The History that Led to Bank Failures in 2023

To properly understand the recent events in the banking sector, specifically the failure of Silicon Valley Bank (SVB), a quick history lesson is in order.

The COVID-19 Stimulus Reduced Interest Rates in 2020

During the fallout of the Covid-19 shutdowns and economic recession back in 2020, world banks responded by enacting numerous credit facilities, governments passed multiple rounds of stimulus, and central banks around the world dropped interest rates to near zero. Lasting through 2021, bank deposits grew at an unprecedented rate with the influx of liquidity (Cash) into the market, causing investment in venture capital to reach record highs. SVB, predominantly known as Silicon Valley’s tech start-up lender, saw their deposits nearly double.

The Federal Reserve Increased Interest Rates to Combat Inflation in 2022

In 2022, the Federal Reserve began hiking interest rates at a record pace to desperately combat inflation. We’ve mentioned in our January 2023 Market Update that growth companies typically get hurt the most when interest rates go up. The increase in borrowing costs caused the riskiest assets, like venture capital, to experience massive outflows and repricing over 2022 given the decline in liquidity. It also led to a significant decline in cryptocurrencies, brought to light corruption within the cryptocurrency industry, and resulted in solvency issues for FTX. In November of 2022, FTX filed for bankruptcy.

Silvergate and Silicon Valley Bank Shut Down in 2023

On March 8, 2023, Silvergate, a cryptocurrency services firm, voluntarily shut down amid solvency concerns and an investigation by the Justice Department. Two days later, Silicon Valley Bank was seized and shut down by the FDIC. Several stablecoins, which are cryptocurrencies that peg their value to the US dollar, broke their pegs. This means that they went below their typical constant value of $1.

Bank Failures Caused by Lack of Diversification and Poor Risk Management

The common theme among these recent banking failures is that their client deposits (checking/savings accounts) were not diversified, leaving clients with potentially uninsured deposits. Likewise, the banks had poor risk management. Facing higher-than-average withdrawals from clients, these banks were forced to sell securities, like long-term Treasuries and mortgage-backed bonds, at substantial losses to attempt to cover the requests for funds. As more customers demanded withdrawals, it became clear that Silvergate, SVB, and Signature Bank weren’t going to be able to cover client demands, prompting shutdowns and the involvement of the FDIC.

The FDIC, Fed, and Treasury Agree to Back Bank Deposits

The FDIC, Federal Reserve, and Treasury issued a joint statement that they would back bank deposits in efforts to curb systemic risks. The FDIC protects $250,000 per depositor, per insured bank, for each account ownership category. Since the start of the FDIC on January 1, 1934, no depositor has lost a penny of insured funds as a result of a bank failure. The SIPC is the equivalent of the FDIC for member broker-dealers. It protects against the loss of cash and securities – such as stocks and bonds – held by a customer at a financially-troubled SIPC-member brokerage firm. The limit of SIPC protection is $500,000, which includes a $250,000 limit for cash. Most customers of failed brokerage firms are protected when assets are missing from customer accounts.

Charles Schwab Not at Risk from Bank Failures

The Founder and CEO of Charles Schwab released a joint statement below assuring clients they have no direct business relationship with Silicon Valley Bank or Signature Bank, reducing their credit risk from either. They also mentioned that over 80% of client-held cash at Schwab Bank is insured dollar-for-dollar, with the remaining amount covered by their credit line from the Federal Home Loan Bank. More information on that can be read here: Perspective on recent industry events | About Schwab.

Diversification Helps Protect Portfolios from Stock Market Declines

Although stocks have taken significant hits with financials leading the downward charge, the song of diversification rings loud! While the S&P 500 declined -4.76% between March 7 and March 13, Bonds have seen gains over the same time period, with long-term Treasuries up 4.37%. Maintaining diversification by spreading investment risk across many different asset classes has its advantages during uncertainty.

The Federal Reserve May Not Increase Interest Rates

We are closely watching the Federal Reserve’s reaction as probabilities of future rate increases are dropping, meaning the Fed could be more likely to loosen up its grip on interest rate hikes more than expected. Just in the last few days, the probabilities of future rate increases have dropped when studying the chart below.

It’s important to keep your long-term investment goals in mind when making investment decisions. Remaining diversified during times of uncertainty can help cushion the blows. To talk to a financial advisor about your financial plan, please click here!

For more information, watch the full March 2023 Market Update video below.

