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Can AI Give Financial Advice? What You Should Know Before You Trust It

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

Maybe you’ve never touched it. Maybe you merely dabble with it from time to time. Maybe you use it every day and can hardly imagine life without it. But regardless of which category you fall under, by now you’ve certainly heard all about it.  

We’re referring, of course, to artificial intelligence.  

Since ChatGPT exploded on the scene in late 2022, AI has been a never-ending topic of conversation. It dominates online discourse, the halls of government, and even the markets. (Especially the markets.) But one sub-topic we’re often asked about centers on a single question:  

“Can I use AI for financial advice?”  

The answer is, yes. You can.  

But should you? Well, that’s a bit more nuanced.  

AI is fast, convenient, and powerful. But your finances — the combination of all your investments, savings, income, taxes, debt, and the dreams they empower — represent your life. So, as with any tool, we must be careful about when to use it…and when not to.      

What AI is and what it can be used for

When people talk about “artificial intelligence,” what they’re really referring to is a Large Language Model, or LLM. ChatGPT, Claude, Gemini, and other chatbots use LLMs to calculate the statistically most likely next word in a sentence. It’s sort of like the autocomplete function on your phone when you write a text, except much more powerful.  

It’s important to remember this when interacting with AI, because what you’re seeing is not actual intelligence, but rather extremely sophisticated pattern-matching. If you ask AI a question, like, “What’s the difference between a 401(k) and an IRA?”, it will scour its database for previously written material on that subject, determine which words are statistically most likely to answer that question, what order they should go in, and then reproduce those words on the screen for you.  

For that reason, the best and most reliable way to apply AI to your personal finances is to treat it like a more in-depth, conversational Google search. It’s an excellent way to:

  • Get a quick answer to a question (“What age can I start taking Social Security benefits?”)
  • Search for resources (“Show me some resources that will help find, purchase, and then manage a vacation home.”)   
  • Check your thinking (“I’ve heard that the cheapest day to fly to Europe is on Wednesday. Is that true, or is there more I should know?”)  

AI is also great for organizing, filtering, and finding data. For example, let’s say you wanted to build a budget for an upcoming vacation. You could prompt an AI with the amount of money you have available to spend, along with a list of places you want to see and activities you want to do, and have it organize everything into a spreadsheet, with every expense broken down and itemized. With AI, you can also have it summarize a document, pull data out of a report, or ask it to compare different financial choices.  

Why you shouldn’t rely on AI too much

With all that said, AI has some very definite flaws and limitations, which is why it shouldn’t be overly relied on when it comes to finances.  

For one thing, AI is infamously prone to something called “hallucinations.” This is when a chatbot generates information that is inaccurate or just plain made up. It doesn’t happen all the time, but it does happen enough to make AI less reliable than the average encyclopedia.  

The reason this happens is because of the way an AI works. Remember how we said everything a chatbot generates is based on the data it’s trained on? If AI lacks the correct data to answer a question or follow a prompt properly, it will make a “guess” based on the data it does have.   

Another reason AI can be an unreliable partner is that it frequently makes assumptions…and then lets those assumptions affect what it generates. For instance, a study by MIT found that AI often assumes the gender of the person prompting it based on the words they use.1 Worse still, AI would change its recommendations based on that assumed gender. According to the study:

“…advice from prompts written by women led to nearly $60,000 (4.10%) less wealth than advice from prompts by men, largely driven by lower recommended equity exposure and less active rebalancing.”   

Which brings us to the most important reason you should not overly rely on AI:

AI is superb at providing information; it is not well-suited for giving advice.  

What’s the difference? Well, the act of “informing” is essentially providing facts and data meant to educate. “Advice,” on the other hand, is a recommendation based on your specific situation. It’s meant not just to increase your knowledge, but to guide your decisions. And this is not yet something AI is very capable of doing.  

To understand why, think again about what AI is and how it works. It generates text based on statistical plausibility. That means any advice it gives is not truly specific to you. And while providing AI with more input can increase the quality of its output (though, sometimes not knowing what to input is the reason for the question in the first place), every answer to every prompt will still be mere pattern-matching, and not truly tailored to your past, your personality, your emotions. AI doesn’t know you. It’s just very good at statistics.  

