Page 12 – Moore Advisors

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 In College Planning

Shifting the “Dream School” Mindset

I grew up in a New England household where weekends were spent in ice rinks. I loved it! My brother was an ice hockey player, and I was a figure skater who joined my sisters in the sport each weekend (at the time, hockey for young women wasn’t an option).

I have a favorite quote from one of hockey’s greats, Wayne Gretzky, who said: “Skate to where the puck is going, not where it has been.”

I was reminded of this quote recently during a conversation I had with a gentleman at a networking event while waiting in line for a “free headshot,” a perk of being a participant in the event.

My new acquaintance had grown children, and when I told him I was a college planning advisor, he perked up and said, “Good for you!” He then began to reflect upon his experience in helping his children with their college applications.

He said he was obsessed with one outcome: the bumper stickers he would be able to affix to the family car. Not the college cost; not where his kids would be happy and thrive academically; just the school with the best “elite” reputation.

He was from an affluent suburb in Boston. He said all the cars in his neighborhood had elite college bumper stickers: Harvard, Yale, Brown, etc. His primary thought, and self-admitted anxiety thinking about college for his children, was about those bumper stickers. He said literally “nothing else mattered.”

While this gentleman had every right to his approach and opinion (every family has their own list of criteria for choosing a college) I was taken aback. But I was also intrigued because he was so animated and emphatic while telling me his story.

While bumper stickers might have a limited audience, consider the scope of merchandise a typical family will buy at the bookstore during a college tour or event. Don’t many students and parents want to wear that sweatshirt to manifest attaining admission? It’s almost like a dream board (and maybe not so different from the bumper sticker after all).

That conversation at the networking event reinforced my belief in the importance of helping parents and students move beyond the emotional part of college search.

If families think deeply about their priorities and goals and how school choice will impact their personal financial situations, the decision framework might shift.

One critical outcome may be that “dream school” may no longer be synonymous with “elite school.”

Consider a recent Bloomberg article entitled If You Didn’t Get Into an Ivy, a Public School Is the Better Investment, which claims that many elite private colleges underperform when it comes to the average student’s return on investment.

The Bloomberg News analysis of more than 1,500 nonprofit four-year colleges shows the return on investment at many elite private institutions outside the eight Ivies is no better than far-less selective public universities.

The analysis shows that a typical 10-year return on investment of the so-called “Hidden Ivies” – a list of 63 top private colleges – is about 49% less than the official Ivies and 9% less than states’ most prominent universities, known as public flagships.

These statistics are meaningful because of the high cost of attendance. For instance, a recent New York Times article commented on a situation where a newly admitted Vanderbilt University engineering student was shown an all-in price of attendance for their first year of $98,462.

As a financial advisor providing college planning, I encourage a holistic approach to the planning and decision-making process, with the goal of finding the most affordable choice that also is a great fit for the student to accomplish their academic goals, in a community and location where they will be happy and flourish.

There are so many excellent schools with significantly lower total cost of attendance and lower out-of-pocket costs compared to the often-elusive elite institutions.

Many of the alternatives will give students a four-year merit scholarship along with a great education and a wonderful experience. These institutions are p aces where students can build a tremendous foundation, lifetime friendships and mentor relationships, and gain experience to build on.

Which brings me back to Wayne Gretzky’s quote.

I recommend families move away from where college admissions goals have been: attaining admission to a brand-name, elite school.

Instead, consider where holistic college admissions planning is going:

acknowledging emotions
thinking deeply about priorities and goals
discovering which institutions align best with those priorities and goals
considering how school selection will affect student’s and parents’ long-term financial situation

Shifting the Dream School mindset and using a holistic planning approach to college search will help parents and students make the best all-around “smart choice” from their college list.

-DC

Donna Cournoyer In Market Updates

Q1 2024 Market Review

Stocks powered ahead in the first quarter of 2024. For large company US stocks, it was the best quarterly performance since 2019, with the S&P 500 Index registering twenty two “all time high closes” during the three-month period as trading wrapped up on March 28.

Many market forecasters were constructive heading into the start of the year, but few prognosticators predicted the continuation of the powerful rally that began in late October 2023. A resilient economy, confident consumers, and excitement about artificial intelligence were reasons cited for the run-up in stock prices.

For the quarter, large company US stocks returned 10.4%. Small company stocks also rose, but the pace of increase was a slower 5%. Stocks of foreign companies returned 6%.

Bonds, however, finished in the red. Interest rates rose as inflation data disappointed. The Bloomberg US Aggregate Bond Index, the benchmark for high-quality bonds, declined by 0.7% during the quarter.

Here’s snapshot of stock and bond returns for the last five quarters:

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

Midway through April, stock markets were showing some signs of fatigue after running up so much in Q1.

As of April 19, the S&P 500 Index of large company US stocks had declined by 5% from the end of March, and the technology-heavy Nasdaq Index had fallen by nearly 7%.

Longer-term bond yields increased by about 0.4 percentage points, a sizable three-week move, which also translated to about a 5% price decline for high-quality bonds maturing beyond ten years.

-RK

Donna Cournoyer In College Planning

2024-2025 FAFSA FORM – Continuing Issues and Delays

This 2024-2025 college application year is one for the books…

We (schools, parents and especially students) have endured delay after delay for the newly overhauled FAFSA- the Federal form for applying for financial aid, which the government uses to determine student eligibility for financial aid and schools also use to determine how they will award their own funds.