Important Disclosures: The information provided here is of a general nature and is not intended to answer any individual’s financial questions. Do not rely on information presented herein to address your individual financial concerns. Your receipt of information from this material does not create a client relationship and the financial privileges inherent therein. If you have a financial question, you should consult an experienced financial advisor. Moreover, the hiring of a financial advisor is an important decision that should not be based solely upon blogs, articles, or advertisements. Before you hire a financial advisor, you should request information about the financial advisor’s qualifications and experiences. Past performance is no guarantee of future results. All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed. Examples provided are for illustrative (or “informational”) purposes only and not intended to be reflective of results you can expect to achieve. AllGen Financial Advisors, Inc. (AllGen) is an investment advisor registered with the SEC. AllGen does not provide personal financial advice via this material. The purpose of this material is limited to the dissemination of general information regarding the services offered by AllGen. The Disclosure Brochure, Form ADV Part II, which details business practices, services offered, and related fees of AllGen, is available upon request.​

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Nearly every broad market category began 2022 at or near all-time highs. Following COVID-19 shutdowns back in 2020, markets saw record stimulus with uncomfortable rises in inflation. Then came record quantitative tightening with desperate intentions to control inflation, all happening in one of the shortest time periods on record! Investors can mostly agree that 2022 has felt more like a hangover year as markets react to complete stimulus cutoffs and reversals since asset prices spent most of 2022 withdrawing from their peaks.

In the charts below we examine 2022 and the performance of US large-cap stocks, US small-cap stocks, international stocks, and bonds, all of which are down over -13%. Partly due to aggressive rate hikes by the Federal Reserve, bonds have seen their worst drawdown on record; bond prices move inversely to rates. Bonds typically hold up better in falling stock markets offering diversification benefits to more conservative investors. However, in 2022, bonds experienced their worst drawdown ever making it difficult for money managers. This caused a notable phenomenon across benchmarks causing narrow differences in returns across aggressive benchmarks (mostly stocks) and conservative benchmarks (mostly bonds).

Relationship of Growth vs. Value Stocks

We’ve mentioned the relationship between growth vs. value stocks in past market updates and how they typically outperform one another for several years at a time. Growth stocks typically have weaker balance sheets and are heavily reliant on investor funding of operations. They don’t normally pay dividends (largely tech companies).

On the other hand, value stocks have much stronger balance sheets, an established history of operating profitability, and pay dividends. In the chart below, a rising line means value stocks are leading, while a declining line means growth stocks are leading. Over the last 14 years growth stocks have outperformed significantly, but in 2022 value stocks have outpaced growth which we believe will continue. We have been noticing this trend reversal for several months now and are already favoring value stocks in our client portfolios. Investors should also acknowledge that the Fed has aggressively raised interest rates which increases the cost for companies to borrow money and fund operations. Companies with weaker balance sheets that are more reliant on investor funding like “Growth” companies may incur higher costs to operate and may struggle to outperform in the years ahead. Value companies with low debt and strong operating cash flow may be less affected by rising borrowing costs.

Below are the 2022 returns of common growth companies including Tesla, Meta (formerly Facebook), Amazon, AAPL, and, just for fun, Bitcoin. These companies saw massive gains in 2020 and in 2021 when rates were low, making borrowing costs cheap. In 2022, rates rose faster than expected which increased borrowing costs and put pressure on these companies, all of which declined in price by -50% or more (except for Apple at -26.4%!). Monitoring these shifts in outperformance and adjusting target weights periodically can help investors reduce exposure to risk in a changing market environment.

While there were few places for investors to hide in 2022, commodities and gold offered some protection against falling markets which were up 21.99% and 0.44% respectively. Incorporating these asset classes in a diversified portfolio can cushion a portfolio in a falling market. We began 2022 with a strong commodity allocation that helped offset negative returns in other areas of the portfolios.

Technical Analysis is a research method we use to help make decisions based on charting and the use of trendlines. In the below illustration, we chart resistance lines (downward sloping red lines) to connect points across all major indexes; US large, US small, international stocks, and bonds. All market indexes have experienced downtrends in 2022. However, international stocks and bonds have signaled recent trend breaks with international stocks exhibiting the largest signal. These are technical indicators that support the idea that international stocks and bonds could continue rising; we will address additional fundamental indicators later on. For additional explanation on technical analysis relating to the below illustrations, see the video at the end of this article.

Fed Attempts to Control Inflation

We mentioned earlier that the Fed has been aggressively raising rates in an effort to control rising inflation. There are numerous inflation indicators that can be used to determine the rate at which prices are increasing. See the below chart for several of the most-used indicators, all of which indicate inflation peaked around mid-2022. Although inflation has trended downward, it is still historically elevated and well above the Fed’s 2% target. We believe the Fed is pleased to see inflation trending downward evident in their plans to slow raising rates and hold them steady for 2022.

While inflation declines are good news for consumers, one economic factor that could keep inflation elevated is wage growth which has held above its 50-year average for the last couple of years. As consumers make more money, they tend to spend more money which can inflate prices. One factor that keeps wage growth high is low unemployment, which makes it harder for companies to find workers, forcing companies to pay higher wages.

