Donna Cournoyer, Author at Moore Advisors

May 2024 Market Recap: Warming Up

April showers gave way to flowers during the first half of May.

Stock market declines seemed to have been a function of early spring. As investors anticipated clearer, brighter weather ahead, they warmed up to stocks, though the warmth faded somewhat during the final week of May.

Large company US stocks, as measured by the S&P 500 Index, rose by 5% in May. Year-to-date, US stocks are in the black by 11.3%. Foreign stocks also returned 5% in May, and thus far in 2024 have gained 7.7%.

Small company US stocks climbed by 4% last month and are up by 4.5% so far in 2024.

Treasury bond yields were stable for shorter maturities but declined slightly for longer-term maturities in May.

For the month, the Bloomberg Aggregate Bond Index, the main benchmark for US investment-grade bonds, registered a positive return of 1.7%. Year-to-date, investment-grade bonds have declined by 1.6%.

Below is a summary of May returns:

US Stocks = S&P 500 Index; US Bonds = Bloomberg US Aggregate Bond Index

-RK

Donna Cournoyer In Reading Recommendations

Thinking in Bets

Annie Duke knows a thing or two about risk and how to manage it.

As a former World Series of Poker champion, with total tournament winnings of over $4 million, Duke draws from her experiences at the card table to share methods for embracing uncertainty and making better decisions in her book Thinking in Bets: Making Smarter Decisions When You Don’t Have All the Facts.

For example, Duke contends that we, as humans, are bad at separating luck from skill. We are uncomfortable knowing that results can be beyond our control. And we often create a strong connection between results and the quality of decisions preceding them.

One of my favorite stories about the quality of decision making is told within the first few pages. Duke highlights events of the final seconds of Super Bowl XLIX in 2015. The Seattle Seahawks, with twenty-six seconds remaining and trailing by four points, had the ball on second down at the New England Patriots’ one yard line.

The Seahawks had three chances to walk the ball over the goal line, and a touchdown would likely have sealed the victory. But the Seahawks coach, Pete Carroll called for a pass. The Patriots intercepted and won the game.

Carroll was vilified by the press the next day. The Seattle Times opined that it was “the worst call in Super Bowl history.”

But considering clock management and end of game considerations, Carrol’s call was defensible.

Also, empirical evidence supported the call. In the previous fifteen seasons, the interception rate in that situation was about 2%. The bottom line was that it was a good decision with a bad result.

Duke tells us that Pete Carroll was a victim of our tendency to equate the quality of a decision with the quality of its outcome. Poker players call this “resulting”. It is a routine thinking pattern that trips up most of us. Drawing an overly tight relationship between results and decision quality affects our decisions every day.

As a Pats fan, I was certainly pleased with the outcome of that game.

More importantly, though, the lessons Duke teaches throughout her book are useful for developing a better understanding of the behavioral aspects of decision making and can be directly applied to investing and risk management.

-RK

Donna Cournoyer In Financial Planning

Estate Plan Refresh

Spring cleaning season is upon us. As the weather warms and the days lengthen, we typically have a higher level of motivation to clean and refresh our living spaces.

This is also a good time to consider an Estate Plan refresh.

As situations in life change our estate plans should be updated. For example, my oldest and middle sons are now in their mid-20s, and we’ve used this as a trigger to review our estate plan and revise certain elements of it.

It’s advisable for every estate plan to contain the following four legal documents:

Will: specifies how a person’s assets should be distributed after their death, and includes an executor who will manage the estate and ensure the will is carried out as written.
Durable Power of Attorney: grants another person the authority to make financial decisions on behalf of the individual if they become incapacitated.
Medical Power of Attorney(aka Health Care Proxy): grants another person the authority to make medical decisions if the individual is unable to do so themselves.
Advance Directive(aka Living Will): specifies an individual’s preferences regarding medical treatments they want to receive or refuse, particularly concerning end-of-life care.

Other elements of estate planning include:

Trusts, which can be used for various purposes, such as minimizing estate taxes, protecting assets from creditors, or managing assets for minor children.
Beneficiary Designations, which allow an account owner or policy holder to specify who will receive the assets in those accounts directly upon the holder’s death, bypassing the probate process.
Guardianship Designations, which allow parents to name a guardian to care for minor children or dependent adults if the parents or current guardians are no longer able to do so.
Letter of Intent, which is a non-binding document intended to guide the executor or beneficiaries on the personal wishes regarding the distribution of assets or funeral arrangements.