That matters, because just as your financial goals are intensely personal, so too must be the path you take towards them. The media often likes to portray financial goals as the same choices on a menu that everyone has to select: Retire by a specific age, travel a certain amount, leave a legacy for your children. But that’s just surface-level stuff. A person’s real financial goals are much more complex. Like this:  

“I need to retire so I have more time to take care of my disabled sister, but I’m afraid I won’t have the money to do that and still accomplish my bucket list.”

“I’ve always dreamed of seeing the small village in Germany where my great-grandparents got married, but inflation and market volatility make it feel impossible.”

“I want to leave my family a legacy, but my oldest child has passed away, leaving two kids of his own behind, my second lives in a different state, and my youngest isn’t good with money, so I don’t know how to divide my assets evenly between all of them.”

It’s these situations, these needs, these dreams, that require not just information, but advice. And not just any advice, but advice truly specific to you.  

AI is an exciting tool. A tool that has come on by leaps and bounds in recent years. A tool that will undoubtedly play a major role in society over the years to come. But while it has plenty of uses, remember that all tools must be used carefully, thoughtfully, and only in the right situations. Just as a wrench can’t replace a hammer, and a hammer can’t function as a saw, AI is excellent for information and organization.  

But it’s not the best thing to turn to for financial advice.  

1 “Half of Americans now ask AI for financial advice, but how good is it?” MIT Sloan School of Management, https://mitsloan.mit.edu/press/half-americans-now-ask-ai-financial-advice-how-good-it

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Covid lessons and the Strait of Hormuz image

Lessons from Covid: How Global Disruptions Impact Your Investments

Written by Minich MacGregor Wealth Management on . Posted in News, Posts.

No, you are not reading a message that’s been stuck in our drafts since 2020. This message is about the world in 2026. But as you’ll see, the lessons we can apply today are drawn from the markets as they were exactly six years ago.

As you know, geopolitical conflicts tend to have a short-lived effect on the markets. But sometimes, conflicts can lead to economic disruption. When that happens, investors must contend with major uncertainty…and uncertainty means volatility. This is what we’re seeing now due to the ongoing war in Iran and the near-total closure of the Strait of Hormuz.

Disruption, uncertainty, and volatility.

Here’s the situation in a nutshell: 20% of the world’s oil flows through the Strait.1 With only a few tankers passing through over the last few weeks, the world is facing the single largest supply disruption in history, made worse by the fact that Iran has also struck nearby oil and gas facilities across the Persian Gulf. Due to this, the price of oil has risen to over $100 a barrel, with Brent crude, the global benchmark, rising as high as $113.1

Oil, as you know, is the blood that powers the world economy. Furthermore, it’s not just oil that passes through the Strait. In fact, up to 20% of the world’s natural gas and 30% of its fertilizer transported by ship must first transit the Strait before reaching the wider ocean.2

Take a moment to visualize what this looks like. Three products, oil, gas, and fertilizer, all choked off in one of the world’s most important pipelines. Over the coming weeks, ships that have already left the Strait will finish delivering what supplies they have, but after that, shortages may begin.

Now, the United States does not heavily rely on oil and gas passing through the Strait, as we have our own supply of both. But Asia and Australia do, which means that goods produced on these continents may become much more expensive. Natural gas is a critical part of producing fertilizer; fertilizer is a critical part of growing food. Both gas and oil are used to produce plastic, which is used to contain nearly everything that gets shipped from one place to another. Shipping, of course, requires oil.

Some countries that normally depend on oil and gas from the Persian Gulf can potentially pivot to other forms of energy. China and India, for example, have enormous coal reserves. But not all countries can do this, and even those that can, probably won’t be able to replace all of what they normally get from the Strait. Furthermore, pivots take time. As a result, many countries simply may not be able to produce the amount of goods they normally do. And as we know from the Law of Supply and Demand, when supply goes down but demand does not, prices rise. Not just for oil and gas, but for everything that is made or transported by oil and gas.

Here is where the lessons of the Covid years begin to kick in, because we’ve seen something like this before. When supply chains get disrupted, as they were during the Covid shutdowns of 2020, prices rise. We call this inflation.

When the price of goods rises, something else tends to rise with it: The cost of money itself. By this, we’re referring to interest rates. Here in the United States, the Federal Reserve, which is mandated to keep prices stable, typically fights inflation by raising interest rates. (Investors learned all about this after 2020, too.) Higher interest rates make it more expensive to borrow money, which in turn tamps down on spending. Lower spending, in turn, forces businesses to reduce their prices, thereby reducing inflation.

