Beyond the Market: Understanding Your Investment Performance

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Sometimes, it pays to strive for greener grass. But as an investor, second-guessing a stable strategy can leave you in the weeds. Trading in reaction to excitement or fear tricks you into buying high (chasing popular trends) and selling low (fleeing misfortunes), while potentially incurring unnecessary taxes and transaction costs along the way. 

Still, what do you do if you’re unsure about how your investments stack up?

Compared to the Stocks du Jour?

It’s easy to be dazzled by popular individual stocks or sectors that have been earning more than you have and wonder whether you should get in on the action. 

You might get lucky and buy in ahead of the peaks, ride the surges while they last, and manage to jump out before the fads fade. Unfortunately, even experts cannot foresee the countless coincidences that can squash a high-flying holding or send a different one soaring. To succeed at this gambit, you must correctly—and repeatedly—decide when to get in, and when to get out … in markets where unpredictable hot hands can run anywhere from days to years. 

Remember, too, just by investing your money in the global stock market overall and sitting tight, you’ll probably already own some of today’s hot holdings. You’ll also automatically hold some of the next big winners, before they surge (effectively buying low).  

Rather than comparing your investments to the latest sprinters, be the tortoise, not the hare. Get in, stay in, and focus on your own finish line. It’s the only one that matters.

Compared to “The Market”?

What if your investments seem to be performing differently not just from the high-flyers, but from the entire market? Maybe you’re seeing reports of “the market” returning a different amount than what you are experiencing. 

Remember, when a reporter, analyst, or other experts discusses market performance, they’re usually citing returns from the S&P 500 Index, the DJIA, or a similar proxy. These popular benchmarks often represent one asset class: U.S. large-cap stocks. As such, it’s highly unlikely your own portfolio will always be performing anything like this single source of expected returns. 

Most investors instead prefer to balance their potential risks and rewards. For example, if your portfolio is a 50/50 mix of stocks and bonds, you should expect it to underperform an all-stock portfolio over time. But it also should deliver more dependable (if still not guaranteed) returns in the end, along with a relatively smoother ride along the way. 

Even if you’re more heavily invested in stocks than bonds, a well-diversified stock portfolio will typically include multiple sources of risks and returns, such as U.S., international, and emerging market stocks; small- and large-cap stocks; value and growth stocks; and other underrepresented sources of expected return. 

Thus, we advise against comparing your portfolio’s performance to “the market.” Usually, any variance simply means your well-structured, globally diversified portfolio is working as planned. 

In Summary

Admittedly, it can be easier said than done to avoid inappropriate performance comparisons across shifting times and unfolding events. But your portfolio should be structured to reflect your financial goals and your ability to tolerate the risks involved in pursuing your desired level of long-term growth. 

In roaring bull and scary bear markets alike, we team up with you to address these critical questions about your investments. That way, you can accurately assess where you stand and where you’d like to go from here. 

Please reach out to your advisor if you’d like to discuss further. We are always here for you!

WSWA

Warren Street Wealth Advisors

Warren Street Wealth Advisors, LLC., a Registered Investment Advisor

The information presented here represents opinions and is not meant as personal or actionable advice to any individual, corporation, or other entity. Any investments discussed carry unique risks and should be carefully considered and reviewed by you and your financial professional. Nothing in this document is a solicitation to buy or sell any securities, or an attempt to furnish personal investment advice. Warren Street Wealth Advisors may own securities referenced in this document. Due to the static nature of content, securities held may change over time and current trades may be contrary to outdated publications. Form ADV available upon request 714-876-6200.

Financial Quick Takes: Making Mistakes

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Nobody wants to make investment mistakes. And yet, we’re human; mistakes happen. Here’s how to minimize the ones that matter the most, and make the most of the ones that remain. 

Bad Decisions vs. Bad Outcomes

First, let’s define what we’re talking about: 

Investment mistakes happen when you make bad decisions, regardless of whether the outcome is good or bad. 

Bad decisions are the ones a rational investor would not make. For example: 

  • Failing to spread your risks around: Concentrating in too few securities, instead of diversifying across many, and many types of investments. 
  • Confusing speculating with investing: Chasing or fleeing hot trends, instead of structuring your total portfolio to capture expected market growth over time. 
  • Taking on too much or too little investment risk for your circumstances: Investing too conservatively or too aggressively for your financial goals and risk tolerances.  
  • Overlooking taxes: Spending more than necessary to participate in the market’s expected long-term growth. 
  • Succumbing to harmful behavioral biases: Acting on gut feel over rational resolve. 

These common investment mistakes share a recurring theme: By making wise decisions about that which you can control, you can best prepare for that which you cannot. 

Damage Control

Consider auto insurance as an analogy with similar controllable choices and random risks. From hail storms to hit-and-runs, misfortunes happen. They are not your fault; they are not your mistake. But you insure against them anyway, since they can still generate a substantial loss. 