The most recent delay coming this week when the Department of Education announced, the day before the ISIRS (Institutional Student Information Records) were supposed to start arriving at schools, that they were in fact, not going to start arriving at schools until “the first half of March”. This means that for anyone who completed a FAFSA, schools are not going to have those records to start reviewing until at least mid-March. This cuts the time even more and SIGNICANTLY for financial aid offices, who will need to scramble to review the FAFSA forms and try to get their financial aid offer letters out to freshman applicants in time to decide on where to go to college by May 1. A decision which for many families, depends in large part on how much it will cost the family out of their pocket after any merit scholarships and financial aid. Families will be receiving these letters months later than usual this year.

Some of the issues are also that some students and parents are having difficulty accessing and signing the form. Due to the processing delays, there is also the issue of not being able to correct the form until the records are processed and are sent to the schools. So, if you know you have made a mistake, you cannot correct it for another few weeks at least.

First, for freshmen applying to college for fall of 2024, this creates an extra layer of uncertainty and stress, estimating that they will not know how much aid they will receive and how much they will need to pay to attend the schools on their list until likely past April 1. For their parents, even greater stress.

Second, for students returning to college, they need to know if their aid package will change, based on the overhaul in the Department of Education’s formula on the brand new FAFSA this year. For example, the loss of the “sibling discount” for families having more than one child in college at the same time.

Ways You Can Take Advantage of the Extra Time:

Apply for private scholarships. This is the time they are open. Search locally, with your high school guidance office and qualified search sites. See my links
Consider appealing for more merit scholarship money. If you have offers from competing schools, or if you know your school offers higher merit scholarships, you may have a good chance at an appeal. Schools still need to secure enrollment for their fall class of students during these delays, and if there is a chance for an applicant to deposit early, they may have incentive to increase the offer.
If you have extenuating circumstances, don’t wait to reach out to the financial aid offices. If you have had situation over the past year that may have affected your finances, such as a job loss, you will want to reach out the financial aid offices to ask about their process for appeals if it is not clear on their website, so that you can be prepared to send documentation when they are ready to receive it.
Do some assessment of your financial plan to pay for college. Although you may not have the net cost confirmed for any of your schools. Start planning for what resources you will be using to cover out of pocket costs for college over the next 4 years and make a list. Will you be using a 529? Savings? Making payments monthly to the school? Borrowing? Or a combination of the above? Start planning out what you have for resources so that when you begin getting final offers from the schools, you will know how your finances match up.

Check the websites for your school list:

Decision Dates: Some schools have or are considering changing their decision date of May 1 this year due to the FAFSA delays.

Be sure to check all the websites for the schools on your list to see if they have extended their May 1 decision to commit date.

Financial Aid process: Some schools may have created their own preliminary financial aid form due to the Department of Education delay of the FAFSA. Also, schools that use the CSS Profile (between 250-300 schools) may be sending out offers ahead of receiving the FAFSA records for applicants, due to the fact that the CSS Profile form has not changed and opened in October.

Be sure to check the financial aid pages of your school websites to see if your schools have created and require new forms or are using the CSS Profile due to the FAFSA delays.

The bottom line is that the 2020 Congressional laws passed that required significant changes to the FAFSA form with the intention of making more students eligible for aid and the form completion easier has created a lot of anxiety and uncertainty for college students and families for the 2024-2025 year as the rollout has been anything but smooth.

In light of these delays of information – essentially knowing the cost you will pay out of pocket for each school on your list – which is crucial for most families in order to decide on college, some families may decide not to apply for financial aid, thus leaving money on the table and spending more out of their pockets next year. Some schools require the FAFSA form to award their merit scholarships and/or some free grant money that is sometimes even offered to those applicants who are not eligible for need-based financial aid by the FAFSA form, in order to entice students to commit.

Of course, as in my previous articles, my advice is to weather the storm, and do the form and be more vigilant than ever staying on top of deadlines and information gathering in this last sprint in your college decision. It will be worth it in the end.

Donna Cournoyer In Reading Recommendations

Measuring Your Life

For people accustomed to relying on intuition and ‘trusting their gut’, the question How Will You Measure Your Life? might seem strange. Is it possible to measure one’s life? If it is, how would one approach the task? And anyway, is life worth measuring?

On the other hand, for quantitatively oriented individuals, the idea of not measuring everything that can be measured may seem odd. Measuring provides information, information allows for analysis, and analysis enables optimization. Who doesn’t want to lead an optimized life?

Innovation expert Clayton M. Christensen spent his life studying businesses and how people behave in business settings. He was troubled by his observation that people with great potential (his Harvard Business School classmates, for example) often made choices that resulted in disharmony and unhappiness in their personal lives.

In How Will You Measure Your Life?, Christensen refrains from recommending that we measure everything in our lives that can be measured.

Rather, he suggests that we can use theories which have been rigorously examined and used in organizations all over the globe to help us with decisions that we must make as individuals.

The book seeks to answer the question: “How can I find happiness in my career?” But it gets at deeper issues, guiding us to consider what it means to lead a fulfilling life, and offering frameworks for helping the reader find fulfillment.