As of this writing, the Fed has not raised the Federal Funds Rate, which is the key interest rate that our central bank controls. But this isn’t the only interest rate that matters. One rate that has jumped in recent weeks is that of the 10-year Treasury Note.3 This interest rate — which is essentially the rate at which the government borrows from investors for a term of 10 years — influences mortgage rates, credit cards, and other types of loans. The fact that it’s on the rise is the market’s way of saying that investors expect interest rates in general to rise, too.  

Put all these factors together and you suddenly have a situation that looks a bit like the Covid-era. There are some important differences, of course. For one thing, oil prices initially plummeted during the Covid shutdowns. And it was the combination of snarled supply chains plus a major surge in demand after the world reopened that triggered inflation. But the potential trio of economic disruption, rising inflation, and higher interest rates is doing the same thing it did all those years ago: Inject significant uncertainty into the markets.

Which is why the Dow, the S&P 500, and the Nasdaq are all in “market correction” territory.4 (A correction, remember, is a drop of 10% or more from a recent high.)

Now, note that we used the word “potential” just a moment ago. That’s because we’re still in hypothetical territory here. We don’t yet know exactly whether and how much inflation will go up, or for how long, or what that will mean for interest rates over the long-term. We certainly can’t predict what the markets will do. Corrections are common, and it’s possible the war could end as quickly as it started.

But there are two major mistakes an investor can make whenever uncertainty kicks in. The first is to bury our heads in the sand and pretend everything is fine. As you can see from all the analysis you just read, we are certainly not going to make that mistake here at Minich MacGregor Wealth Management. Because there’s no point in sugarcoating it: This situation has major ramifications for the global economy. And even if the war were to end tomorrow, that doesn’t guarantee everything will go back to normal overnight. Oil prices alone may remain elevated for some time. (There’s a saying among economists that oil prices rise like a rocket and fall like a feather.)

The second mistake is to take that uncertainty and think the sky is falling. And here is where the major lessons from Covid come into play.

Over the coming days and weeks, we may see plenty of headlines that point out just how serious the situation is. We might see words like “unprecedented” or “historic.” Terms like “correction,” “downturn,” or even “bear market” could be on the cards, too. But if that happens, remember this: We’ve been through this before. And we’ve made it through this before, too.

Close your eyes and think back to how much uncertainty existed in the spring of 2020. We can still remember where we were when we heard the news about quarantines and shelter-in-place restrictions. We can still remember how the schools closed, and “non-essential” offices closed, and grocery store shelves got frighteningly bare. And we can remember how the markets reacted to it all. We’re sure you can, too.

We can also recall what happened next. How the markets stabilized, rebounded, and expanded.

Covid taught us that patience, steadiness, and the ability to look past immediate headlines become more important during times of increased uncertainty, not less. Because while uncertainty creates volatility, it also creates opportunity. Opportunities for companies to adapt, and in adapting, find new ways to grow. Opportunities for the markets to rebound, and in rebounding, reach new heights. It’s not easy to endure the volatility to get to the opportunity. It never is. But the one thing we know for sure is that we do not want to be absent when opportunity comes.

The pandemic was a historic event that had major ramifications for the global economy. It’s possible that what’s happening in Iran will be, too. We don’t know how long it will last, or how deep its impacts will be. But even historic events eventually become just that: History.

One day, we expect we’ll write a message titled, “Lessons from Iran,” too.

The final lesson that we hope all our clients learned during Covid, is that our team will always be here for you. Whether the current volatility resolves or increases, we are always available to answer your questions, address your concerns, and examine every development. So, if you would ever like to talk — about Iran, about your portfolio, or anything else — please reach out. We always love to hear from you!  

1 “A new oil shock is building,” CNBC, https://www.cnbc.com/2026/03/28/oil-gas-prices-iran-war-hormuz.html
2 “It’s not just oil. Here comes Hormuz inflation.” Politico, https://www.politico.com/news/2026/03/14/hormuz-inflation-helium-fertilizer-00828680
3 “Treasury yields rise as Iran ceasefire optimism fades,” CNBC, https://www.cnbc.com/2026/03/26/treasury-yields-rise-uncertainty-ceasefire-talks.html
4 “Dow closes in correction,” CNN, http://cnn.com/2026/03/27/investing/us-stocks-iran

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Primer on Market Indices

Understanding Market Indices: A Visual Guide

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

When you hear the phrase “the stock market” in the news, it’s usually shorthand for a market index — but what exactly does that mean?