We can see below that unemployment is still historically low, making it harder for companies to find workers. Even though wage growth is coming down, it’s still largely above its 50-year average.

Housing Prices

Housing has the largest weighting in the inflation calculation and as seen in the illustration below, housing affordability is at its lowest level since the 1980s. The 30-year mortgage rates have nearly tripled in the last year, largely as a result of aggressive Fed rate hikes. This raises the cost of housing, which reduces consumer spending in other areas of the economy that can ultimately reduce inflation. In the chart on the left-hand side, we see that Florida house prices have surged much more than the US since 2020. Now that homes are much less affordable on average with interest rates much higher than they were, we are beginning to see home prices peak which should come down going forward.

Inverted Yield Curve

The term yield curve is used frequently in market commentaries and is one of several metrics used to determine the overall health of an economy. In normal markets, investors typically demand higher rates of return for investing their money for longer periods of time. For example, an investor purchasing a 30-year Treasury bond would typically want to be compensated more than if they were to purchase a 5-year Treasury bond since it will take longer for the investor to recover the principal. Suppose the 10-year treasury bond is paying a 3% yield, and the 3-month Treasury bond is paying a 4% yield; the yield curve reading would be -1% (3% – 4%).

This phenomenon is known as a negative yield curve or inverted yield curve, which means that investors are now compensated less for buying longer-term bonds than if they were to buy shorter-term bonds. This indicates that the economy is weakening. In the chart below, we chart the difference in yield between the 10-year and 3-month Treasury bonds since 1968. Yield curve inversion has preceded every major recession on record which currently is inverted. Remember that markets anticipate the future and although an inverted yield curve has historically indicated impending economic recessions, whether markets will continue to fall in the future is less certain; we will cover market sentiment later in this article.

More on International Stocks

The below chart represents the strength of the dollar which is highly correlated to monetary policy and has now reversed its upward trend. As noted earlier, the Fed has been raising interest rates aggressively which attracts investors and strengthens the dollar. Now that the Fed is holding rates steady with the potential need to lower interest rates sooner than expected, the dollar is weakening. Remember that markets anticipate the future, which is why we’ve seen the dollar begin to decline several months ago.

A weakening dollar offers clues that other areas of the world may begin to outperform, particularly international stocks. In the chart below, we examine the relationship of performance between international stocks and US stocks. As the line increases, international stocks are leading and as the line decreases, US stocks are leading. In the bottom right we see a significant trend reversal where we believe international stocks will continue to outperform.

The last two charts offer great technical guidance supporting the outperformance of international stocks. However, it’s important to compare it with fundamental metrics that also support this conclusion. We’ve used the below diagram in the last few market updates that indicate Price/Earnings are at deep discounts to US stocks Price/Earnings, indicating good value. Additionally, see that international stocks are still paying historically higher dividends when compared to US dividends. We have supported overweighting international stocks for several months now, which have begun to outperform. See our October Market Update and even our August Market Update where we point out these relationships.

Bonds are another area we believe will recover from historic lows. Below is a familiar chart that illustrates the bond market has historically recovered well in the year following negative returns. In fact, 2022 was the worst year on record for bonds with 2023 already showing signs of recovery.

Low Market Sentiment Indicator

Remember that markets anticipate the future and while economists argue whether we are currently in, or are close to entering, a recession, it’s obvious to say that current market sentiment is very negative. In fact, we can chart it! Below we chart the Panic/Euphoria model which aggregates several different sentiment indicators into one. It covers short interest, margin debt, put/call ratios, and several more (blue line).

We can see that when this sentiment indicator is low, meaning investors are mostly pessimistic, it ironically indicates historically great buying opportunities when comparing it with the S&P 500 (black line). Since the 1990s, when this indicator dropped to extremely pessimistic levels, the market averaged 18.86% 1 year later, 95% of the time! Although the economy is showing signs of weakness in a number of areas, we must continue to consider that markets anticipate the future and that we could already be at a market bottom. We’ve been strategically adding to stocks over the last few months cautiously preparing for this possibility.

The year of 2022 was no doubt one of the toughest years for money managers and a hard lesson for new investors learning the importance of maintaining a well-diversified portfolio. Markets can be scary, causing investors to make irrational decisions, especially when your life savings are on the line. Removing emotion from the equation and basing investment decisions on fundamental and technical analysis, with a healthy dose of discipline, can offer calm in times of uncertainty.

For more information about how AllGen can invest your money, reach out to an AllGen advisor here!

For more information, watch the full January 2023 Market Update video below.