You also do all you can to minimize your “at fault” errors. You don’t drive while impaired. You keep your vehicle in safe repair. You observe traffic laws. None of these sound decisions guarantee success, but they appreciably increase the odds you’ll remain accident-free. 

As an investor, you can take a similar approach:

Mistake-free investing does not guarantee success. Rather, it improves your odds for happy outcomes, while softening the blow if misfortune strikes.

It’s worth noting, even if you make all the right investment decisions for all the right reasons, random misfortune can still strike. If it does, it would be a mistake to decide your prudent investment strategy was to blame. It would be an even worse mistake to abandon that strategy because you’ve encountered the equivalent of a market hit-and-run. This would be like dropping your insurance coverage because it didn’t prevent the accident to begin with.  

The Upside of Making Investing Mistakes

“I’ve failed over and over and over again in my life. And that is why I succeed.” — Michael Jordan

As just about any star athlete will tell you, the path to success is paved with errors. The same can be said about investing. The occasional misguided decision may even be good for you as an investor—especially if it’s made when the stakes are smaller and time is on your side. 

The point is, if you’ve made investment mistakes in the past, don’t beat yourself up over them, or make more mistakes trying to “fix” the past (such as deciding you’ll never invest again after being burned by the market). Often, your best move is to identify which investment mistakes were involved, embrace the lessons learned, and give yourself permission to move on. 

Admittedly, if you made an investment that didn’t pay off as you hoped for, it may be hard to know just what went wrong. Was it you, the whims of the market, or both? 

Among our chief roles as a financial advisor is to help you sort out investment errors from market misfortunes, so you can move forward with greater resolve. Sometimes, this means adjusting your portfolio to reflect evolving personal financial goals or targets. Often, it means convincing you to stay the course with your already-solid plan. Either way, your future is not yet written. Reach out to us today if we can help you make the most of your next steps.

WSWA

Warren Street Wealth Advisors

Warren Street Wealth Advisors, LLC., a Registered Investment Advisor

The information presented here represents opinions and is not meant as personal or actionable advice to any individual, corporation, or other entity. Any investments discussed carry unique risks and should be carefully considered and reviewed by you and your financial professional. Nothing in this document is a solicitation to buy or sell any securities, or an attempt to furnish personal investment advice. Warren Street Wealth Advisors may own securities referenced in this document. Due to the static nature of content, securities held may change over time and current trades may be contrary to outdated publications. Form ADV available upon request 714-876-6200.

Chevron 401(k) Changes: Unpacking Your New Funds

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As a retired Chevron employee and financial advisor, I’m constantly keeping my finger on the pulse of what’s happening at the company. Last month, Chevron sent a letter to employees announcing that, as of June 1, the funds in their retirement plans will be changing. 

Given these updates, I wanted to take the time to make sure my Chevron connections understand what’s happening — and what it could mean for your portfolio.

What’s changing?

The gist is this: on June 1, 2023, your Fidelity NetBenefits account will reflect new investment choices. In many cases, your money will be automatically allocated to new funds. For example, If you’re currently in a Vanguard Target Retirement Date Fund, this will map to a BlackRock LifePath® Index Fund. All in all, the 16 existing investment choices will be funneled down into just 11 choices. This applies to both the Employee Savings Investment Plan (ESIP) and Deferred Compensation Plan (DCP).  

In my opinion, the most impactful change is the consolidation of three equity funds — Vanguard 500 Index, Vanguard Large Cap Value Index, and Vanguard PRIMECAP — into just one equity fund, the “Equity Index.” This is tricky, because for many people, it made sense to hold a pure S&P 500 fund such as the Vanguard 500 Index. Pure S&P 500 funds allow you to “own” the largest 500 companies in the US, compared to the “Equity Index,” which is more of a mix. 

We are currently investigating this and the other new funds to understand exactly what they entail and how they will interact with the rest of your portfolio.

What should you do?

This fund consolidation is neither good nor bad; however, it does mean that you should talk to an advisor about the impact it will have on your portfolio. The new funds have different risk and return profiles, expense ratios, and diversification characteristics than the old funds, and they’re not necessarily a direct map. It’s critical that you confirm your new funds still support your future retirement goals. 

No matter your age or retirement goals, it’s always a good practice to review your 401(k) plan on a regular basis and make sure it still aligns with your needs. The updates to the Chevron 401(k) plans are a good reminder to take a close look at yours and make any necessary changes.

If you don’t already have an advisor or are looking for a new one, I’m also happy to speak with you (no charge) about your portfolio. I’ve been helping Chevron colleagues and clients for more than 40 years and am an expert on the company’s employee benefits package. I’m available to answer any questions you have about the upcoming changes. 

Feel free to give me a call at 714-876-6200 or book time with me if you’d like to chat. I hope to hear from you and am here to help!

