Investing and Planning in a New World

To say the world has evolved over the past 12 months is an understatement.  We passed the one-year anniversary of the war in Ukraine.  Inflation persists more than the Federal Reserve and markets would hope.  Yet the jobs market and US economy remain resilient despite these headwinds.  For capital markets, the single biggest change was the incredible rise in interest rates.  For the first time in 16 years, a 1-Year Treasury offers a 5% yield[1].  The first iPhone had just launched the last time 1-Year Treasury yields were 5%[2].

After all this time of low or zero interest rate policy, this rate increase is one of the fastest and largest on record.  Asset values from bonds, stocks, real estate, private investments, precious metals, and crypto are still in process of calibrating to this new environment.  However, don’t mistake this article as full of disappointment.  On the contrary, I am as excited as ever about the long-term investment prospects from this new starting point.  Let me share three reasons for this excitement and what it means to investors:

1. Saver’s rejoice – Cash Pays

Safe and liquid cash reserves now earn meaningful yield after 14 years of paying next to nothing.  We are more than happy to see the “cash is trash” phrase retired that was so often used during this time.  As of March 1st, money market funds boast yields greater than 4% and US Treasury Bills have now eclipsed 5% on both 6-month and 1-Year maturities.[3] However, most large banks are not as generous.  According to Bankrate’s February 22 weekly survey of institutions, the average yield for savings accounts is 0.23% APY.  If you are earning below 4% on your cash reserves, please contact us today to explore options for making cash work for you.

2. Improved Valuations on Stocks and Bonds

As a result of the rate increases, stocks and bonds have seen meaningful corrections to both their share prices and valuations.  Valuations are not helpful in making short term investment decisions and another correction or even over-correction can always occur.  However, valuations do help inform what long term return prospects might look like. Investors are receiving better starting valuations today than 12 months prior.   

3. Mind the Gap - Impact to Financial Plans
We repeat over and over “focus on controlling what you can control” when building financial plans.  This often boils down to (1) your spending rate, (2) your savings rate, and (3) constructing a sound investment plan.  However, we do need to account for those “uncontrollable” assumptions including inflation and future investment returns.  Real returns are the difference (or gap) between nominal investment returns and inflation.  We all see the increase to inflation everywhere we turn.  Less visible are the higher investment return assumptions as discussed above.  It’s the real return gap that matters in the long run.  Though any given year can vary significantly, we believe the real return gap remains relatively consistent over the long term.  At 2% inflation (the Federal Reserve’s publicly stated target), it takes 35 years for your purchasing power today to be cut in half.  The last CPI inflation report from February for the past 12 months was 6.4%.  At that rate, it would take only 11 years to cut purchasing power in half.  While the real return gap may stay consistent, the need to at minimum keep pace with inflation increases if inflation stays higher for longer.  Most importantly, we still believe a well-constructed diversified portfolio has the potential to achieve the gap and earn a positive real return in the long run.  Please contact us today to see how your financial plan minds the real return gap in a new world.

If you or someone you know have questions about the current investing landscape, please contact us today at 615-370-1253.

All investing involves risk, including the possible loss of principal. Nothing contained herein should be construed as individualized advice and is for informational purposes only. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be suitable or profitable for a client's investment portfolio. Past performance is no guarantee of future performance.

Andy Michael, CFA
Portfolio Manager

[1] As listed on treasury.gov as of March 2, 2023

[2] Per treasury.gov as of July 23, 2007.  iPhone launched June 29, 2007 appleinsider.com

[3] As listed on Fidelity Institutional March 2, 2023