Friday, April 16, 2021

Warren Buffet's Annual Shareholder Letter

 


Every year, Berkshire Hathaway’s Chairman and CEO Warren Buffett sends a thoughtfully crafted letter to the company’s shareholders from which the investment industry gleans whatever newfound wisdom possible. Given that 2020 was an unusual year by economic, social and financial standards, there is much to glean.

 

Despite the difficulties the U.S. has experienced in managing the COVID-19 virus, Buffett has one sustaining message: “Never bet against America.” He also is a man who aligns his money with his beliefs. Presently, Berkshire Hathaway owns the highest value of U.S. business assets – comprised of property, plants and equipment – than any other company in the country.1

 

Berkshire is a conglomerate of disparate companies, and Buffet spends much time in his letter imparting what he’s learned about being a majority shareholder versus running a business. He says that “owning a non-controlling portion of a wonderful business is more profitable, more enjoyable – and far less work.”2

 

Fortunately, that’s also what it can be like to be an individual investor. While we may not be major shareholders, investors are often rewarded with a slice of the profit pie when we choose a well-run and profitable business. The key, of course, is to pick the right ones. Short-term investors may look to trade high risk for a quick profit, while longer-term investors may seek more reliable performance and give a company plenty of time to deliver. Sometimes it’s a matter of first figuring out what it is you want to accomplish with the money you make and then develop a strategy from there. Let us know if we can help.

 

One concept Buffett often reiterates is the need to hold a margin of safety when investing. Millions of people who lost their jobs during the pandemic learned just how narrow that margin of safety was within their own households. For those lucky enough to continue working, they may be even better off than before – simply because the pandemic shut down normal spending activities. That means many households are now in a position to reduce their debt and financial risks, and create an emergency fund they may not have had previously.3

 

Another hallmark move Buffett made in 2020 was an outsized buyback of Berkshire Hathaway’s own shares. The total 2020 tab came to $24.7 billion – compared to the combined total of $6.4 billion from the two prior years. Buffett noted that while he normally shies away from repurchases, the strategy offered “a simple way for investors to own an ever-expanding portion of exceptional businesses.” The strategy proved to be appropriate for an unpredictable year such as 2020.4

 

And finally, another key component of the shareholder letter was that Buffett admitted to making a big mistake in the past that came to a head in 2020. In 2016, Berkshire purchased aerospace-

parts manufacturer Precision Castparts for $37 billion. While he still believes the company is the leader of the aerospace industry and will generate solid returns in the future, Buffett cops to an earnings miscalculation that led him to pay too much for the company.5

We take pride in assisting our clients with incorporating all aspects of their life into their Retirement Roadmap 360®. Take control of your financial future and give us a call at (734) 769-1719 today to see how we may be able to help you! 

 

1 Yun Li. CNBC. Feb. 27, 2021. “Warren Buffett says ‘never bet against America’ in letter trumpeting Berkshire’s U.S.-based assets.” https://www.cnbc.com/2021/02/27/warren-buffett-says-never-bet-against-america-in-letter-trumpeting-berkshires-us-based-assets.html. Accessed March 8, 2021.

2 Warren Buffett. Berkshire Hathaway. Feb. 27, 2021. “To the Shareholders of Berkshire Hathaway Inc.” https://www.berkshirehathaway.com/letters/2020ltr.pdf. Accessed March 8, 2021.

3 Chris Farrell. Star Tribune. March 6, 2021. “Take advantage of this rare opportunity to reduce financial risk.” https://www.startribune.com/take-advantage-of-this-rare-opportunity-to-reduce-financial-risk/600031093/?refresh=true. Accessed March 8, 2021.

4 Aparna Narayanan. Investor’s Business Daily. Feb. 27, 2021. “Warren Buffett’s Key Investment Strategy Rests On These ‘Family Jewels’.” https://www.investors.com/news/warren-buffett-annual-letter-signals-maintaining-berkshire-hathaway-strategy-2021/. Accessed March 8, 2021.

5 James Leggate. Fox Business. Feb. 27, 2021. “In Warren Buffett’s annual letter he admits making this ‘big’ mistake.” https://www.foxbusiness.com/markets/warren-buffett-admits-making-this-big-mistake-in-annual-letter-to-investors. Accessed March 8, 2021.

 

We are an independent firm helping individuals create retirement strategies using a variety of insurance and investment products to custom suit their needs and objectives. This material is intended to provide general information to help you understand basic financial planning strategies and should not be construed as financial or investment advice. All investments are subject to risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.

 

The information contained in this material is believed to be reliable, but accuracy and completeness cannot be guaranteed; it is not intended to be used as the sole basis for financial decisions. If you are unable to access any of the news articles and sources through the links provided in this text, please contact us to request a copy of the desired reference.

