Well, the SECURE Act was signed into law yesterday (20Dec2019)...

What is the SECURE Act? Beyond the acronym (Setting Every Community Up for Retirement Enhancement), it is the most sweeping retirement legislation that Congress has enacted within the past decade. Is this new legislation good or bad? While there are potentially some benefits, I am not the hugest proponent of it. Let’s cover why.

Here are some of the major provisions of the SECURE Act:

• Required Minimum Distributions will now begin at age 72 (versus 70.5 years of age), as long as you turn 70.5 years of age after 01Jan2020 - I LIKE this provision!!;

• You can contribute to your traditional IRA after age 70.5 as long as you have earned income - I LIKE this provision, but it does mean folks are working longer;

• Most inherited IRAs will now need to be distributed within 10 years - I really DISLIKE this provision (the SECURE Act funds its passage through this revenue provision);

• You may see more annuity options through your 401k provider - I generally dislike this provision because annuities often carry high charges and expense ratios, which benefit the insurance companies and NOT the investor (although annuities can have their place for a select few investors).

With the elimination of the stretch IRA and the addition of higher cost annuity options for 401k participants, some of the beneficial SECURE Act provisions are seeming outweighed by these less beneficial provisions.

If you have questions about the effects of the SECURE Act upon your retirement plan or investment portfolio, please feel free to contact Intelligent Investing at www.mynmfp.com/new-clients for a no-obligation consultation.

For additional information about this topic, please click on the title above.

David L. Hogans, Esq. is an author and the founder of Intelligent Investing, Inc., a registered investment advisor firm located in Albuquerque, NM.  He earned his Bachelor of Science in Chemical Engineering (ChE) from Virginia Tech and his Juris Doctorate (JD) from the University of Dayton.  Mr. Hogans is licensed to practice law in the states of Virginia and New Mexico, as well as, before the Federal Patent Bar.  For more information about Mr. Hogans and his firm please see his filing with the Securities and Exchange Commission (SEC) (https://files.adviserinfo.sec.gov/IAPD/Content/Common/crd_iapd_Brochure.aspx?BRCHR_VRSN_ID=602988).

Vanguard's Market Perspectives for 2020

What does Vanguard see for 2020? Here are a few highlights:

• Global growth slows in 2020 and sets the stage for a potential shallow recession in the US with growth around 1%;

• With a shallow recession possible, the Federal Reserve will need to cut interest rates once or twice in 2020;

• US-China trade tensions will continue as some larger scale structural trade issues still remain unresolved;

• Global and US inflation will remain muted due to slowing economic and wage growth; and

• US unemployment rates should remain stable or rise slightly due to a slowing labor market and muted wage pressures.

What do the above macro-economic perspectives mean for your portfolio going forward? Vanguard provides the following 10-year annualized nominal return projection estimates as a gauge:

Equities

Global equities ex-U.S. (unhedged) 6.5%–8.5%

U.S. equities 3.5%–5.5%

U.S. real estate investment trusts 2.5%–4.5%

Fixed income

U.S. bonds 1.5%–3.5%

U.S. Treasury bonds 1.0%–3.0%

Global bonds ex-U.S. (hedged) 1.0%–3.0%

U.S. credit bonds 2.0%–4.0%

U.S. high-yield corporate bonds 3.0%–5.0%

U.S. Treasury inflation-protected securities 1.0%–3.0%

U.S. cash 1.0%–3.0%

With US equities potentially returning between 3.5% and 5.5% and US bonds forecasted to return between 1.5-3.5%, it is a good time to make sure you have sufficient international exposure in your portfolio.

To see a mid-year 2020 Vanguard Economic Outlook update, click here.

If you have questions about your investment portfolio, please feel free to contact Intelligent Investing at www.mynmfp.com/new-clients for a no-obligation consultation.

For additional information about this topic, please click on the title above.