Market indices, like the Dow Jones, S&P 500, and Nasdaq Composite, are some of the most-watched measures in finance. They shape headlines, move markets, and give investors a snapshot of performance. But because each index is built differently, they can tell very different stories about “the market.”

That’s where our new infographic comes in. 📊

It breaks down:

  • What a market index is and why it matters
  • How different indices (like the Dow vs. the S&P 500) are structured
  • Why index values look so different — and what those numbers really mean
  • How investors can actually use indices in practice

Whether you’re new to investing or just want a clearer understanding of the numbers behind the headlines, this guide makes it simple.

war time rules golf

Rules for Getting Through Market Volatility

Written by Minich MacGregor Wealth Management on . Posted in News, Posts.

Like getting the flu or visiting the DMV, market volatility is one of those facts of life that never gets more pleasant no matter how many times we experience it.  As you know, the markets have been very volatile of late.  In large part this has been spurred on by the fears and uncertainty surrounding the tariffs that have been announced or discussed by the White House. This has many investors asking, “What should I do?” 

As financial advisors, we hear that question a lot.  While thinking about how to answer it, we came across an interesting story that illustrates exactly what investors should do.  It’s called: 

The War-Time Rules for the Richmond Golf Club

The year was 1940.  World War II was well under way, with France having fallen to Germany.  When the Germans began bombing England in preparation for an invasion, some of the bombs fell on the Richmond Golf Club in southwest London.      

Undaunted, the golfers, many of whom were veterans of World War I, devised a set of “war-time rules” to ensure they could keep playing even during a bombing raid.1  Decades later, the rules were rediscovered.  They are still as incredible now as they were then…and as amusing!   

  1. Players are asked to collect bomb and shrapnel splinters to save these causing damage to the mowing machines.
  2. During gunfire or while bombs are falling, players may take cover without penalty for ceasing play.
  3. The positions of known delayed action bombs are marked by red flags at a reasonably — but not guaranteed — safe distance therefrom.
  4. Shrapnel on the fairways or bunkers within a club’s length of a ball may be moved without penalty. No penalty shall be incurred if a ball is thereby caused to move accidentally.
  5. A ball moved by enemy action may be replaced, or if completely destroyed, a new ball may be dropped not nearer the hole without penalty.
  6. A ball lying in a crater may be lifted and dropped not nearer the hole without penalty. 
  7. A player whose stroke is affected by the simultaneous explosion of a bomb may play another ball from the same place.  Penalty, one stroke.

We love this story because it illustrates a very important point: Whenever we face uncertainty in life, whenever we’re not sure what to do, it’s valuable to have rules in place that can help guide us and stabilize us.  From the Golden Rule to the Fire Rule (stop, drop, and roll), rules make things easy to remember, easy to understand, and easier to get through.  So, with those golfers’ plucky example in mind, here are our rules for getting through even the roughest stretches of market volatility:

1. Continue to save and contribute to your retirement accounts.  Market volatility often means lower prices. That both lowers the financial barrier to invest and makes it easier to buy good companies.  It’s like shopping for Christmas lights after the holidays are over — the prices are lower, but the product is the same.  Furthermore, by continuing to save and invest even during volatility, you are positioning yourself for the rebound.  Remember, it’s time in the markets, not timing the markets, that matters. 

2. Examine your current risk level.  That said, there’s nothing wrong with looking at your portfolio and saying, “You know what?  Maybe I don’t want to deal with this level of risk.”  Many investors end up becoming overexuberant and taking on too much risk during bull markets, and changes in your life sometimes require a change in your investment strategy.  After all, even the Richmond Club golfers took cover when the bombs were dropping. 

3. Invert the problem.  One of the great investors, Charlie Munger, used to talk about how inverting his thinking was his most reliable form of decision-making.  In other words, during a time when other investors are trying to figure out the “smart thing to do,” replace that with, “What is the foolish thing to do?”  Or “What will I most regret doing in five or ten years?”  It’s often much easier to figure out what not to do than what you should do.  By starting there and working backwards, you will arrive at the correct decision — which is often much simpler than it first appeared! 

4. Focus on a different aspect of financial planning.  There is more to reaching your financial goals than investing.  When the markets are turbulent and the headlines are scary, there’s a simple solution: Stop thinking about them!  Instead, focus on something else that will help get you closer to your goals.  Look at your cash flow.  Update your will.  Start a rainy-day fund.  Get your tax planning done.  Concentrate on increasing your income.  There are lots of possibilities, all of which are far more important in the long-term than stressing about markets in the short-term.         