If you need help with sorting through estate planning issues, or thinking about how to go about a refresh if you haven’t updated your plan in some time, the two guides provided below are a good place to start (click on the images to download a pdf).

Issues to Consider When Creating an Estate Plan

Issues to Consider When Reviewing an Estate Plan

Donna Cournoyer In College Planning

College Planning: 529 Update

529 Plans Provide a Smart Savings Vehicle to Fund Your Child’s College Education, and New Options and Features Make 529s Even More Beneficial

Even if you do not have children old enough to be thinking about college just yet, it would be hard to escape the news on what is happening at colleges and universities right now, along with the fact that a college education has been rising exponentially for decades to almost incomprehensible figures.

Planning and financing a college education for a child is one of the biggest expenses you will face over your lifetime as parents, so planning ahead and finding smart ways to maximize what your child will receive for assistance at application time is critical.

One of the best ways to grow education savings is with a 529 college savings plan.

Investing your college savings for a child in a 529 plan allows that savings to grow tax-free. And withdrawals, if used for qualified college-related expenses, are free of tax.

Also, contributors to 529s can benefit from tax savings in some states.

Massachusetts residents contributing to a qualified 529 plan can claim a state income tax deduction of up to $1,000 for single filers and up to $2,000 for married persons filing jointly. In Rhode Island, single filers can deduct up to $500, and married people up to $1,000.

Since its inception in 1996, the main drawback of the 529 education-savings plan has been its relative inflexibility.

If the beneficiary did not go to college, or they did not use all the funds, the owner (usually parent) of the plan had few options for the account savings and faced tax penalties for withdrawing funds for other uses if they did not have another beneficiary to transfer the funds to for college costs.

Some recent changes to the rules make the 529 plan a more flexible option for parents. The SECURE Act 2.0 was signed into law in December 2022. One provision of the act, effective this year, allows for owners of a 529 plan to move unused funds in the account into a Roth IRA for the beneficiary.

New Rollover Rules

As of January 2024, 529-plan account owners can now make tax- and penalty-free rollovers of unused funds to Roth individual retirement accounts if the beneficiary is the original beneficiary or a family member.

Here are some limits and restrictions on the rollovers:

A provision in the Secure 2.0 retirement-savings act allows up to a lifetime limit of $35,000 in unused 529 funds to be rolled over into a Roth IRA.
529 contributions and earnings in the last 5 years cannot be rolled over.
The 529 account must have been open for at least 15 years.
Rollovers are considered contributions to the Roth IRA and are subject to the Internal Revenue Service’s yearly contribution rules. This year the limit for those under age 50 is $7,000. The beneficiary must have earned income, and the rollover amount is whatever is less, the earned income or the contribution limit.

529 Contribution Limits

There are options when considering how much to contribute to a 529 plan. It may also depend on your overall financial plan and when you start (how old your child is). It is best to think of college funding as part of your overall financial picture.

Here are some limits for funding a 529 Plan:

In 2024, you can contribute up to $18,000 per beneficiarya year before needing to file a gift-tax return with the IRS.
Married couples filing jointly can contribute up to $36,000 per child.
There is also a “superfund” option. The IRS allows a per-child contribution of $90,000 in 2024 without gift-tax implications. Married couples can each contribute up to $90,000 for a total of $180,000.
A caveat with “superfunding”: You cannot make any additional contributions to the same beneficiary for the next five years.
Total 529 balance limitsare determined by the state you live in and fall somewhere between $235,000 and $500,000. (Massachusetts is $500,000 and Rhode Island is $520,000.)

Types of 529 Plans

College Savings Plans: These work like a 401(k) or IRA by investing your contributions in mutual funds or similar investments. The account will go up or down in value based on the performance of the chosen investments.
Prepaid Tuition Plans: These allow for the pre-purchase of tuition based on today’s rates, primarily at a public institution. (Be sure to check with your state for options and all requirements and restrictions.)

529 Plans Owned by Grandparents and Relatives – and Federal Financial Aid

In many families, grandparents (or other relatives) like the idea of creating a 529 college savings plan for their grandchildren or family members.

In the past, this affected a student’s eligibility for financial aid.

Under the new rules, the grandparent or relative accounts no longer factor in and no longer count against the beneficiary’s calculations for federal financial aid. (Some schools that use the CSS Profile form in addition to the Federal Application for Student Aid may factor this in.)