Len Hanson

Wealth Advisor, Warren Street Wealth Advisors

Investment Advisor Representative, Warren Street Wealth Advisors, LLC., a Registered Investment Advisor

The information presented here represents opinions and is not meant as personal or actionable advice to any individual, corporation, or other entity. Any investments discussed carry unique risks and should be carefully considered and reviewed by you and your financial professional. Nothing in this document is a solicitation to buy or sell any securities, or an attempt to furnish personal investment advice. Warren Street Wealth Advisors may own securities referenced in this document. Due to the static nature of content, securities held may change over time and current trades may be contrary to outdated publications. Form ADV available upon request 714-876-6200.

2023 Investment Update

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Every January, it’s typical to reflect on market data from the year past. You’ll see the results in your own quarterly reports, as well as across the usual flurry of broad market analyses. 

Even when the numbers aren’t what we’d prefer—which has certainly been the case for 2022—we look at them anyway. It’s good to keep an eye on your annual investment returns, as they are one consideration among many that guide your financial plans. 

However, whether the numbers are up or down in any given year, we caution against letting them alter your mood, or as importantly, your portfolio mix. When it comes to future expected returns, a year’s performance is among the least significant determinants available.

To illustrate, consider what happened in 2022, and how global markets reacted. 

In the thumbs-down category, U.S. stock market indexes turned in annual lows not seen since 2008, with most of the heaviest big tech stocks taking a bath. Bonds fared no better, as the U.S. Federal Reserve raised rates to tamp down inflation. The U.K.’s economic policies resulted in Liz Truss becoming its shortest-tenured prime minister ever, while Russia’s invasion of Ukraine and China’s continued COVID woes kept the global economy in a tailspin. 

On the plus side, inflation has appeared to be easing slightly, and so far, a recession has yet to materialize. A globally diversified, value-tilted strategy has helped protect against some (certainly not all) of the worst returns. An 8.7% Cost-of-Living Adjustment (COLA) for Social Security recipients has helped ease some of the spending sting, as should some of the provisions within the newly enacted SECURE 2.0 Act of 2022 here. 

Now, how much of this did you see coming last January? Given the unique blend of social, political, and economic news that defined the year, it’s unlikely anything but blind luck could have led to accurate expectations at the outset. 

In fact, even if you believe you knew we were in for trouble back then, it’s entirely possible you are altering reality, thanks to recency and hindsight bias. The Wall Street Journal’s Jason Zweig ran an experiment to demonstrate how our memories can deceive us like that. Last January, he asked readers to send in their market predictions for 2022. Then, toward year-end, he asked them to recall their predictions (without peeking). The conclusion: “[Respondents] remembered being much less bullish than they had been in real time.” 

In other words, just after most markets had experienced a banner year of high returns in 2021, many people were predicting more of the same. Then, the reality of a demoralizing year rewrote their memories; they subconsciously overlaid their original optimism with today’s pessimism. 

Where does this leave us? Clearly, there are better ways to prepare for the future than being influenced by current market conditions, and how we’re feeling about them today. Instead, everything we cannot yet know will shape near-term market returns, while everything we’ve learned from decades of disciplined investing should shape our long-range investment plans. 

We wish you and yours a happy and healthy 2023, come what may in the markets. Please let us know of any new ways we can further your financial interests at this time. This, and every year, we remain grateful for your business.

Blake Street, CFA, CFP®

Founding Partner & Chief Investment Officer, Warren Street Wealth Advisors

Investment Advisor Representative, Warren Street Wealth Advisors, LLC., a Registered Investment Advisor

The information presented here represents opinions and is not meant as personal or actionable advice to any individual, corporation, or other entity. Any investments discussed carry unique risks and should be carefully considered and reviewed by you and your financial professional. Nothing in this document is a solicitation to buy or sell any securities, or an attempt to furnish personal investment advice. Warren Street Wealth Advisors may own securities referenced in this document. Due to the static nature of content, securities held may change over time and current trades may be contrary to outdated publications. Form ADV available upon request 714-876-6200.

Letter to Clients on Market Volatility

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Year to date, 2022 is in bear market territory across multiple markets. To place that news in meaningful context, we pose two questions: 

  1. In better times, had you boldly “pre-decided” what you would and would not do during the next bear market? 
  2. Even if you had disciplined bear market plans in place, have you been wondering whether you should un-decide anything anyway? 

Admittedly, it’s a tall order to whistle past the graveyard of recent market returns without being haunted by at least a dash of indecision. Given how unsettling many third quarter and year-to-date events and performances have been, you may struggle to un-notice the usual swarm of hand-wringing predictions and “this time it’s different” warnings about what may lie ahead. 

Perhaps the scariest part isn’t necessarily the numbers themselves, as much as the lingering uncertainty of it all. When will the pain end? 