David L. Hogans, Esq. is an author and the founder of Intelligent Investing, Inc., a registered investment advisor firm located in Albuquerque, NM.  He earned his Bachelor of Science in Chemical Engineering (ChE) from Virginia Tech and his Juris Doctorate (JD) from the University of Dayton.  Mr. Hogans is licensed to practice law in the states of Virginia and New Mexico, as well as, before the Federal Patent Bar.  For more information about Mr. Hogans and his firm please see his filing with the Securities and Exchange Commission (SEC) (https://files.adviserinfo.sec.gov/IAPD/Content/Common/crd_iapd_Brochure.aspx?BRCHR_VRSN_ID=602988).

Are not all bond funds the same?

There are a lot of different bond funds available to investors. But, are they the same or are they really different? Morningstar broke down bond funds into four (4) major categories (sure, there are more, but this is a good start). The four (4) bond categories are as follows:

Intermediate Core

• Invests primarily in investment-grade U.S. fixed income issues including government, corporate, and securitized debt.

• Holds less than 5% in below-investment-grade exposures.

Intermediate Core-Plus

• Invests primarily in investment-grade U.S. fixed income issues including government, corporate, and securitized debt.

• Has greater flexibility than core offerings to hold non-core sectors such as corporate high-yield, bank loan, emerging markets debt, and non-U.S. currency exposures.

Multi-sector

• Seeks income by diversifying their assets among several fixed-income sectors, usually U.S. government obligations, U.S. corporate bonds, foreign bonds, and high-yield U.S. debt securities.

• Typically holds 35% to 65% of their assets in securities that are not rated or are rated BB and below by a major agency such as Standard & Poor's or Moody's Investors Service.

Nontraditional

• Seeks returns uncorrelated with those of the overall bond market.

• Has the flexibility to invest tactically across a wide swath of individual sectors, including high-yield and foreign debt, in addition to the potential for significant usage of derivatives.

It goes without saying that most individuals would do best if they placed the majority (if not the vast majority) of their bond portfolio holdings within an Intermediate Core Bond Fund. This type of bond fund generally exhibits a correlation that protects investors during a down stock market - as noted below by the graphic from Morningstar about bond fund correlations with the S&P 500 Index. Please also note that a correlation value of 1.00 means the fund perfectly matches the S&P 500 Index, while a correlation value of 0.00 means there is no correlation and a correlation value of -1.00 means they are inversely correlated (as one goes down, the other goes up).

Ten-year return correlation of Morningstar bond categories with the S&P 500 Index

S&P 500 Index 1.00

U.S. High-Yield Bond 0.72

U.S. Nontraditional Bond 0.50

U.S. Multisector Bond 0.56

U.S. Intermediate Core-Plus Bond 0.15

U.S. Intermediate Core Bond –0.03

Sources: Vanguard and Morningstar, Inc. as of July 31, 2019.

So, the next time you are thinking about stretching out on the yield curve to obtain a little more return from you bond fund portfolio, don’t forget why you invested in bonds in the first place (to smooth out the ride of your investment returns over your portfolio’s lifespan).

To learn more about dividend paying stocks versus bonds, see my earlier post (Dividend Paying Stocks versus Bonds).

If you have questions about how to invest your bond portfolio, please feel free to contact Intelligent Investing at www.mynmfp.com/new-clients for a no-obligation consultation.

For additional information about this topic, please click on the title above.

David L. Hogans, Esq. is an author and the founder of Intelligent Investing, Inc., a registered investment advisor firm located in Albuquerque, NM.  He earned his Bachelor of Science in Chemical Engineering (ChE) from Virginia Tech and his Juris Doctorate (JD) from the University of Dayton.  Mr. Hogans is licensed to practice law in the states of Virginia and New Mexico, as well as, before the Federal Patent Bar.  For more information about Mr. Hogans and his firm please see his filing with the Securities and Exchange Commission (SEC) (https://files.adviserinfo.sec.gov/IAPD/Content/Common/crd_iapd_Brochure.aspx?BRCHR_VRSN_ID=602988).

The "Risk-Off" Investing Environment Continues . . .

Investors continue to be risk-averse in 2019. Simultaneous readings by Vanguard’s three (3) “Risk Speedometers” have only been this low 4% of the time in the last fifteen (15) years. That means folks do not have a lot of appetite for risk, i.e., equities or stocks.