Important Disclosures: The information provided here is of a general nature and is not intended to answer any individual’s financial questions. Do not rely on information presented herein to address your individual financial concerns. Your receipt of information from this material does not create a client relationship and the financial privileges inherent therein. If you have a financial question, you should consult an experienced financial advisor. Moreover, the hiring of a financial advisor is an important decision that should not be based solely upon blogs, articles, or advertisements. Before you hire a financial advisor, you should request information about the financial advisor’s qualifications and experiences. Past performance is no guarantee of future results. All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed. Examples provided are for illustrative (or “informational”) purposes only and not intended to be reflective of results you can expect to achieve. AllGen Financial Advisors, Inc. (AllGen) is an investment advisor registered with the SEC. AllGen does not provide personal financial advice via this material. The purpose of this material is limited to the dissemination of general information regarding the services offered by AllGen. The Disclosure Brochure, Form ADV Part II, which details business practices, services offered, and related fees of AllGen, is available upon request.​

The post January 2023 Market Update: Inflation, Housing Prices, and International Stocks appeared first on AllGen Financial Advisors, Inc..

Many people are considering relocating for financial reasons. Their strategy is to move somewhere with a lower cost of living while maintaining a paycheck that reflects a more expensive city, like New York City or Chicago.

Orlando and the surrounding Central Florida area have become a popular option for financial and tax reasons. But with the entire country to choose from, people are especially drawn to Orlando for its beautiful weather and the year-round outdoor activities Central Florida has to offer. In addition to the beautiful weather, Orlando is known worldwide for its premier theme park attractions, including Walt Disney World and Universal Studios.

So now that you’ve decided to move to Orlando, what do you need to do?

To Buy or To Rent?

One of the biggest decisions that needs to be made when moving to a new location is whether to rent or own. There are pros and cons to consider on both sides.

Timing and Finances

For some, renting makes more sense than owning. For others, buying a home is the right thing to do. Regardless, you may want to consider renting first. Renting gives you the ability to become familiar with your new surroundings – without the long-term commitment of buying. After renting, you might decide that you prefer to live in a different neighborhood or area of town.

There is also a significant financial difference between the two. Renting requires smaller upfront expenses than the down payment and closing costs associated with purchasing a home. Additionally, most repairs and maintenance items are eliminated as that is the responsibility of the landlord.

If you’re moving from a higher cost of living area to Orlando, then by selling your home in your current city, you’ll likely be well-positioned to buy a home in Central Florida. However, market conditions are also an important factor to consider when deciding to buy or rent.

Renting literally “buys” time to do your due diligence and get a better feel of the area before making a very important, more permanent decision.

Additional Resources

It’s a good idea to talk to a local real estate professional as well as discuss such a major purchase like this with a fiduciary financial advisor so you can determine your optimal budget to keep you on your Path to Financial Freedom.

Check out Zillow or Realtor for home listings, which includes both rental properties and those available for purchase.

Purchase Home Owner’s or Renter’s Insurance

As soon as you’ve signed the contract for your new house, you should start shopping around for homeowners’ insurance. Depending on where you live, a standard homeowners’ insurance policy may not cover certain weather events like hurricanes or floods. In fact, in some areas of Florida, purchasing extra insurance packages to cover floods and hurricanes may be required.

Renter’s insurance covers your personal belongings rather than the property itself. This means that your renter’s insurance should cover any damage to your belongings that may occur during a hurricane as well as the cost of having to make alternative living arrangements if your home is damaged and temporarily unlivable. Renter’s insurance won’t cover any damage to the property itself, but that’s because property damage should be covered by the landlord’s homeowner’s insurance.

Set Up Utilities

Before you actually move into your home, you’ll want to set up utilities so it’s ready as soon as you arrive. These include gas, water, electricity, and (because it’s 2021) the Internet. You’ll want to do this several weeks before you actually move in so that you can ensure everything is turned on and working ahead of time.

These may be some helpful resources:
https://www.duke-energy.com/Home
https://www.ouc.com/residential
https://www.orlando.gov/Trash-Recycling
https://www.orangecountyfl.net/WaterGarbageRecycling/GreenClean.aspx#.YRQruohKhPY
https://www.seminolecountyfl.gov/departments-services/environmental-services/solid-waste-management/
https://www.orangecountyfl.net/watergarbagerecycling/waterservice.aspx#.YRQsIIhKhPY
https://www.seminolecountyfl.gov/departments-services/environmental-services/customer-service/
https://www.spectrum.com/internet-service/florida/orlando
https://www.centurylink.com/local/fl/orlando
https://www.att.com/local/internet/florida/orlando

Change Your Driver’s License

Once you’ve moved into your new home, you’ll need to start the process of changing your address. The first step is to make sure that official mail is coming to your new address. This will allow you to use mail as proof of address when you go to the DMV to change your driver’s license. Bills from the utilities you recently set up are typically good options.

Find a Financial Advisor

Regardless of whether you have a financial advisor already, it’s important to establish a relationship with a local fiduciary advisor in advance of moving to your new home. An Orlando financial advisor can help you to understand various nuances like the tax implications of your move. Taxes vary from state to state and even from city to city, so it’s important to find an experienced advisor.