 

Investment Advisory Services are offered by Imber Financial Group, LLC., a Registered Investment Adviser firm. Insurance services are offered through Imber Wealth Advisors, Inc. Imber Financial Group, LLC. and Imber Wealth Advisors, Inc. are affiliated companies

Wednesday, April 7, 2021

Annuity Insights


 The Insured Retirement Institute (IRI) – a trade association for the retirement income industry – advocates annuities as a vehicle that can help provide retirees income, guaranteed by the insurer. The organization has been actively educating and lobbying legislators to expand annuity access as part of employer-sponsored retirement plans.1 Under this scenario, whatever portion the investor contributes to an annuity option in his 401(k) would be eligible for distribution throughout his lifetime based on an estimated calculation of life expectancy.

A deferred annuity is a contract between an insurance company and an individual. The individual pays a one-time or ongoing premium in exchange for eventual payouts that include both return of premium plus interest.2

There are many types of annuities. They are complex and include additional fees and restrictions that make them more expensive than other types of investments. Then again, there are no other products that guarantee a combination of minimum income payout, an option for guaranteed income for life and a guaranteed death benefit. It’s important to work with a financial professional to ensure an annuity is appropriate for your situation, and to choose the best option. We would be happy to help you with that evaluation.

Outside of a qualified workplace plan, retirees may purchase an annuity to diversify their retirement portfolio. Historically, bonds offered guaranteed income that retirees could count on, but today’s lower yields have investors searching around for other alternatives. An annuity can offer a similar level of guaranteed income without market risk.

In a fixed-index annuity (FIA) an investor pays premiums to an annuity company, which then invests to earn enough money to distribute contractual payouts plus interest, as well as generate revenues to run the company and hold a general reserve fund. Because the insurer does the investing, it bears all the market risk. With an FIA, the investor’s principal is protected from market volatility and he receives a minimum interest guarantee.3

Some fixed-index annuities are linked to a specific index, such as the S&P 500. The insurer provides the annuity owner a certain percentage of the index’s return but limits any losses. That way the investor can earn more income in any given year, based on how well that index returns.4

Note that when the owner withdraws money from an annuity, regardless of whether it is part of or separate from a workplace retirement plan, the full distribution is taxed as ordinary income, not as long-term capital gains. However, note that when annuity interest is earmarked to pay for long-term care insurance premiums or qualified long-term care expenses, it may be withdrawn tax-free.5

We take pride in assisting our clients with incorporating all aspects of their life into their Retirement Roadmap 360®. Take control of your financial future and give us a call at (734) 769-1719 today to see how we may be able to help you! 


Mark Schoeff Jr. Investment News. March 4, 2021. “Insured Retirement Institute wants more worker access to plans, annuities.” https://www.investmentnews.com/insured-retirement-institute-wants-more-worker-access-to-plans-annuities-203567. Accessed March 4, 2021.

David Rodeck and John Schmidt. Forbes. Feb. 4, 2021. “What Is a Deferred Annuity?” https://www.forbes.com/advisor/retirement/deferred-annuity/. Accessed March 4, 2021.

Insurance News Net. March 3, 2021. “Are Annuities A Good Alternative To Bonds?” https://insurancenewsnet.com/oarticle/are-annuities-a-good-alternative-to-bonds. Accessed March 4, 2021.

Sandra Block. Kiplinger. Feb. 19, 2021. “The Case for Indexed Annuities.” https://www.kiplinger.com/retirement/annuities/602301/the-case-for-indexed-annuities. Accessed March 4, 2021.

Ken Nuss. Kiplinger. Feb. 12, 2021. “How Annuities Are Taxed.” https://www.kiplinger.com/retirement/annuities/602248/how-annuities-are-taxed. Accessed March 4, 2021.

Investment Advisory Services are offered by Imber Financial Group, LLC., a Registered Investment Adviser firm. Insurance services are offered through Imber Wealth Advisors, Inc. Imber Financial Group, LLC. and Imber Wealth Advisors, Inc. are affiliated companies


Friday, April 2, 2021

Tax Pitfalls


Millions of Americans took advantage of the delayed tax-filing deadline in 2020. In fact, according to one survey, 11% of taxpayers filed their 2019 returns after the July 15 extension, and 3% still hadn’t filed as of last December. The primary reason most taxpayers file late isn’t due to procrastination, but rather because they owe taxes. Among them, 24% say they don’t have the financial ability to pay and 27% admit they didn’t want to.1

However, the bad news is that even if you file for an extension, you still have to pay your taxes on time, even if you must estimate the amount paid. Any back taxes owed after the filing date starts the clock on interest and penalties.

There are several ways to estimate your taxes and get them paid on time, and good reasons to do so. If you’re a W-2 employee, you can request to have your tax withholding changed at any time during the year to reflect changes in your income. If you’re self-employed, you simply change the estimated tax you pay each quarter to align with recent earnings. It’s better to pay taxes on time than run up a penalty tab that you’d otherwise be saving or spending elsewhere. If you’d like to learn about ways to use insurance products to minimize your tax liabilities, please contact us.