This is borne out by the fact that US equity, US ETF’s, and active equity funds all suffered net cash outflows, while taxable bond funds and ETF’s experienced large net inflows of cash. The category receiving the largest cash inflows over the last 1, 3, and 6 months, as well as, the last 1, 3, and 5 years has been Money Market Funds.

Notably, while Money Market Accounts and Intermediate Core Bond portfolios are receiving the largest cash inflows over the last month, their returns placed them 66 out of 103 fund categories and 61 out of 103 fund categories, respectively.

If you have questions about how to invest in this “risk-off” environment, please feel free to contact Intelligent Investing at www.mynmfp.com/new-clients for a no-obligation consultation.

David L. Hogans, Esq. is an author and the founder of Intelligent Investing, Inc., a registered investment advisor firm located in Albuquerque, NM.  He earned his Bachelor of Science in Chemical Engineering (ChE) from Virginia Tech and his Juris Doctorate (JD) from the University of Dayton.  Mr. Hogans is licensed to practice law in the states of Virginia and New Mexico, as well as, before the Federal Patent Bar.  For more information about Mr. Hogans and his firm please see his filing with the Securities and Exchange Commission (SEC) (https://files.adviserinfo.sec.gov/IAPD/Content/Common/crd_iapd_Brochure.aspx?BRCHR_VRSN_ID=602988).

Recent market volatility got you worried?

Click on the title above to watch a quick video about what to do (and what not to do).

If you have questions about market volatility, please feel free to contact Intelligent Investing at www.mynmfp.com/new-clients for a no-obligation consultation.

David L. Hogans, Esq. is an author and the founder of Intelligent Investing, Inc., a registered investment advisor firm located in Albuquerque, NM.  He earned his Bachelor of Science in Chemical Engineering (ChE) from Virginia Tech and his Juris Doctorate (JD) from the University of Dayton.  Mr. Hogans is licensed to practice law in the states of Virginia and New Mexico, as well as, before the Federal Patent Bar.  For more information about Mr. Hogans and his firm please see his filing with the Securities and Exchange Commission (SEC) (https://files.adviserinfo.sec.gov/IAPD/Content/Common/crd_iapd_Brochure.aspx?BRCHR_VRSN_ID=602988).

Taxes (and Rebalancing)!

We all should rebalance our portfolios at least annually or when they deviate from our desired asset allocation by a set percentage. I know, I know … portfolio rebalancing is right up there with pulling out the refrigerator and cleaning behind it. However, may I propose that rebalancing your portfolio is much more financially rewarding from a risk reduction perspective than one might imagine.

Now that we are entering our eleventh year of a bull market, an individual’s stock allocation could be off by more than 20% from their original 2009 asset allocation. For example, if your asset allocation in 2009 was 50% stock and 50% bonds, your stock exposure could exceed 60% or even 70% stock at this point (if you have not been rebalancing along the way). And, if you are on the cusp of entering retirement, this level of stock exposure is just too high for most investors.

If this sounds familiar, then the question you should be asking yourself is not “if” the stock market will experience a correction, but “when.” Since a decline in the stock market is inevitable at some point in the future, it then becomes a question about your sequence of returns risk (i.e., the order of your annual investment returns and withdrawals) and do these sequence of returns forecast a statistically successful retirement. Stated another way, if your stock allocation is too high and you experience a significant market decline in the early years of your retirement, you may be going back to work. Yuck.

With the before mentioned premise in mind, some folks might still balk at rebalancing because they are worried about triggering tax consequences. As such, here are some ways to rebalance while minimizing tax consequences:

• Rebalance inside of your tax advantaged accounts first (think IRAs and your 401k) because these trades will not trigger taxable events;

• If you are still directing money into your portfolio, use the “new” money to purchase additional shares of your underweight asset class(es);

• If you are subject to a Required Minimum Distribution (RMD), use the RMD to sell assets from the appreciated or overweight asset class(es);

• Rebalance by selling assets with a high cost basis, thereby reducing your tax liability; and/or

• Gift low cost basis assets to a charity, thereby removing these high capital gain assets from your portfolio while receiving the full appreciated value as a deductible donation.