Unfortunately, we can’t answer that, or guarantee the doomsday predictors aren’t right. But we can be inspired to reframe the uncertainty and understand what to make of it based on recent reflections from Dimensional Fund Advisors’ David Booth: 

“You can feel empowered by uncertainty instead of beaten down by it. Without uncertainty, there would be no opportunity. … If you think about it, the life equivalent of compound interest is wisdom. Learning from the past helps you make better decisions in the future, and those lessons build on one another over time.”

In that context, let’s look back to the last time we encountered some of the inflationary and potentially recessionary economic conditions we’re currently enduring. We now have the compound wisdom to know just how wrong an infamous 1979 BusinessWeek cover story turned out to be when it declared “The Death of Equities.” Eventually, BusinessWeek rolled into Bloomberg’s publications. Forty years later, in 2019, a Bloomberg columnist described how they were “still getting grief” about it:

“Three years after [“The Death of Equities”] appeared, the stock market hit bottom and then began a remarkable resurgence. The total return on the Standard & Poor’s 500-stock index since its 1982 low, with dividends reinvested, has been nearly 7,000%. Not bad for a corpse.”

It would’ve been a bad idea to give up on capital markets in 1979. It remains a bad idea to give up on them today, especially given the compound wisdom we’ve acquired since then. Durable, well-diversified asset allocation remains our best strategy in bull and bear markets alike. 

“Great investment experiences treat most portfolio decisions as non-decisions. They’ve been pre-decided, and are immune to market prices, sentiment, and human judgment. They remove agency, and thus reduce regret.” 

— Rubin Miller, Fortunes & Frictions

We encourage you to recall everything we’ve already done to manage your globally diversified mix of stock, bond, and appropriate alternative investments. We’ve based your portfolio on the assumption that markets are durable over the years and frequently uncertain in real time (and yes, as we’re seeing, that can apply to bond markets, too). We can also discuss myriad bear market actions worth considering at this time, such as:

  • Sticking with your well-planned portfolio mix (reallocating when appropriate for your personal financial goals).
  • Periodically rebalancing to stay on target. 
  • Tax-loss harvesting in your taxable accounts.
  • Adding even more investable assets to your portfolio while prices are low (especially if you’ve got a long time to invest). 
  • Taking a close look at your discretionary spending (especially if you’re in early retirement).

How else can we assist you and yours at this time? Please let us know if we can answer any questions about current market conditions, or anything else that may be on your mind.

Kirsten C. Cadden, CFP®

Associate Advisor, Warren Street Wealth Advisors

Investment Advisor Representative, Warren Street Wealth Advisors, LLC., a Registered Investment Advisor

The information presented here represents opinions and is not meant as personal or actionable advice to any individual, corporation, or other entity. Any investments discussed carry unique risks and should be carefully considered and reviewed by you and your financial professional. Nothing in this document is a solicitation to buy or sell any securities, or an attempt to furnish personal investment advice. Warren Street Wealth Advisors may own securities referenced in this document. Due to the static nature of content, securities held may change over time and current trades may be contrary to outdated publications. Form ADV available upon request 714-876-6200.

Tax Loss Harvesting: How to Make the Most Out of Market Volatility

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When we invest money, our main objective is to see the money grow. When we think about market losses and downturns, we may think of painful periods where we watch our account balances decrease instead of grow. While market losses are never fun, they are unfortunately a part of the normal investment life cycle. However, when market volatility hands us losses, there are some options to make lemonade out of lemons.  

What is tax loss harvesting?

Tax loss harvesting is the process of selling securities while they are at a loss, realizing that loss for tax purposes, and then redeploying that money into another investment (such as a different stock, bond, or mutual fund). The IRS does not allow you to sell an investment at a loss, receive the tax benefit, and then immediately reinvest those proceeds into the exact same security right away. Selling a security and re-purchasing it within the same 30-day window is called a “Wash Sale.” You can avoid triggering the Wash Sale rule by investing in something similar but different enough to avoid having the rule apply.

While most people will tend to do this only once at year end, this is actually something that can be done at any time in the year with no limit as to how frequently you do so. With custom indexing and commission-free trading, frequent tax loss harvesting has become more achievable than ever. In years of high volatility, frequently harvesting tax losses can have a big impact on your tax bill.  

Keep in mind that for this strategy to work, you must have capital invested in a taxable, non-retirement brokerage account. Your 401(k) and IRA are not eligible for tax loss harvesting.

How does it benefit you?

In years of extreme volatility, you may be able to accumulate a large amount of tax losses in a short period of time. These losses can then be used to offset future capital gains.  If you end up with more tax losses than you have gains to offset them in any given year, you can use the losses to offset up to $3,000 of ordinary income on your tax return.  

You will be able to carry forward an unlimited amount of these losses into future tax years until you’ve been able to use them up.

Tax loss harvesting can be especially useful for investors who might have highly concentrated company stock with a large amount of unrealized gains, or other legacy investments that they’ve been holding onto to avoid a large tax impact. These tax losses can be used to help decrease single stock risk and sell off legacy assets with little to no tax impact.