Considering the 529 Plan Option for College Funding

The features of the 529 plans make a compelling option for parents and families to save for college in a tax-efficient way. And the new Roth IRA rollover option can help your college graduate or college-aged child start to build their retirement savings.

If you are considering a 529 plan, be sure to compare plans and understand all your options thoroughly and ask for advice from your trusted financial advisor to be sure you make a decision that is best for your situation.

-DC

Donna Cournoyer In Behavioral Finance

Envisioning Risk

For some investors, risk is a dreadful word. Risk is associated with downside and loss. Good if it can be mitigated; better if it can be avoided; best if it can be eliminated altogether.

If asked to visualize their perception of risk in canine terms, the risk-averse investor’s image of risk may look something like:

This attitude may stem from learned behavior (perhaps from parents or grandparents that lived through a life-altering event like the Great Depression of the 1930s) or from personal experience (maybe by having lost sizable sums during the Global Financial Crisis of the mid-aughts).

For other investors, risk is perceived as a necessary evil. They know that compounding is an important factor in capital accumulation.

To facilitate compounding at a satisfactory rate, they accept the risk (as discomforting as it may be) that comes with their targeted rate of return.

Fewer people associate risk with opportunity. The idea of risk as an attractive feature of the investment landscape may seem strange.

However, learning to view risk through a lens of opportunity can be good for your wealth and important for your peace of mind as an investor.

Being able to envision risk as something with beneficial aspects – though requiring regular attention and sometimes tricky to manage – is a more desirable orientation. The risk-tolerant investor’s view of risk (again, in canine terms) might be pictured like this:

In his latest client memo, the professional investor and author Howard Marks, the co-founder of Oaktree Capital Management, talks about “the indispensability of risk”. Here are a few illuminating quotes on the nature of risk:

As five-time world chess champion Magnus Carlsen put it, “not being willing to take risks is an extremely risky strategy.”
Investors must accept that success is likely to stem from making a large number of investments, all of which you make because you expect them to succeed, but some portion of which you know won’t.
Not every effort will be rewarded with high returns, but hopefully enough will do so to produce success over the long term… refusal to take risk in this process is unlikely to get you to where you want to go.
You have to sacrifice certainty (as an investor) but it has to be done skillfully and intelligently, with emotion under control.
The risk inherent in not taking enough risk is very real. Individual investors who eschew risk may end up with a return that is insufficient to support their cost of living.

Marks’ words are helpful in validating the need to take risk and in reminding us that, while some investments are likely to fall short of our return expectations, a willingness to bear risk in an intelligent and controlled manner facilitates investment success.

The last point from the above list seems most relevant to those who are approaching, or in, retirement – and thinking about longevity. It is worth restating: the risk inherent in not taking enough risk is very real.

The financial planning process is a particularly useful way to assess portfolio risk as it facilitates:

understanding the current level of risk you have
calibrating the degree of risk you need
knowing when to adjust other parts of your financial plan if the risk in your portfolio changes suddenly

For those who have a high level of concern when it comes to taking financial market risk, we find that our suite of financial planning tools can help improve risk visualization and raise the comfort level for maintaining a level of risk that supports a financial plan over the long term.

If you envision bared teeth and sharp claws when you hear the word risk, please let us know.

We’d like to use our expertise and planning tools to begin shifting your perception of risk, and to help you see it as a beneficial and desirable aspect of investing and a necessary part of your financial plan.

-RK

Donna Cournoyer In Market Updates

April 2024 Market Recap: Pullback

Throughout the month of April, the financial markets were hit by stronger-than-expected inflation readings. The effect was a pushing back of expectations for interest rate reductions by the Federal Reserve, and a pullback of prices for stocks and bonds.

Large company US stocks, as measured by the S&P 500 Index, dropped by 4% in April. Year-to-date, US stocks are in the black by 5.9%.

Small company US stocks fell by 6.5% last month and are up a marginal 0.5% so far in 2024. Foreign stocks declined by 3.25% in April, and thus far in 2024 have gained 2.5%.

The jump in Treasury bond yields in April by somewhere between 0.2 and 0.45 percentage points, depending on the maturity, translated to a fall in bond prices.

For the month, the Bloomberg Aggregate Bond Index, the main benchmark for US investment-grade bonds, fell by 2.5%. Year-to-date, bonds have declined by 3.2%.

Below is a summary of April returns:

US Stocks = S&P 500 Index; US Bonds = Bloomberg US Aggregate Bond Index

-RK

Donna Cournoyer In Reading Recommendations

Happiness, and its Price

How happy are people around the world?