In the event that you need more help, an Orlando financial advisor can also help you find a trusted source for legal advice, home buying, and a local CPA.

If you have questions or concerns, you can contact us at any time.

We’re here to serve. 407-210-3888

Important Disclosures: The information provided here is of a general nature and is not intended to answer any individual’s financial questions. Do not rely on information presented herein to address your individual financial concerns. Your receipt of information from this material does not create a client relationship and the financial privileges inherent therein. If you have a financial question, you should consult an experienced financial advisor. Moreover, the hiring of a financial advisor is an important decision that should not be based solely upon blogs, articles, or advertisements. Before you hire a financial advisor, you should request information about the financial advisor’s qualifications and experiences. Past performance is no guarantee of future results. All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed. Examples provided are for illustrative (or “informational”) purposes only and not intended to be reflective of results you can expect to achieve. AllGen Financial Advisors, Inc. (AllGen) is an investment advisor registered with the SEC. AllGen does not provide personal financial advice via this material. The purpose of this material is limited to the dissemination of general information regarding the services offered by AllGen. The Disclosure Brochure, Form ADV Part II, which details business practices, services offered, and related fees of AllGen, is available upon request.​

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Here’s what you can expect at the AllGen Office during this time:

• Our physical office will be accepting appointments only. Please contact us at 407-210-3888 to schedule a physical or virtual appointment.
• When you arrive at the building where the AllGen Office is located, please keep in mind that the building and the lobby area still require masks. You will need to bring a mask to enter the building.
• Once inside the AllGen Office, there will no longer be a requirement for you to wear a mask. You can wear one if you prefer. 
• If you would like our team members to wear masks during your appointment, just let us know!
• We will continue to offer bottled water, coffee, and self-contained refreshment options. Don’t hesitate to ask one of our team members for help; we are here to serve you.

Virtual Office Options Continue – Serving You Is What We Do!

Please note that we are continuing to offer full virtual availability for all of your financial needs. We encourage you to take advantage of our virtual office whenever you’d like – it’s about convenience!

Finally, we realize the current situation is fluid and will continue to monitor the latest advisories and best practices to ensure the safest possible experience for you.

If you have any questions at all, please call us at 407-210-3888 or reach out via our contact form. We’re here to serve.

Important Disclosures: The information provided here is of a general nature and is not intended to answer any individual’s financial questions. Do not rely on information presented herein to address your individual financial concerns. Your receipt of information from this material does not create a client relationship and the financial privileges inherent therein. If you have a financial question, you should consult an experienced financial advisor. Moreover, the hiring of a financial advisor is an important decision that should not be based solely upon blogs, articles, or advertisements. Before you hire a financial advisor, you should request information about the financial advisor’s qualifications and experiences. Past performance is no guarantee of future results. All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed. Examples provided are for illustrative (or “informational”) purposes only and not intended to be reflective of results you can expect to achieve. AllGen Financial Advisors, Inc. (AllGen) is an investment advisor registered with the SEC. AllGen does not provide personal financial advice via this material. The purpose of this material is limited to the dissemination of general information regarding the services offered by AllGen. The Disclosure Brochure, Form ADV Part II, which details business practices, services offered, and related fees of AllGen, is available upon request.

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Of AllGen Financial Advisors’ 15 employees, over half are women and 60% are Hispanic or Asian. CEO and Co-Founder Paul Roldán is of Puerto Rican descent as well. 

“Diversity and inclusion isn’t just a strategy for us,” says Paul Roldán, CEO of AllGen Financial Advisors. “It’s just who we are. It’s in our DNA. Our goal is to be approachable to people of all walks of life… Diversity is not only smart business, but it’s also the right thing to do.”

AllGen’s commitment to diversity is part of the firm’s efforts to reflect the community they serve. The AllGen team is fluent in English, Spanish, Portuguese, and Hmong.

Additionally, AllGen recently launched AllGen Academy, which is a library of resources available to both individuals and small businesses. AllGen is currently offering “Building a Foundation,” an ecourse in AllGen Academy, at no charge to the public. The goal behind AllGen Academy is to make financial planning more accessible to all. These financial lessons come in the form of webinars, videos, worksheets, and more.

To sign up for “Building a Foundation” for free, click here and fill out the green form. 