What are the next steps?

If you are a Warren Street client, we are already doing this for you (as applicable).  For clients with larger taxable brokerage accounts invested in our custom indexing strategy, you will likely see tax loss harvesting happening on a more frequent basis.  

All in all, seeing losses reported on your Form 1099 form is not necessarily a bad thing. While your long term objective remains the same in terms of seeking growth, taking advantage of short term volatility through tax loss harvesting can lead to a nice tax perk that can aid in your overall financial return on investments in the long run.

If you have any questions or would like to speak with one of our advisors for complimentary portfolio review, you can schedule a consultation here. 

Justin Rucci

Justin D. Rucci, CFP®

Wealth Advisor, Warren Street Wealth Advisors

Investment Advisor Representative, Warren Street Wealth Advisors, LLC., a Registered Investment Advisor

The information presented here represents opinions and is not meant as personal or actionable advice to any individual, corporation, or other entity. Any investments discussed carry unique risks and should be carefully considered and reviewed by you and your financial professional. Nothing in this document is a solicitation to buy or sell any securities, or an attempt to furnish personal investment advice. Warren Street Wealth Advisors may own securities referenced in this document. Due to the static nature of content, securities held may change over time and current trades may be contrary to outdated publications. Form ADV available upon request 714-876-6200.

Actions to Take in a Market Downturn

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Market downturns are an expected part of investing, but they can be painful and nerve-racking nonetheless. Investors often want to take action or make changes during these times. Predicting which way the market will move in the short term is nearly impossible; short-term changes usually work against us. Below you will find some actions that you can take during a market pullback that will often yield positive results.  

Here are some potential actions to take during a market downturn:  

  • Continue to invest. Market downturns may provide an opportunity to buy into the market at a lower entry point. Consider increasing your savings and investing rate during this time.  
  • Tax loss harvesting. Loss harvesting is a way to turn lemons into lemonade. Loss harvesting allows investors to take advantage of their portfolio losses by realizing the losses and using them to reduce taxable income.  
  • Hold off on large withdrawals. Wait until the market recovers to make larger-than-usual portfolio withdrawals.  
  • Overall financial planning check-up. Now is a good time to take care of any financial planning items that have been lingering on your to-do list. Check your beneficiaries, review your estate documents, and review your insurance coverage. The market is not in your control, so take a minute to review and manage anything that is in your control.  
  • Check your 401(k) allocation and contributions. Make sure you are on track to receive any company matching contributions.  
  • Roth conversions. Roth conversions are case-by-case specific, but generally speaking periods of market volatility may create opportunities for Roth conversions. The idea is to convert funds from a Regular to a Roth IRA while your account value is low, decreasing the amount of tax generated from the conversion. Assuming the market eventually recovers, your newly converted Roth dollars will appreciate tax free (assuming you meet all the other criteria necessary for Roth tax treatment). This scenario works best when you are in a low tax bracket and have the cash to pay tax on the conversion.
  • Rebalance your portfolio. Rebalancing your portfolio often forces you to sell high and buy low, even during periods of market downturn. By rebalancing during volatility, you are selling the funds that have held up better (typically bonds and other diversifiers), and reinvesting into the areas that have pulled back. This forces you to “buy the dip.” If/when the weaker parts of your portfolio recover, you participate more fully.  
  • Reevaluate your risk level. Market corrections provide an opportunity to increase your risk level (i.e., your stock exposure) and to take advantage of lower stock prices.  Typically these periods are not a good time to lower risk by selling stocks unless your goals and/or investment time horizon has changed.  

Usually the best action is no action. If you’re not in a position to save more, sticking to your long-term allocation and plan is likely the best way to weather market turbulence. Market corrections will continue to happen over the course of your investing life. While overall the long term trend tends to be upward, corrections will typically happen every few years.  During turbulent times, emotional decision-making often works against us.

The chart below illustrates how the S&P 500 has performed after a variety of global events and conflicts since 1950.  You can see that in most cases, the market has had strong performance in the years following a crisis.  

Please feel free to reach out to us if you have any questions. If you would like to speak with one of our advisors for complimentary portfolio review, you can schedule a consultation here. 

Emily Balmages, CFP®, CRTP

Director of Financial Planning, Warren Street Wealth Advisors

Investment Advisor Representative, Warren Street Wealth Advisors, LLC., a Registered Investment Advisor

The information presented here represents opinions and is not meant as personal or actionable advice to any individual, corporation, or other entity. Any investments discussed carry unique risks and should be carefully considered and reviewed by you and your financial professional. Nothing in this document is a solicitation to buy or sell any securities, or an attempt to furnish personal investment advice. Warren Street Wealth Advisors may own securities referenced in this document. Due to the static nature of content, securities held may change over time and current trades may be contrary to outdated publications. Form ADV available upon request 714-876-6200.