A comprehensive study on the subject, the World Happiness Report (WHR) is produced annually and measuring happiness around the world.

Below is a heatmap of happiness by country.

The 2024 edition of the WHR focuses on the happiness of people at different stages of life. In the West, the received wisdom has been that the young are the happiest and that happiness thereafter declines until middle age, followed by a substantial recovery.

Two findings that may be of particular interest:

There is a lower level of happiness among people born since 1980
The greatest plague in old age is dementia, and new research demonstrates that higher well-being is a protective factor against future dementia

The WHR also reflects a worldwide demand for more attention to happiness and well-being as criteria for government policy. It reviews the state of happiness in the world today and shows how the science of happiness explains personal and national variations in happiness.

The academic findings, social insights, and policy implications of the report are fascinating and important. But how about the price of happiness?

Fortunately, this is easy to determine.

Happiness costs $50 per hour and relates to a visit to the Golden Dog Farm in Jeffersonville, Vermont. This short video explains. Watching is free. Click on the link or the picture below. Hopefully viewing it will deliver a bit of happiness, or at least a smile!

-RK

Donna Cournoyer In Financial Planning

Inherited IRA RMD Relief – Again

For the fourth year in a row, the IRS has provided relief on Required Minimum Distributions (RMDs) for beneficiaries of Individual Retirement Accounts (IRAs) who are subject to the 10-year payout rule.

This class of IRA beneficiary is known as “Non-Eligible Designated Beneficiaries” (beneficiaries who are not surviving spouses) and who inherited IRAs where the original owner died after December 31, 2019.

The original SECURE Act, which took effect in 2020, eliminated the stretch IRA for most IRA and Roth IRA beneficiaries whose original owner died after 12/31/2019, and replaced it with a 10-year withdrawal rule.

On April 16, the IRS issued Notice 2024-35, which excuses RMDs missed in 2024 for Non-Eligible Designated Beneficiaries.

The relief does not apply to RMDs for beneficiaries who inherited IRAs before 2020.

Pre-2020 inheriting beneficiaries are subject to the pre-SECURE Act rules, which allow any designated beneficiary to stretch distributions out over their own lifetime, resulting in smaller RMDs and a smaller annual tax bill.

We provided more information on this topic in our August 18, 2023 blog post entitled: Heir Drama: Inherited IRA Update. The IRS also expects to issue final regulations on this topic later in 2024.

If you fall into the category of Non-Eligible Designated Beneficiary, you may want to consider the impact to your income tax situation over time by delaying distributions. Holding off could mean future spikes in taxable income, and ultimately paying more income tax over time.

-RK

Donna Cournoyer In Economy

Geopolitics & Stocks

With hostilities raging in the Middle East and Eastern Europe, the resultant humanitarian tragedies weigh heavily on caring individuals, even for those of us fortunate enough not to have loved ones directly affected by the strife.

As investors, our minds may also turn to the potential financial market impact of the conflicts.

I participated in a conference call recently on geopolitics hosted by Goldman Sachs. The guest speaker was Retired General Sir Nick Carter, whose last assignment was chief of the Defense Staff for the United Kingdom (the US analog is the Chair of the Joint Chiefs of Staff).

The first message for investors: geopolitical tensions are rising, and with higher tension comes higher risk.

General Clark examined the situations in Gaza / Israel / Iran; Ukraine / Russia; China / Taiwan; and North Korea – through the lens of current or potential future military engagement.

The flashpoint that concerned Clark most was Iran’s recent drone and missile attack on Israel, following the Israeli attack on the Iranian consulate in Damascus on April 1.

Clark stated that this was the first time since the founding of the Islamic Republic of Iran in 1979 that Iran has mounted a direct attack on Israel. In Clark’s words, “we’ve reached another level in terms of escalation.”

Additionally, Clark sees the Israeli / Hamas situation as near unsolvable; the Russia / Ukraine war as intractable; China’s objective of gaining control of Taiwan unmovable; and North Korea’s desire for nuclear weapons insatiable.

Clark concluded by wondering if the system of rules-based international order, put in place after World War II, will survive; and if not, what might replace it.

This was clearly a heavy report with a discouraging prognosis.

The second message for investors: bad geopolitical outcomes infrequently bring about extended stock market declines.

While far from uplifting, past experiences may serve to allay the worst fears related to the potential market impact of escalating geopolitical risk.