5. Commit to understanding why the markets are behaving the way they are.  Most people don’t spend their days scrutinizing the markets.  As a result, volatility can feel particularly stressful for investors who don’t immediately have an explanation for it.  But Marie Curie once said: “Nothing in life is to be feared, it is only to be understood.”  In my experience, when we take the time to understand the cause of volatility, the volatility itself becomes less unsettling.  Understanding brings clarity, and clarity brings confidence — that all volatility, no matter the cause, is temporary. 

The British were famous for their “keep calm and carry on” attitude during World War II.  The “War-Time Rules for the Richmond Golf Club” is a perfect example of this.  The rules they created helped those golfers make sense of a scary situation by continuing to do what they loved.  We can apply that principle to every area of our lives — including our finances and including the markets. 

One last point.  Sometimes, the media will try to get us to choose fear over rules like these.  When that happens, remember this.  During the War, the Richmond rules became famous even in Germany.  None other than Joseph Goebbels heard about them and publicly declared, “The English snobs try to impress the people with a kind of pretended heroism.  They can do so without danger, because, as everyone knows, the German Air Force devotes itself only to the destruction of military targets.”1 

Still, in the very next raid, German planes bombed the golf club’s laundry facilities. 

The members continued playing.    

1 “Our Famous War Time Rules,” The Richmond Golf Club, https://therichmondgolfclub.com/war-time-rules

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Spring Cleaning Image

Financial Spring Cleaning

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

Spring is in the air, and that means it’s time for spring cleaning. But wait! Before you pick up that dustpan, give a thought to your financial spring cleaning first.

What do finances and spring cleaning have to do with each other? Well, if you have financial goals you’re planning for, the answer is “A lot!” These days, the term spring cleaning is often used as a metaphor for getting our daily affairs in order. As you can imagine, getting your financial affairs in order is critical if you intend to check off all the items on your personal bucket list. There are many things to keep track of. Many tasks that need doing; many decisions to make.

So how do you begin? Well, when many people do their actual spring cleaning, they make a checklist. What supplies they’ll need, what rooms need to be cleaned, what needs to be mopped, vacuumed, dusted, or organized… it’s the most efficient way to clean. We suggest doing the same for your finances. So, without further ado, here is a sample Spring Cleaning Checklist to help you stay organized and on track to your financial goals.

Financial Spring-Cleaning Checklist

[ ] Contribute the maximum amount to your IRA if you have one. Remember, an IRA is a valuable way to save for retirement in a simple, tax-advantaged way. For the 2024 tax year, the annual IRA contribution limit is $7,000 if you’re under 50, and $8,000 for those 50 and older.1

 [ ] Review your 401(k) and rebalance if necessary. How has your 401(k) been performing? Do you understand how your money is being invested, and why? Are you contributing enough to take advantage of any employer matching? Do the investments inside your 401(k) need to be rebalanced to match your original allocation?

[ ] Review your holdings. These days, many investors adopt a “set it and forget it” mentality with their investment portfolio(s). That’s certainly better than stressing over the markets daily, but it’s critical to review your holdings at least once or twice a year to make sure everything is in order. Is your allocation still where it should be? Is your portfolio still in line with your tolerance for risk? Are your holdings providing the kind of return you need to reach your financial goals? Do you understand everything you own and why? If the answer to any of these questions is “No” or “I don’t know,” then it’s time for us to sit down and take a closer look at things. And when we say, “review your holdings,” we mean all of them. That includes all institutions you do business with! (Many investors sometimes forget where all their assets are kept and thus fail to review them.)  

[ ] Review your cash flow and examine your expenses. Which are likely to continue for the long-term? What expenses can you remove right now? This is a good way to find extra ways to save for your goals, and it will make your life a lot simpler once retirement comes.

[ ] Decide now what to do with your tax refund. If you’re getting a tax refund this year, think about how you want to use it. Approximately 1/3rd of Americans use their refund to pay off debts; others stick it in a savings account.2 One underrated and oft-underused option: Invest it instead. It can help you catch up on saving for retirement, pay for a loved one’s college expenses, or enable you to achieve one of your long-term goals even sooner.