Series I Bonds: Are They Right For You?

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Series I bonds offer a low-risk, interest-earning addition to your portfolio. As part of a well-diversified portfolio strategy, now may be a good time to put some additional cash into I bonds and take advantage of an attractive interest rate.

What is a Series I bond?

A Series I bond is issued by the US Treasury. The bond accrues interest monthly until it reaches 30 years or you cash it, whichever comes first.

An I bond has two interest rates – the fixed rate and the inflation rate. These two rates combine to determine a bond owner’s actual rate of return, called the composite rate. A new rate will be set every six months based on the fixed rate and on inflation.

The US Treasury limits the composite rate to no less than 0%, meaning the rate of return on I bonds will never be negative.

What’s the benefit?

The composite rate on Series I bonds is currently 9.62% (annualized). Though the interest rate is variable and will change over time, purchasing I bonds now guarantees that you will earn this interest rate until October 2022 when the new rate is set for the next 6 months.

Are there risks?

An I bond is considered an extremely low risk investment. However, the ultimate rate of return is variable and not guaranteed beyond the current 6-month rate. The current interest rate is high because inflation is higher than usual – if Federal Reserve policy reduces inflation the inflation rate for I bonds will also decrease.

Note that an I bond cannot be redeemed for at least one year after purchase, and any redemption between years 1 and 3 does not receive the interest from the three months prior to redemption.

How do I buy a Series I bond?

Visit treasurydirect.gov to purchase electronic I bonds. An I bond must be purchased directly by the investor; it is not something your advisor can add to your portfolio for you. Series I bonds purchased electronically come in any amount to the penny for $25 or more. Paper I bonds can be purchased using your federal income tax refund. The amount of a bond purchased is limited to $10,000 per person per year.

Are I bonds right for me?

Determining what investments are the best fit for you depends on several factors: your age, the timeline for when you need to withdraw from investments, your comfort with risk, and your overall financial health. If you have some cash that is not part of your basic emergency fund and you do not need it in the next 1-3 years, I bonds may be a good choice. However, as with all investing decisions, we recommend consulting with your financial advisor to determine if I bonds are the best fit for your unique situation.

Kirsten C. Cadden, CFP®

Associate Advisor, Warren Street Wealth Advisors

Investment Advisor Representative, Warren Street Wealth Advisors, LLC., a Registered Investment Advisor

The information presented here represents opinions and is not meant as personal or actionable advice to any individual, corporation, or other entity. Any investments discussed carry unique risks and should be carefully considered and reviewed by you and your financial professional. Nothing in this document is a solicitation to buy or sell any securities, or an attempt to furnish personal investment advice. Warren Street Wealth Advisors may own securities referenced in this document. Due to the static nature of content, securities held may change over time and current trades may be contrary to outdated publications. Form ADV available upon request 714-876-6200.

Part 3: A Lookback at Q1 and Portfolio Impact

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If you’re talking with friends about market volatility, pessimists may say “downward is the only way forward,” but optimists like us will continue to share the sentiment that “We Will Prevail,” which is based on our assessment of history, data, and our go-forward market outlook.

For those of you who caught that subtle reference from the movie Inception, maybe you’re getting a taste for how big of a cinephile I am. For those who didn’t – no sweat; let’s wrap up this series of blog releases by assessing the first quarter’s market performance. 

Before diving in, it’s important to note the macroeconomic trends that are primarily driving market risk: 1) the tightening of financial conditions and 2) the war in Eastern Europe. The Federal Reserve and other Central Banks are raising interest rates to calm inflation. Meanwhile, Russia’s invasion of Ukraine has had knock-on effects economically, particularly in Europe. With that in mind, see below for how markets are ending the first quarter.

Exhibit A – Asset Class Performance in 2022

Source: YCharts

The Laggards

Looking at Exhibit A, bonds, followed by US Large Growth names (i.e., AMZN, AAPL), and international stocks (i.e., emerging markets and Europe stocks) are lagging. 

  • Bonds Begrudgingly Behind: recent bond volatility can be attributed to inflation and rising interest rates. Inflation diminishes the purchasing power of a bond’s interest payments, while interest rate hikes apply downward price pressure on the value of a bond (you can now find a similar bond in the market yielding a higher rate). 
  • Growth Names Falter: This asset class includes larger companies that are typically more expensive (e.g., Amazon, Apple), with stock prices that are highly dependent on future earnings growth. However, rising interest rates are raising the cost of borrowing, which depletes the value of a company’s future cash flows and are skewing growth names to the downside.

Exhibit B – How Are Big Tech Stocks Doing?

  • International Stocks Give Up Ground: At the start of the year, international stocks including European, Australian, and Far East (EAFE) and Emerging Markets (e.g., China, Brazil) equities outperformed domestic markets. US markets were being punished for an overweight to growthier names amid interest rate hikes. Most recently, the Russian invasion of Ukraine has dampened investor appetite for the international scene, overturning the region’s initial outperformance. 

