles ahead, including the Federal Reserve’s interest rate hikes and earnings results from companies affected by those consumer spending changes, and election season.

One big question still remains: can the Fed bring down inflation without a “hard landing” that tips the country into recession?

Opinions are mixed, unsurprisingly. Some analysts think there’s a narrow path to success.6

Others think the risk of a recession is very high and that investors are underestimating how far the Fed will go to lower inflation.

Be prepared for more bumps ahead.

In other news, what’s in the Inflation Reduction Act for you?

Before we dive into the guts of the new legislation, we have one caveat:

While new deals always garner big headlines, it’s very possible that court challenges, post-election shakeups, or future negotiations could change a lot of the details inside.

That said, here are a few things to keep an eye on:

The Act mainly addresses two big areas: green energy and Medicare.

On the green side, the bill includes a slew of incentives to boost adoption of things like solar panels and electric vehicles.

However, many of the incentives may not be immediately available, as many of the specifics need to be figured out. Want a full rundown of the tax credits and rebates? Here you go.

On the Medicare side, the bill includes some interesting prospects for retirees:7

  • Starting in 2023, insulin costs for Medicare enrollees will be capped and vaccine cost-sharing will be eliminated.
  • Medicare prescription drug plans could see benefit changes in 2024 and 2025 designed to lower costs.
  • Medicare managers could have the power to negotiate (some) drug prices starting in 2026. That could mean cost savings for retirees as well as potentially lower premiums.
  • If you purchase insurance through an Affordable Care Act marketplace, you could qualify for an expanded premium tax credit through 2025 to help lower monthly costs.8

As always, we’ll have to wait for the legislation to mature before we can fully understand its total impact.

Overall, there’s a lot going on as we head into the fall and election season. Let’s not be surprised at more volatility or even a bigger selloff ahead.

1 – https://www.foxbusiness.com/economy/gas-prices-dip-below-4-gallon-heres-why-still-could-bad-news-biden

2 – https://www.thetrucker.com/trucking-news/the-nation/trucking-freight-costs-us-wholesale-inflation-see-declines-for-first-time-in-2-years

3 – https://www.nbcnews.com/business/economy/july-inflation-numbers-consumer-prices-rose-85-year-year-summer-inflat-rcna42393

4 – https://www.investors.com/news/consumer-spending-us-economy-sputters-winners-losers/

5 – https://www.marketwatch.com/story/why-blackrock-says-the-stock-markets-big-summer-rally-isnt-worth-chasing-11660579176

6 – https://www.cnbc.com/2022/08/15/goldman-sees-a-feasible-but-difficult-path-for-the-fed-to-defeat-inflation-without-a-recession.html

7 – https://www.morningstar.com/articles/1109390/the-inflation-reduction-acts-impact-on-retirees

8 – https://www.kiplinger.com/taxes/605057/inflation-reduction-act-premium-tax-credit

Dow and S&P

Questions You Were Afraid to Ask #2

Written by Minich MacGregor Wealth Management on . Posted in Uncategorized.

We recently started a new series of posts called “Questions You Were Afraid to Ask.”  Each month, we will look at a common question that many investors have but feel uncomfortable asking.  Because, after all, when it comes to your finances, there’s no such thing as a bad question!

In our first post, we looked at the difference between the Dow, S&P 500, and NASDAQ indices.  This month, let’s discuss a related question:

Questions You Were Afraid to Ask #2:
Why is the price of the Dow so much higher than the S&P 500?

Before we get started, do me a favor.  Pick up your phone or go to your computer.  Open your internet browser and search for “S&P 500.”  The first result will show the current price of the index.  Make a note of the number. 

Next, search for “Dow Jones.” 

Notice how much higher it is?  As in, tens of thousands of dollars higher. 

As you know from our last post, the Dow tracks the performance of 30 of the most prominent companies listed on stock exchanges in America.  (Think Apple, Coca Cola, and Walmart, among others.)  The S&P 500, meanwhile, measures 500 of the largest companies listed on American stock exchanges. 

This is why many investors often wonder why the Dow’s total price is so much higher than the S&P, even though the latter contains hundreds more companies.  The answer has to do with how these two indices are calculated. (Brace yourself, because we’re about to do some math.)

The Dow, for example, is calculated by taking the 30 stocks in the average, adding up their prices, and then dividing the total by the “Dow Divisor.”  Early in the Dow’s history, this divisor was simply the number of companies within the average.  Today, the divisor is adjusted regularly to factor in changes to the list of companies, stock splits, and other events that could have an impact on the overall average. 

As of this writing, the Dow Divisor is 0.15172752595384.1  In effect, calculating the Dow’s value essentially means multiplying the sum of each company’s price by roughly 6.5.  (Because the divisor is less than one means it technically functions as a multiplier.)  Every $1 change in price to a particular stock within the Dow equates to a movement of 6.59 points on the Dow.  (1 divided by 0.15172752595384.)  We know that probably seems counterintuitive, but hey, that’s math! 

This multiplication effect is partly why the Dow’s value is so much higher than the S&P 500’s.  You see, even though the S&P contains hundreds more companies, its overall price is lower because of how it’s weighted.  Now, take another deep breath before we plunge into the wild world of weighted vs. unweighted indices…and yes, do a little more math.    

In an unweighted index, every company has the same impact on the overall index, no matter its price or how many shares are available.  The price of the index is determined by simply adding up every company’s stock price, then dividing by the total number of companies in the index.  For example, imagine an unweighted index containing only three companies.  If Company A went up 15%, Company B went up 10%, and Company C went up 5%, the index itself would be up 10%.  (15+10+5=30, and 30 divided by 3 equals 10.) 