 
[ ] Make sure you know where all your estate planning documents are. You should have a copy of your will, power of attorney, advance medical directives, letter of instructions, and other documents in a secure but easily accessible place. Make sure your spouse (or other loved ones) knows where these documents are kept.

[ ] Review your current insurance policies. Are there any potential gaps? (For example, Disability and Long-Term Care insurance are two types of policies many people don’t have but are often extremely valuable for retirees.)

[ ] Check your credit reports. Credit reports aren’t just for getting loans. They’re also a handy early-warning system for fraud and identity theft. A good rule is to check your credit at least once per year. Be on the lookout for changes that don’t look familiar to you as well as “hard inquiries.” This is when a business checks your credit report because they received a new application for credit or services. These can impact your score and stay on your reports for up to two years. They can also be a red flag for thieves trying to use your information illicitly.

[ ] Reprioritize your goals. As you think about getting your finances in order, also think about the goals your finances are designed to help you achieve. Do you have new goals? If so, write them down. Are there older objectives that need more attention? If so, determine where they need to be placed on your schedule. By doing these things, you can ensure your finances are not only organized but getting you closer to the places — and person — you want to be.

Spring cleaning is never the most fun thing in the world, but it’s often one of the most beneficial. Just as you probably enjoy living in a clean, organized home, you’ll enjoy the peace of mind that comes with getting your finances in order. Trust us: if there’s one thing we’ve learned in all our years of helping people plan for their goals, it’s that a little organization today can make for a much happier tomorrow. In the meantime, we wish you a happy spring — and a happy spring cleaning!

1“IRA Contribution Limits,” IRS, https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-ira-contribution-limits
2 “Over a third of Americans plan to spend their tax refund right away, mostly to pay bills,” CNBC, https://www.cnbc.com/2022/04/02/most-americans-plan-to-spend-tax-refund-on-essentials.html

Buy Sell Hold image

Questions You Were Afraid to Ask #14

Written by Minich MacGregor Wealth Management on . Posted in News, Posts.

The only bad question is the one left unasked. That’s the premise behind many of our posts. Each covers a different investment-related question that many people have but are afraid to ask.

To begin this post, we’d like to ask you a question: Have you ever seen an episode of Star Trek?  If so, you know the writers often use something called “technobabble.”  You’ll hear terms like dilithium core, temporal convergence, tachyon fields, and more.  It’s obvious, of course, why the writers would do this.  As the show takes place in the future, technobabble is a quick and easy way to make the characters seem smarter and more technologically advanced than we are today.   

The media has its own form of technobabble.  If you’ve ever watched CNBC, for example, you’ve probably heard many instances of “financial jargon.”  Words that sound complicated and intimidating, and that you almost never hear in everyday conversation.  Many do have meanings, and some are very important – but they can often be bandied about by professionals in order to sound sophisticated. 

Sophistication is all well and good, but not when it comes at the expense of clarity.  So, over the next few posts in this series, we want to break down some common bits of financial jargon that you are likely to hear in the media, what they mean, and why they do — or do not — matter. 

Questions You Were Afraid to Ask #14:
What do stock ratings mean?   

Buy.  Sell.  Hold.  Overweight.  Outperform.  Strong, weak, reduce, accumulate.  These are just some of the ratings you’ll often see attached to specific investments, usually stocks.  Financial websites love to list them.  Talking heads on TV love to recite them.  But what are they?

A rating is an analyst’s recommendation on what to do with a particular stock.  Typically, an analyst will research a company by reviewing financial statements, talking with leadership, and surveying customers.  Some analysts will also study broader economic trends to try and estimate how the company will be affected by the overall economy.  Other analysts may rely heavily on algorithms and mathematical models.  Whatever their method, these analysts then prepare a report that discusses how they see the company’s stock performing in the near future. 

Inside that report is a rating.  Their advice, distilled down to a single word or phrase, on what their clients should do with the stock in question.  The three most basic ratings are: buy, sell, and hold. 

Buy and sell are fairly obvious.  They are recommendations to buy the stock — or buy more of it — or to sell whatever shares you already own.  “Hold” essentially means to sit tight.  If you already own shares in the stock, don’t buy any more, but don’t sell, either. 

So far, so simple.  But here’s where things can get a little tricky.  Since there is no standardized way to rate stocks, pretty much every financial firm will have its own system.  That’s why you’ll often see many variations and degrees of those three basic ratings.  For example, think of buy, sell, and hold as umbrella terms.  Beneath the buy umbrella, you may sometimes hear terms like moderate buy, overweight, outperform, market perform, add, or accumulate.  Under sell, you may see reduce, underweight, underperform, weak hold, moderate sell. 