Exhibit C – The Race Between International and the US

Source: YCharts

Leaders

  • Gold Shines Bright: After a lackluster 2021, gold regained its shine this past quarter. Geopolitical uncertainty, coupled with a distrust of central banks to tame inflation, has resulted in sizable outperformance from the precious metal.
  • Value Names Triumph: While US Large Growth suffers from tighter financial conditions, investors are paying more attention to company profitability. US Large Value typically consists of companies that are larger, have a long-standing business model, and proven profitability. Examples include Target, Walmart, and Disney. 
  • S&P 500 Recovers: After a weak start to the year (at one point being down 12% year-to-date), the S&P 500 has largely regained lost ground. Although the expectation of rate hikes remains a risk to the broader index, domestic markets have been favorable given a relatively unthreatening economic impact from the Eastern European war.

Takeaways, Portfolio Impact and Our Game Plan

Takeaways – Is the 60/40 Portfolio Dead? A 60/40 portfolio has long been coveted as the standard for a “moderate” risk investor, with a 60% allocation to stocks and a 40% allocation to bonds. The bond allocation is meant to mitigate volatility during downturns, but with today’s largely challenged bond environment, the asset class has not cushioned investors during this recent equity sell-off. 

Source: YCharts

Exhibit C includes the annual returns of a 60/40 portfolio, the global stock index (Ticker: ACWI), and the passive bond index (Ticker: AGG). Over the years, bonds have served as a protector against equity volatility, capturing a fraction of an equity market drawdown. However, thus far in 2022, bonds are selling off more than equities. Therefore, investors should not expect to receive similar risk-adjusted returns they did in the past for a traditional 60/40 portfolio – at least in the near term.  

Portfolio Impact – Thinking Outside the Box: With the 60/40 structure in jeopardy and bonds to endure some short-term pain, a different approach should be considered. Enter Warren Street’s Real Assets sleeve – or what we like to call “Diversifiers” – which consist of real assets that typically benefit from inflation (i.e., gold, natural resources, and real estate).

Last summer, after acknowledging the adverse circumstances of the bond realm, Warren Street proceeded to underweight bonds and overweight diversifiers within blended models on top of initiating a position in a commodities fund. This trade has rewarded our portfolios and cushioned the bond and equity sleeves amid the most recent 2022 sell-off.

Our Game Plan – An International Resurgence: With Diversifiers outpacing stocks, our team rebalanced real assets into equity weakness, effectively selling high and buying low. We will continue to monitor momentum within Diversifiers and the bond landscape before returning to our neutral weights. 

The looming question remains on our equity strategy, which incurred relative underperformance attributed to our overseas exposures. Although Russia’s military invasion overturned initial outperformance against domestic markets (see Exhibit C), we believe there is significant headroom for an international equity resurgence should the war abate. 

Albeit still unpredictable, Ukrainian resistance is increasing the probability for a ceasefire. Couple that with the pandemic transitioning to an endemic, a US market that is more sensitive to central bank reserve tightening and attractive valuations overseas, we continue to remain optimistic about our clients being rewarded for their patience and for avoiding home-country bias. 

Conclusion

You’ll hear us say it time and time again: control what you can control. Throughout this quarter, our team has tax-loss harvested in accounts amid sell-offs, rebalanced diversifiers into equity weakness, and thoroughly assessed the impact of conditions #1 and #2 mentioned above in our portfolios.

Outside of portfolio strategy, we’ve made strides in uploading more content on socials, blogs, and video formats to upkeep communications beyond our client meetings. We encourage you to read recent blog releases pertaining to the war in Ukraine and to give us a follow on social media. 

Ultimately, the movie inception is about planting an idea and allowing it to grow. I’m no extractor or architect of dreams, but let me attempt to fortify my parting idea once more: “We Will Prevail.”

Phillip Law, Portfolio Analyst

Wealth Advisor, Warren Street Wealth Advisors

Investment Advisor Representative, Warren Street Wealth Advisors, LLC., a Registered Investment Advisor

The information presented here represents opinions and is not meant as personal or actionable advice to any individual, corporation, or other entity. Any investments discussed carry unique risks and should be carefully considered and reviewed by you and your financial professional. Nothing in this document is a solicitation to buy or sell any securities, or an attempt to furnish personal investment advice. Warren Street Wealth Advisors may own securities referenced in this document. Due to the static nature of content, securities held may change over time and current trades may be contrary to outdated publications. Form ADV available upon request 714-876-6200.

Part 2: Assessing War and the State of the Global Economy

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Don’t Miss the Big Picture 

With news outlets centered on Eastern Europe, it is easy to miss the bigger economic picture both globally and domestically. For a broader assessment, it helps to understand how Russia fits into the global economy. Prior to the invasion, the Kremlin represented just 3.11% of global GDP.  