To connect with AllGen Financial Advisors, Inc., visit their LinkedIn page here: https://www.linkedin.com/company/allgenfinancial/ 

For additional information about Investment News, visit their website here: https://www.investmentnews.com/ 

For Inquiries, contact:
Ted Watson, AllGen Financial Advisors, Inc.
watson@allgenfinancial.com
100 W Lucerne Circle, Suite 200
Orlando, FL 32801

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Here’s what we’ll be doing to help keep a safe office environment:

• Our physical office will be accepting appointments only. No walk-in options will be available. Please contact us at 407-210-3888 to schedule an appointment.
• When you arrive at the AllGen office for an appointment, there will be additional instructions posted as you enter. We will ask that you sit in the lobby and one of our team members will greet you there.
• Our check-in procedure will involve taking your temperature with a non-contact digital thermometer, as well as getting you set up with sanitizer and a mask (if you don’t bring your own). If anyone has a fever at the time of their appointment, they will be asked to reschedule their appointment.
• All of our team members will also be using sanitizer and a mask during physical meetings.
• We will continue to offer bottled water, coffee, and self-contained refreshment options, but all items will be disposable for sanitary reasons. Don’t hesitate to ask one of our team members for help; we are here to serve you.
• All work spaces used will be fully sanitized between meetings.

Virtual Office Options Continue – Serving You Is What We Do!

Please note that we are continuing to offer full virtual availability for all of your financial needs. We encourage you to take advantage of our virtual office whenever you’d like… The choice is yours!

Finally, we realize the current situation is fluid and will continue to monitor the latest advisories and best practices to ensure the safest possible experience for you.

If you have any questions at all, please call us at 407-210-3888 or reach out via our contact form. We’re here to serve.

Important Disclosures: The information provided here is of a general nature and is not intended to answer any individual’s financial questions. Do not rely on information presented herein to address your individual financial concerns. Your receipt of information from this material does not create a client relationship and the financial privileges inherent therein. If you have a financial question, you should consult an experienced financial advisor. Moreover, the hiring of a financial advisor is an important decision that should not be based solely upon blogs, articles, or advertisements. Before you hire a financial advisor, you should request information about the financial advisor’s qualifications and experiences. Past performance is no guarantee of future results. All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed. Examples provided are for illustrative (or “informational”) purposes only and not intended to be reflective of results you can expect to achieve. AllGen Financial Advisors, Inc. (AllGen) is an investment advisor registered with the SEC. AllGen does not provide personal financial advice via this material. The purpose of this material is limited to the dissemination of general information regarding the services offered by AllGen. The Disclosure Brochure, Form ADV Part II, which details business practices, services offered, and related fees of AllGen, is available upon request.​

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What is the Mix of my assets versus fixed income?

This question is important because the answer impacts the strategy of distribution during the Freedom stage. A higher level of fixed income streams puts less stress on the investment portfolio. Conversely, a lower level of fixed income requires the investment portfolio to maintain levels while producing income from liquidation and/or earnings. A rule of thumb states that a distribution rate from an investment portfolio ranging from 3-5% highly increases the odds of this portfolio lasting a lifetime. Yet, sometimes the asset/income stream mix requires a higher distribution rate. As such, it is important to run “stress tests” on portfolios during the Freedom stage in order to assess the probabilities of success and better grasp the most appropriate balance between risk and preservation. While there are many stress tests available to clients, many financial advisors use multiple probability simulators to determine future success rates of varying investment portfolios with fixed income streams. Once determined, appropriate actions can then be taken to increase the “odds of success” during the Freedom stage, determined by the maintenance of your lifestyle during this stage.

What role do Taxes play in my finances?

Aside from not wanting to pay too much, taxes should be considered at all stages of investing but especially during the preservation stage. Taxes can have several negative effects on investment portfolio including: 1) Reducing investable income; and 2) Reducing real returns. The latter is of greater consequence during the preservation stage. Consider a portfolio the produces a gross return of 7%. A person having to pay 20% on this return will net closer to 5.5%. As a result, this could represent significantly less income during the freedom stage (see chart on right). This effect can be even worse if the returns are taxed at a higher income tax rate. If you are not considering taxes in your financial discussions, you might not be maximizing your financial opportunities.

What Coordination strategy optimizes my Freedom assets/income?

Several decisions can impact the longevity of a portfolio during the Freedom stage. Among these are the distribution choices for pensions as well as the social security income selections. Questions that should be answered during this preservation stage include but are not limited to: 1) Should I delay receipt of my social security income; 2) Should I claim single life, joint life, or period certain when it comes to my pension; 3) should I choose an income stream or a lump sum distribution for my pension, etc.? The answers to these questions can vary depending on the makeup of the family (i.e. married, single, non-married but cohabitating, etc.) Each of these scenarios can lead to different conclusions in terms of how to optimize your Freedom income/portfolio. Additionally, the mix of assets vs income streams needs to be considered in determining the optimal choice to make when entering the Freedom Stage.

What Risks can impact my portfolio preservation during the Freedom stage?