“Moderate” essentially means to buy or sell more shares of the stock, but not too much.  Same for add/reduce.  Over/underweight and over/underperform means the analyst believes the stock will perform somewhat better or worse than the overall market.  Weak hold is basically a push – it’s probably fine to hold onto your shares, but you can sell if you want to. 

Sometimes, if an analyst uses all these variations, then a simple buy or sell can then take on a new meaning.  That’s why you’ll sometimes see the terms strong buy or strong sell.  This indicates the analyst believes you should either buy or sell as much of the stock as you possibly can. 

So, now you know what stock ratings mean.  But do they matter? 

Imagine you’re shopping online for a new coffee maker.  What’s the first thing you’d see?  Likely, it would be a list of coffee makers with some sort of numerical rating next to each based on all the customer reviews.  Now, would you buy the first machine that has a good rating?  Probably not.  What you would do is look at the first machine with a good rating, and then go from there. 

For regular investors, that’s essentially what stock ratings are good for.  They provide a handy place to start.  A quick reference.  A way to weed out the stocks you don’t want to look at immediately versus those you do.  But you shouldn’t ever make decisions based solely on those ratings.  Because, like the customer ratings online, they don’t tell the whole story. 

It’s important to remember that a stock rating is just the opinion of one analyst.  Others may have different opinions.  Also, because there’s no standardized rating system, one analyst’s “buy” might be another’s “hold.”  An “underperform” at one place might be a “strong sell” at another.  And while analysts can be very smart and experienced, rating is not an exact science and can be often used more as a marketing pitch than as a truly objective evaluation. 

Finally, stock ratings are not specific to you.  Consider the coffee maker analogy.  One machine might have a rating of 4.3 stars; a second might be 4.0.  But when you read the reviews closely, you might see the higher-rated machine is versatile but complicated.  The lower-rated machine can’t do as much, but it’s fast and easy – perfect for that quick cup before work.  If that’s what you want, the “lower-rated” machine might be better.  Stock ratings are similar.  They don’t address your goals, your risk tolerance, your timeline.  And that’s why they should never be used as a substitute for having your own customized investment plan. 

So, that’s the skinny on stock ratings.  Next month, we’ll look at another stock term: Big Caps vs Small Caps.  Have a great month!

Open Suitcase image

Q2 Market Recap

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

One of our favorite metaphors for investing is that it’s like packing a suitcase.

Let’s say you’re preparing for a summer trip to the beach. What would you put in your suitcase?  A swimsuit, probably. Sandals. Sunscreen. Plenty of shorts and t-shirts. Sunglasses and a hat. Then, when you take a step back, you realize you still have space for a few more items. What do you choose?  More beach gear?  Makes sense – after all, it’s the middle of summer, and your destination is famous for being the perfect place to work on a tan.

Or would you pack a pair of pants and a long-sleeve shirt because you guess it might get cold at night?  Would you tuck in an umbrella and fold up a poncho…just in case it rains?

In our experience, some investors are like the tourist who packs for one kind of weather and one type of activity. To illustrate what we mean, let’s recap how the markets performed last quarter.

When 2024 began, inflation was near its lowest point in two years. As a result, many investors figured prices would continue to drop, and the Federal Reserve would lower interest rates sooner rather than later. (And possibly even several times throughout the year.)  In other words, they “banked” on warm weather and sunny skies, then packed their suitcase accordingly.

Well, there’s nothing more frustrating than when unexpected rain ruins fun in the sun. Instead of falling, inflation ticked up through Q1, rising from 3.1% in January to 3.5% in March.1

As a result, when the second quarter began, the mood on Wall Street had shifted substantially. Suddenly, there was no more talk of the Fed cutting rates early and often. Instead, investors began to wonder if the Fed would cut rates at all in 2024. Some economists even speculated that the Fed might raise rates again. So, investors re-opened their suitcases. Out went the swimwear; in went the coats and gloves. It’s no surprise, then, that the S&P 500 dropped 4.2% in April.2

What these investors didn’t realize was that the sun was already starting to peek out from behind the clouds.