To further illustrate, Exhibit A and Exhibit B portray the size of Russia’s economy, population, and percent makeup of the global stock market compared to other countries. Looking at Exhibit A, Russia has the largest population of this subset, yet its economy (the size of the bubble) is smaller than Texas. Thus, the war’s direct effect on global growth was already limited even before indices deemed Russia as “uninvestable” or before western parties imposed sanctions.  

Exhibit A – Russia’s Economy is Smaller Than Texas 
 Exhibit B – Russia is Miniscule compared to the US, China, and India  

Zooming out in Exhibit B, you can assess just how small Russia is relative to the United States and its Asian neighbors China and India.  

The State of the West 

Before discussing other nations, let’s cover our home turf. Within the United States, we have successfully fended off the Omicron wave. COVID-19 data is trending in the right direction, pandemic related pressures (i.e., labor market, car prices) are slowly easing (Exhibit C), and consumer balance sheets are rock-solid (Exhibit D).  

Exhibit C: The Labor Market is Loosening, and Inventories are Building 
Exhibit D.1: Debt as a % of Consumer Incomes

Exhibit D.2: Consumers Have a Record $2.4T in “Excess Savings”

Although the threats of additional COVID-19 variants and prolonged inflation linger, our economy is expected to produce above-trend economic growth (see Exhibit E). In fact, economists remain optimistic about the US economy, with the median 2022 real gross domestic product forecast only revised 0.10% downwards after the invasion of Ukraine.  

Other major economies (particularly in Europe) are more at risk for an economic slowdown attributed to higher energy prices (i.e., over $120/barrel for Brent Crude driven), or what we call “pain –at –the– pump.”  

Although Europe derives 40%+ of its natural gas from Russia and Ukraine, we expect that new measures targeting energy independence and militaristic efforts will have positive long-standing effects on European growth despite interim road bumps. For some near-term perspective, European nations are still expected to grow GDP above their long-term forecasts in 2022 (see Exhibit E).

Exhibit E: How Much Are Our Economies Expected to Grow in 2022?

Commodity Chaos – Not to be Overlooked 

Although the war’s direct effect on global growth is likely to be meager, indirect pressures on commodity prices are a larger concern, as they may diminish the purchasing power of disposable incomes. Russia is the world’s second largest oil producer behind the US, and accounts for 12% of global production. Also, Russia and Ukraine make –up 25% of global wheat exports, 33% of global corn trade, and 80% of sunflower oil production.  

What happens if sanctions are imposed, or if nations surrender agricultural practices to fight on the battlefield? The price of electricity in your factories will rise. Middle eastern nations reliant on wheat imports (i.e., Egypt and Lebanon) must ration appropriately. Chinese-grown hogs – which feed on corn – are more expensive to raise. Lastly, the price of that bag of Ruffles (made from sunflower oil) is expected to increase. 

Exhibit F: Commodity Prices Are Rising

Where Do We Go from Here? 

Could this lead to inflation? Yes – we have already seen commodity prices surge exponentially. Does this mean that the US economy will fall to its knees? The probability of that is very low.  

After all, two-thirds of our nation’s economy is consumption-driven, and with consumers looking healthy and a central bank easing the economy into a higher rate environment, it is hard to envision a full-scale economic disaster unfolding. Even if we run into a recession, perhaps it will be much smaller than our recent lived experiences of the Great Recession and the Great Lockdown (2020 COVID-19 Pandemic).  

Our European neighbors will be more vulnerable over the next three months, especially with an energy embargo on Russia still on the table. However, between German Chancellor Olaf Scholz mobilizing its military (for the first time in 20 years), renewed sentiment on energy independence, and a newfound unity amongst the entire West, the European economy is exuberating a different luster and willingness to grow than it did in previous years. Should this war abate, we believe Europe could resume course towards full recovery and investors with allocations will be rewarded. 

A Stronger West, Once the War is Put to Rest 

Ultimately, our sentiment from part 1 of this series that “We Will Prevail” has not changed. We have endured many instances of short-term pain and come out victorious. This time is no different. I am confident that our economies – particularly the West — will emerge stronger and more united after this war is put to rest.  

Stay tuned in part 3 where we discuss asset class performance and portfolio impact! 

Phillip Law, Portfolio Analyst

Wealth Advisor, Warren Street Wealth Advisors

Investment Advisor Representative, Warren Street Wealth Advisors, LLC., a Registered Investment Advisor

The information presented here represents opinions and is not meant as personal or actionable advice to any individual, corporation, or other entity. Any investments discussed carry unique risks and should be carefully considered and reviewed by you and your financial professional. Nothing in this document is a solicitation to buy or sell any securities, or an attempt to furnish personal investment advice. Warren Street Wealth Advisors may own securities referenced in this document. Due to the static nature of content, securities held may change over time and current trades may be contrary to outdated publications. Form ADV available upon request 714-876-6200.