Risk management is an area that we promote in all stages of your financial life. In the preservation stage this is even more critically important as there is less room for error. A few of the risk considerations are: 1) portfolio volatility; 2) death of spouse/partner; and 3) Disability (i.e. need for Long Term Care. While we hope for the best at Allgen, these happenings occur in life and should be accounted for in any Freedom plan. Not accounting for them can lead to accelerated depletion of assets and therefore added stress during the preservation stage. According to Genworth’s 15th annual Cost of Care Survey, the annual median cost of care in the U.S. can range from $18,720 to $100,375 per year¹ depending on the type of care wanted or required. These costs continue to increase with an aging population, creating more demand. As such, it is important to consider what the goals and tools required would be if this were needed in conjunction with the rest of the asset and income stream picture.

Summary

As you enter the Financial Freedom stage, it is critical to consider the above to ensure optimizing the long-term picture during the preservation stage of your portfolio. These considerations will highly increase your odds of “success” during the Freedom stage and enable you to then move on to planning for a successful legacy and impact living. As always, we invite you to speak with us about your particular situation and see how we can help you optimize your Freedom Stage portfolio.

¹ 15th annual Genworth Cost of Care Survey 

Written by Paul Roldan with Allgen Financial Advisors, Inc.

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• Long-term stock charts point to a potential change of trend in the long-running bull market
• The Federal Reserve could be nearing the end of its current rate rising cycle

4th Quarter Review

US stocks had a difficult 4th quarter and its worst year since 2008. US large and small caps were down 13.5% and 20.1% for the quarter and down 4.4% and 8.5% for year. International stocks fell 11.5% for the quarter and were the worst performing area for the year, down 14.2%. Bonds were up 1.6% for the quarter, despite the FED raising rates another 0.25%, and were flat for the year. In this quarter’s market commentary, we look at the change of the trend of the overall stock market, the potential change of direction in Fed Policy, and how both issues could affect stocks and bonds.

Uptrend in Question

As we’ve mentioned in past articles, while it is very important to study economic indicators and fundamentals, it is equally important to study market trends from a technical charting basis. Price charts of stocks or stock indices (ie. S&P 500) usually give you clues as to what’s to come in the future and they tend to give you these insights before they are reflected in the economic indicators and the fundamentals. Recently the S&P 500 stock chart has broken down from a long-term up-trend. As you can see in the chart below, in the past when the market broke below its long-term uptrend line (prior times were 2000 and 2007), the market went into a significant down-trend and a bear market. However, no one knows the future, and all the analysis we do only helps us to make more informed decisions of what we believe will happen. We are humble enough to know, that we could be wrong and that’s why, with investing, you never put all your eggs in one basket. We have to also prepare for being wrong. For example, we often get asked: “If you think the market is going to drop why don’t you sell out of everything and go all cash and wait?” And the answer is, “Because we could be wrong, and if the market goes up and we are in cash, it has now put is in a very difficult position.” In such a case the quandry becomes when do I get back in as stocks continue to go up and FOMO (fear of missing out) kicks in. Should I get back into the market even if it is higher than when I sold or continue to miss out on market gains? What typically happens is the market goes higher until you can’t handle missing out any longer. So you reinvest into the market and it starts to fall from the now higher level… -then you’ve really made a mistake! You missed out on the gains, and you end up taking a larger loss when the market drops. This even happens to the smartest minds in the world. In 1995 after a very strong bull market, the President of the Federal Reserve at the time, Alan Greenspan, famously quoted that the market was displaying “irrational exuberance” pointing out that the astronomical market rise was not sustainable.¹

If one was to sell out of the market in 1995 and go all cash when the S&P 500 index was at the price level of around 550, then they would have missed out on a 200% rise in the market over the next 5 years until the market finally turned in the year 2000. We highly discourage clients from trying to go all cash to avoid a market drop. A recent Dalbar study shows the average equity investor returns over a 30 year period (1986-2016) are around 4% a year while the S&P 500 returned 10% annually.² The study makes the point that investors are their own worst enemy and constantly mistime the market by selling low and buying high (the opposite of what you should do). That’s why, instead of going all cash, we have reduced stocks and increased safe-haven assets like US Government bonds and money markets. This can help protect us if the market goes down, but if we are wrong and the market continues to go up we should fare well.