Fast-forward to the beginning of July. Looking back, we now know that inflation dropped to 3.4% in April, 3.3% in May, and a surprising 3% in June.1

A big reason for this slide is due to gas prices, which fell by 3.6% in May and 3.8% in June.3 (Energy prices in general fell by 2% in both months.3)  This helped negate the fact that food and housing prices – two of the most stubborn and volatile drivers of inflation actually went up slightly in June.

As you can imagine, the talk has turned once again…to whether the Fed will cut rates sometime in the summer. This renewed optimism, combined with another factor that we’ll get to, helped lift the markets out of the doldrums. For the quarter, the S&P 500 gained 3.9%, while the Nasdaq rose 8.3%.4  

A 3% inflation rate means that consumer prices are up only 3% compared to this same time last year, not that prices have fallen lower.  Inflation is the rate at which prices are increasing.  A lower inflation rate means that prices are rising more slowly; deflation is when prices actually drop…and it’s usually the sign of an unhealthy economy.

So, what does this mean going forward?  Is it time to repack the suitcase?

The answer is no – because we believe we packed it correctly the first time.

Any savvy traveler knows that when you pack a suitcase, you don’t just factor in what you think will happen. You pack for what could happen. If your goal is to hit the beach, you pack a swimsuit…but since you know it could rain, you also pack a poncho. Your plan is to feel sand between your toes, but if the beach is too crowded, you’ll go for a hike instead…which is why you pack shoes as well as sandals.

The way inflation has gone (up and down) and the way the markets have responded (ditto) shows exactly why investing isn’t about predicting what will happen. It’s about planning for what may happen. You pack a suitcase in a way that ensures your vacation will be fun no matter what. We base our investment strategy in a way that helps you keep working toward your goals, regardless of what short-term market conditions are like.

The fact of the matter is we don’t know whether the Fed will lower interest rates in Q3. Of course, it’s certainly possible that they will. Three straight months of declining consumer prices is certainly a good sign. Even better is that the economy has continued to be solid. (GDP grew by 1.4% in Q1.5 As of this writing, many economists are predicting a 2% rise in Q2.6)  But it’s also possible that a rate cut is still many months away. Trying to guess what will happen in the short-term – and then making moves that could impact you in the long-term – is bad packing.

Then, too, inflation and interest rate expectations are not the only drivers of the markets. Tech stocks – specifically those companies most involved in the development or utilization of AI – helped the markets regain momentum in Q2. Any investor who decided to sit on the sidelines because of pessimism over inflation would have missed out on the optimism surrounding AI. Sure, it’s always a bummer to go to the beach and find it raining…but there are often plenty of other fun things to do on your vacation even when the sun isn’t out

When you think about it, the markets really are like going on a trip. There will always be reasons for enthusiasm and reasons for caution. Everyone who goes to Disneyland can look forward to amazing rides and horrendous crowds. The view from the Grand Canyon is spectacular; the weather can be abysmally hot. The flowers in England are spectacular; the rain can feel oppressive.

And for every factor that can pull the markets down, there will be factors that could push the markets up. Our job is to help you pack a suitcase – and implement an investment strategy with an eye on the long-term forecast – that keeps you prepared for all of it.

So, as we move further into a new quarter, that is just what our team will continue to do. We’ll be keeping an eye on many things this quarter. Inflation, the breadth of the market, the upcoming election – you get the idea. And whenever we feel there’s something on the horizon that could affect the items in your suitcase, we’ll let you know immediately.

In the meantime, if you ever have any questions or concerns, please let us know. And if you have any upcoming summer travel plans, well…be sure to send us pictures!

Have a great week!

1 “Inflation falls 0.1% in June from prior month,” CNBC, https://www.cnbc.com/2024/07/11/cpi-inflation-report-june-2024.html
2 “S&P 500 falls 4.2% in April,” S&P Global, https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/s-p-500-falls-4-2-in-april-as-market-momentum-loses-steam-81466397
3 “Consumer Price Index Summary, U.S. Bureau of Labor Statistics, https://www.bls.gov/news.release/cpi.nr0.htm
4 “Stops dip as investors digest inflation data,” Reuters, https://www.reuters.com/markets/global-markets-wrapup-1-2024-06-28/
5 “Gross Domestic Product,” U.S. Bureau of Economic Analysis, https://www.bea.gov/data/gdp/gross-domestic-product
6 “GDPNow,” Federal Reserve Bank of Atlanta, accessed July 10, 2024. https://www.atlantafed.org/-/media/documents/cqer/researchcq/gdpnow/RealGDPTrackingSlides.pdf