The table below from Goldman Sachs presents twelve hostile geopolitical events and stock market performance over three subsequent periods: the next day, 30 days later, and low point in the market following the event (which may have occurred before or after the 30-day mark).

The key take-away from this chart: adjusting portfolio positions in anticipation of a bad geopolitical outcome is a hit-or-miss strategy. In six of the twelve instances, stocks were in positive territory one month after the event.

Stock market drops concurrent with negative geopolitical events are often significant, as the low point in the chart above depicts, but the duration of the impact is impossible to know, and other influences and countervailing events can affect stock prices, too.

Also, the negative stock market impact of geopolitical events tends to be in line with normal stock market declines experienced in years that did not include a hostile geopolitical event.

Since 1980, the average intra-year stock market drop has been 14.2% (see the first chart in the previous section of this letter).

It is understandable if you are troubled by geopolitical risk and worry about how it might affect your investments. Recent events have been distressing, violent, and cause a strong emotional response for many of us.

However, from an investment perspective, remaining dispassionate is recommended. Sticking to your investment approach and your financial plan will serve you well in the long term.

-RK

Donna Cournoyer In Investment Strategy

Investment Marathoners

Investing is a marathon, not a sprint. This adage may seem a bit time-worn, but nevertheless appropriate given the recent conclusion of the 128^th running of the famed race in Boston.

I have had a long relationship with the sport of running, and although my lane has been distance, I’ve always admired sprinters. They approach competition with a narrow focus, execute with maximum intensity, and learn the results of their efforts in a matter of seconds.

And truth be told, I am intrigued by investment sprinters, too, who have a lot in common with track sprinters. For example, I’ve observed professional traders staying narrowly focused on their task and applying a high degree of mental energy throughout a trading session.

Typically, investment sprinters have quick reaction functions. Buying and selling tends to happen frequently under their watch, and investment sprinters try to make profits quickly while avoiding large losses.

I’m also intrigued by investment sprinters because their mental wiring and their market approach is so foreign. In philosophy and in practice, I identify with investment marathoners.

For investors in it for the long haul, lots of buying and selling doesn’t make much sense. Investment marathoners keep long-term objectives in mind. They develop a plan, stick to the plan, and expect to measure success over an extended timeframe.

Investment marathoners share the desire with investment sprinters to avoid large losses, but cutting a loss quickly isn’t part of the approach. Investment marathoners know the environment will include downturns along with market gains and can get comfortable with discomfort for periods of time.

Even though they understand the investment landscape, investment marathoners can get worn down and can become discouraged when the course gets challenging – that is, when prices go down instead of up and when portfolio values drop instead of rise.

The following two charts, courtesy of JP Morgan Asset Management, can be particularly useful in helping investment marathoners maintain perspective.

The first chart below shows what has happened each year in the US stock market for the past 44 years.

The grey bars show annual returns. The red dots show intra-year drops and refer to the largest market drops from a peak to a trough during each year.

Source: JP Morgan Asset Management

Important statistics from this first chart:

10.3%: average annual stock market return
14.2%: average intra-year stock market drop
75%: percentage of time annual returns for stocks have been positive

When the stock market is in one of its periods of decline, the learning from this chart is worth remembering: you can expect stocks to take a tumble during the year, but there’s a high likelihood that returns will finish the year in positive territory.

The second chart shows what has happened for various asset classes over time and highlights the benefit of investing for the long term.

The green bars depict stock market performance, the blue bars bond market performance, and the grey bars performance of a portfolio of 60% stocks, 40% bonds. The bars show the range of returns over 1-year, 5-year, 10-year, and 20-year “rolling” periods, from 1950 to 2023.

For example, the left most bar considers stock market returns for all one-year periods from 1950 to 2023. The highest one-year return was 52%. The lowest one-year return was -37%.

Moving to the right, the next green bar considers stock market returns for all 5-year periods during the same 73-year timeframe. The highest annual return during any 5-year period was 29% and the lowest annual return for any 5-year period was -2%.

Source: JP Morgan Asset Management

Key points from the second chart:

Annual returns compress the longer you stay invested
The downside diminishes the longer you stay invested
With a long enough holding period, expect significant, positive returns

Distance running isn’t for everyone. The mind must be willing, and the body must be able to work hard to get to the finish line.

But investment marathoning is accessible to everyone. All it takes is the right plan, a commitment to stay the course, and confidence to let the financial markets do the hard work (and generate satisfactory returns) over the long term.

-RK

Donna Cournoyer