If you have question about rebalancing your portfolio, please feel free to contact Intelligent Investing at www.mynmfp.com/new-clients for a no-obligation consultation.

For additional information about this topic, please click on the title above.

David L. Hogans, Esq. is an author and the founder of Intelligent Investing, Inc., a registered investment advisor firm located in Albuquerque, NM.  He earned his Bachelor of Science in Chemical Engineering (ChE) from Virginia Tech and his Juris Doctorate (JD) from the University of Dayton.  Mr. Hogans is licensed to practice law in the states of Virginia and New Mexico, as well as, before the Federal Patent Bar.  For more information about Mr. Hogans and his firm please see his filing with the Securities and Exchange Commission (SEC) (https://files.adviserinfo.sec.gov/IAPD/Content/Common/crd_iapd_Brochure.aspx?BRCHR_VRSN_ID=602988).

Dividend Paying Stocks or Bonds?

When considering this investment decision, you may want to ask yourself:

“What purpose do bonds serve in my portfolio”?

Typically, core bond positions within a portfolio are designed provide non-correlated returns when viewed against equity positions, thereby providing a ballast to ones overall portfolio during turbulent market times. However, in order to achieve this non-correlation, your bond portfolio needs to comprise higher quality bonds and would need to avoid below investment grade debt (generally speaking). Unfortunately, higher quality bonds do not yield a high payout but, instead, yield a relatively low payout due to their perceived low risk (as with equities, less risk within the bond market means less reward or yield). Hence, why investors ask themselves if they should use dividend paying stocks in place of bonds because some dividend paying companies have similar or higher yields than commonly employed bond funds, are typically deemed more stable (or less risky) than other stock investments, and may additionally benefit from the upside potential of the stock price. Sounds reasonable, doesn’t it?

Why might dividend paying stocks in place of bonds not be a good idea? Here are two potential considerations:

• stocks (including dividend paying stocks) exhibit a much higher standard deviation than high quality bonds, i.e., their returns can vary greatly from one year to the next - stated another way, stock returns are much more volatile than bond returns (and volatility is not your friend in a down market); and

• dividend paying stocks exhibit a higher correlation with stock market movements than do bonds, i.e., dividend paying stocks are more likely to lose value when the overall stock market declines, whereas high quality bonds should lose less value (and possibly even gain value).

If you have question about whether it is better to purchase dividend paying stocks or bonds, please feel free to contact Intelligent Investing at www.mynmfp.com/new-clients for a no-obligation consultation.

For additional information about this topic, please click on the title above.

Why Does Warren Buffett Prefer a "Wide" Economic Moat?

Because it leads to investing success, that’s why! Companies with an economic advantage or “moat” around their business have an edge over their competitors that helps to protect their market share and profitability. Furthermore, companies exhibiting a “wide” economic moat are usually even more difficult to challenge or duplicate because their distinct advantage essentially creates an effective barrier to entry for other market participants, i.e., other competing companies.

What types of distinct advantages or barriers create these “wide” economic moats:

• markets or businesses with exceptionally high start-up costs (think Intel and the cost of creating multiple semiconductor manufacturing facilities);

• businesses utilizing scale advantages that lower operating costs (think Wal-Mart’s ability to pressure a supplier’s pricing versus a smaller retailer);

• businesses with strong brand recognition (think Coke or Gucci); and/or

• businesses with a strong patent portfolio (think Pharmaceutical Companies or Apple).

Companies that exhibit some of these advantages for Mr. Buffett include: Geico (due to their low operating costs), Coke (brand recognition), and Burlington Northern Santa Fe Railway (high start-up costs). The next time you are looking for a good stock, don’t forget to think about that company’s economic advantage or “moat.”

If you have question about whether or not a company seems to exhibit a “wide” economic moat, please feel free to contact Intelligent Investing at www.mynmfp.com/new-clients for a no-obligation consultation.

For additional information about this topic, please click on the title above.