With us so far?

Most indices don’t work like this, however.  That’s because not all companies are equal.  Some are worth much more than others or have a much higher volume of shares available to buy or sell.  For that reason, a simple mean average is a pretty unnuanced way of looking at the overall index.  For this reason, most indices are weighted.  This means the average is calculated by putting more importance – or weight – on some numbers than others.  It’s a more accurate way of looking at data. 

The S&P is a capitalization-weighted index.  (The Dow, by contrast, is a much simpler price-weighted index.)  That means each company is weighted according to its market capitalization – the company’s share price multiplied by the number of shares available to buy or sell.  As you know, some companies are simply bigger than others.  Typically, this means they have more outstanding shares, which means a higher market capitalization and more weight within the S&P 500.  The result?  The price movement of these companies has a much bigger impact on the S&P than that of smaller companies. 

For these reasons, the divisor that the S&P 500 uses is much higher than for the Dow.  In fact, it’s currently higher than 8,000.2 And the equation the S&P uses is much more complex.  (I’ll spare you the algebra.)  This is all done to keep the value of the index down to a more manageable level, and to prevent the price movement of a few companies from having an even bigger impact on the overall index than they already do.  Hence, as of this writing, the Dow is currently over 35,000, while the S&P is around 4,675. 

Whew!  That was a lot of information to cover in one post, wasn’t it?  This has also been a much more technical post than we usually try to write.  But we hope it gave you a glimpse into the numbers you see reported every day in the news.  That way, when the media says, “The Dow finished at X today,” or, “The S&P 500 opened at Y”, you’ll have a better understanding of what that actually means.  Because, after all, that’s a big part of what life is all about, isn’t it?  Increasing our understanding of how the world works – and why. 

Next month, we’ll cover a simpler – but broader – topic: The difference between stocks, bonds, funds, and other types of investments.  Have a great month!      

Scammer

Scammers Want Your Money (help inside)

Written by Minich MacGregor Wealth Management on . Posted in Uncategorized.

Scams got a big boost during the pandemic and we’ve been hearing about more folks (even very tech-savvy ones) getting caught up.

We wanted to reach out with some tips so you and your loved ones can stay safe.

We’d also like to ask for your help: Please forward this email to anyone you know who could use a refresher on the latest scams.

You might think your friends, family, and elders would be too smart to get caught, but the wider we spread awareness of the latest info, the better. Saving even one person would be worth it.

The goal of scams is to steal your money, steal your accounts, or steal your identity.

Here’s what you need to know:

Phishing emails and texts mimic legitimate communications to trick you into giving up account logins, credit card or bank details, or other sensitive data so scammers can use or sell them.

What do they look like? Scammers send you an email or text message asking you to verify your account or payment info, track a package, or unfreeze your account. Inside is a link to a (very convincing) fake website that steals your info.

Scammers might also send you a file attachment or document link to get you to click and install malware on your computer or phone.

Here’s how to avoid getting scammed:

  • Remember that legitimate institutions will never ask for sensitive information (like usernames, passwords, SSN, or bank details) by email or SMS.
  • Be suspicious if a message contains odd phrasing, grammatical mistakes, or typos.
  • Check the “from” information carefully to make sure messages are from a legitimate domain name or number that is actually associated with the company (e.g. bankemail@yourbank.com and not bankemail@bank23abc.com). Not sure? Call the company’s public phone number and check.
  • Don’t click on links or open attachments unless you fully recognize and trust the sender and are expecting the message. You can hover over a link to view the URL and make sure it’s sending you to a legitimate site.

Here’s a phishing email in action. Can you identify the red flags? (Answers in the P.S.)

How many did you see? Did you catch the fake number at the bottom? Sneaky!

Spoofing calls are another scam that’s on the rise. Scammers “spoof” the info on your caller ID to make it look like they’re calling from a legitimate organization.

What do they look like? Scammers may claim to be from your bank, the IRS, the Social Security Administration, or other organizations to trick you into sending money or giving up sensitive information.

They may claim you owe money or threaten you with the police if you don’t take action right away.

In other cases, they will impersonate a financial institution, claim your account is locked, and attempt to gain your account credentials to “unlock” it.

They might even call about an unexpected refund or windfall that you can only receive right now by handing over your personal information.

How to avoid getting scammed:

  • Be suspicious of calls from the IRS, SSA, or any financial institution. If you receive one, ask for a case or employee ID, hang up, and call them back on the official number on their website.
  • Never confirm information over the phone unless you have personally called the official number or are expecting a call.
  • Hang up immediately if the caller threatens you or pressures you to resolve an issue over the phone right now.

Want to report a scammer who targeted you? The FTC collects reports here.

Folks, stay safe out there.

Scams work by taking advantage of fear, greed, and the desire to do the right thing. If something seems “off” or “too good to be true,” take a break.

Never be afraid to contact a company through its official phone number or website to ask for clarification about a message or call. Better safe than sorry.

P.S. This is not a scam. 🙂

P.P.S. How many red flags did you spot in the phishing email?

  1. The sender info shows the email did not come from Netflix’s domain.
  2. The email client (Gmail in this case) flagged this email as suspicious.
  3. No salutation. Typically, an official email will include some portion of your name.
  4. Weird syntax.
  5. That’s not an official Netflix phone number.

P.P.P.S. Review our Cybersecurity information page on our website at: mmwealth.com/cybersecurity