The Federal Reserve Could Be Nearing the End of the Current Rate Rising Cycle

The Federal Reserve (FED) recently raised rates another 0.25% in December for a total of 4 rate hikes totaling a full 1.0% rise in interest rates for 2018. This brings our current range for the Federal Funds rate to 2.25%-2.5%. At the same time, as we have mentioned in prior market commentaries, the FED continues to do quantitative tightening. Rising rates and quantitative tightening led to interest rates rising to 7-year highs in 2018. Both forces tend to slow down the economy. People and companies that are in debt have seen their borrowing costs rise, which means reduced cashflow (bad for economy). The economy starts to slowdown and markets start to drop near the end of a rate rising cycle. With the recent large drop in the market and some economic indicators starting to cool off. The FED as hinted at pausing or slowing down on interest rate hikes. However, Federal Fund rate futures (see chart on right) show that the market is predicting, by this time next year, that interest rates will be the same as they are now. What’s more interesting is that there

(Source: https://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html As of 1/10/2019 )

is a higher probability of a rate cut then a rate hike. So, what does this mean for stocks and bonds? For stocks it means that the market is anticipating a weaker economy (potentially bad for stocks).  However, for bonds this is potentially a good sign, as bonds tend to perform better when interest rates stay flat or go down.  In our client’s portfolios we have been reducing stocks and increasing bonds. Also, we have been increasing the duration of our bonds (more longer-term bonds).

Going Forward

The stock market appears to have broken down from a long-term uptrend. The Federal Reserve looks like they may pause interest rate hikes as the futures market for the Fed Funds Rates alludes to rates not rising over the next year. These two factors show potentially difficult times for stocks while potentially better opportunities for bonds in the foreseeable future. As such, we have become more defensive on the stock side of our portfolios while increasing exposure and duration to the bond side of our portfolios. We will continue to monitor the markets, economies, interest rates, currencies, sentiment, and many other indicators to try to stay ahead of the markets as we look to preserve and grow our client’s wealth. Our investment philosophy is to manage risk first in an effort to avoid a major loss, as we seek to outperform markets over a full market cycle net of our management fee. We appreciate your trust and confidence in us!

¹ “Irrational Exuberance” Book by Robert Shiller
^{2 Source:} (https://seekingalpha.com/article/4108688-investor-returns-vs-market-returns-failure-endures)

Written by: Jason Martin, CFP®, CMT, Chief Investment Officer, Paul Roldan, Chief Executive Officer; Christina Shaffer, Analyst Allgen Financial Advisors, Inc.;
 

Important Disclosures: The information provided here is of a general nature and is not intended to answer any individual’s financial questions. Do not rely on information presented herein to address your individual financial concerns. Your receipt of information from this material does not create a client relationship and the financial privileges inherent therein. If you have a financial question, you should consult an experienced financial advisor. Moreover, the hiring of a financial advisor is an important decision that should not be based solely upon blogs, articles, or advertisements. Before you hire a financial advisor, you should request information about the financial advisor’s qualifications and experiences. Past performance is no guarantee of future results. All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed. Examples provided are for illustrative (or “informational”) purposes only and not intended to be reflective of results you can expect to achieve. AllGen Financial Advisors, Inc. (AllGen) is an investment advisor registered with the SEC. AllGen does not provide personal financial advice via this material. The purpose of this material is limited to the dissemination of general information regarding the services offered by AllGen. The Disclosure Brochure, Form ADV Part II, which details business practices, services offered, and related fees of AllGen, is available upon request.​

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Here’s what some of our team members learned from the big day:

Jason: “I’m blessed to work with a team who all buy into the company’s mission and vision and passionately pursue it! …Plus, we have a great time working together!”

Karen: I learned that working with a group of people that have the same passion and drive for helping people is invaluable. Also, that teams are there to lift each other up and help us overcome our worst fears.

Kathryn: Together, we can overcome anything! Never forget to lean on your team when you need it most.

Liz: What an amazing time spent with such amazing people! Allgen not only looks out for its clients with such great attention and care, but its employees as well. Jason & Paul thank you for depositing words of encouragement, knowledge, and affirmation as you reminded us the vision and mission of Allgen… it’s heart, while building us up and challenging us to look deeper and grow further. Together as a Team we were able to conquer fears, connect through laughter, and encourage each other through obstacles that limited us to the finish line, but with perseverance, peer support and magnifying the solution not the obstacle, we successfully finished the course. Go Team Allgen!

Be sure to check out some of the fun pictures of the event below!

Important Disclosures: The information provided here is of a general nature and is not intended to answer any individual’s financial questions. Do not rely on information presented herein to address your individual financial concerns. Your receipt of information from this material does not create a client relationship and the financial privileges inherent therein. If you have a financial question, you should consult an experienced financial advisor. Moreover, the hiring of a financial advisor is an important decision that should not be based solely upon blogs, articles, or advertisements. Before you hire a financial advisor, you should request information about the financial advisor’s qualifications and experiences. Past performance is no guarantee of future results. All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed. Examples provided are for illustrative (or “informational”) purposes only and not intended to be reflective of results you can expect to achieve. AllGen Financial Advisors, Inc. (AllGen) is an investment advisor registered with the SEC. AllGen does not provide personal financial advice via this material. The purpose of this material is limited to the dissemination of general information regarding the services offered by AllGen. The Disclosure Brochure, Form ADV Part II, which details business practices, services offered, and related fees of AllGen, is available upon request.​

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