The 2020 tax season has several pitfalls due to the year’s poor economy and measures designed to alleviate its effects. For example, COVID-19 relief programs such as the CARES Act granted forebearance to many Americans carrying student loans and mortgages. Be aware that any amount of debt – including credit card debt – that is forgiven qualifies as taxable income in that year.2

Other income taxpayers must report include termination benefits, such payouts for unused sick days, vacation days or severance pay. Those amounts should be included on the W-2 your former employer provides. Furthermore, unemployment benefits paid by the government also are subject to taxation.3

Speaking of unemployment, it used to be that unemployment benefits would reduce a taxpayer’s eligibility for certain credits, such as the earned income tax credit (up to $6,600), and a refundable portion of the child tax credit (up to $1,400 per qualifying child). However, this issue was adjusted in light of so many people losing income last year. When filing a 2020 return, taxpayers have the option to use 2019 income to calculate their eligibility for tax credits.4

The good news is that if you were eligible for government stimulus checks last year and didn’t receive them, you can claim that money as a Recovery Rebate Credit on your 2020 return. The bad news is that if you are past-due on child support or unpaid student loans, the IRS can withhold some or all of that stimulus credit to offset the debt you owe.5

We take pride in assisting our clients with incorporating all aspects of their life into their Retirement Roadmap 360®. Take control of your financial future and give us a call at (734) 769-1719 today to see how we may be able to help you! 


1 Elizabeth Renter. NerdWallet. Feb. 2, 2021. “Tax Bills Drive Millions of Late 2019 Returns and 2021 Stress.” https://www.nerdwallet.com/blog/2021-tax-report/. Accessed March 4, 2021.

2 Kimberly Palmer. 23ABC News. March 3, 2021. “Unwelcome tax surprises may await those with debt.” https://www.turnto23.com/financial-fitness/unwelcome-tax-surprises-may-await-those-with-debt. Accessed March 4, 2021.

3S The Street. Feb. 25, 2021. “5 Tax Tips for When You’re Suddenly Faced with Unemployment.” https://www.thestreet.com/personal-finance/taxes/tax-tips-sudden-unemployment-turbotax. Accessed March 4, 2021.

4 Darla Mercado and Carmen Reinicke. CNBC. Feb. 15, 2021. “This tax pitfall could affect millions due to Covid. Here’s what you need to know.” https://www.cnbc.com/2021/02/15/beware-this-tax-pitfall-if-you-had-unemployment-income-during-covid-.html. Accessed March 4, 2021.

5 Alison DeNisco Rayome and Shelby Brown. CNET. Feb. 25, 2021. “6 stimulus check pitfalls to know about during tax season.” https://www.cnet.com/personal-finance/6-stimulus-check-pitfalls-to-know-about-during-tax-season/. Accessed March 4, 2021.

Investment Advisory Services are offered by Imber Financial Group, LLC., a Registered Investment Adviser firm. Insurance services are offered through Imber Wealth Advisors, Inc. Imber Financial Group, LLC. and Imber Wealth Advisors, Inc. are affiliated companies


Monday, March 29, 2021

Can Money Buy Happiness



In 2010, a study was published by two Nobel prize-winning economists purporting that people with more money feel better about their lives. However, that held true only up to an annual salary of $75,000 ($90,000 in today’s dollars). Past the $75k threshold, people weren’t necessarily any happier.

That scenario has apparently changed in the ensuing decade. A recently updated version of the study now concludes that happiness continues to increase with income – without a cap.1

How do you define happy? The way we quantify happiness during our working years may be different from retirement. That’s largely because some of us define ourselves by our work or career status – how much we earn and whether we’ve reached our professional goals. Once we retire, the focus is put less on these things – our happiness can be shifted towards other things.

It may be family, travel, improving our golf or tennis game, pursuing hobbies, or checking off that bucket list. When we are in the retirement planning stage, it’s important to think about what will make you happy in retirement. From there, you can establish a number – your total assets – that support those concrete goals. That’s different from coming up with a random number and then living whatever lifestyle you can with it. If you’d like to discuss your retirement goals in more depth, feel free to contact us.

The 2020 World Happiness Report promises to be an interesting read because it’s the first in which data was collected during a global pandemic. While you would think the responses would be dreary, there are some positive patterns to consider. Across 12 countries, people affected by lockdowns developed stronger relationships with friends, neighbors and even the front-line workers at their local stores. In fact, 62% reported that living under a lockdown made them feel more connected to their community. More than half (58%) determined that those human connections are what make them truly happy.2

If you speak with retirees from earlier generations, there has long been a common theme that the important factor affecting a happy retirement is health – not wealth. More than 80% of today’s retirees agree. According to a recent Merrill Lynch study, regardless of wealth, Americans age 50 and older say that their biggest worry in preparing for retirement is being able pay for health-care expenses.3

Everyone’s ideal retirement is different. Your actual plans are what can change the goalposts for “the number” you need to have saved by retirement. While traditional retirement advice recommends we save anywhere from 10 to 15% of current income for retirement, you may be able to save less – or need to save more – to achieve the specific lifestyle you want in retirement. In other words, budget for the lifestyle you plan to enjoy, not the income that you presently earn.4

It’s one thing to scale your annual retirement income to your lifestyle – but what about the big-ticket risks? The Society of Actuaries (SOA) has identified a number of post-retirement risks that can affect income, such as the need for long-term or nursing care.5 By unbundling the income and insurance elements of your plan, you may be better able to afford the retirement lifestyle that will make you happy.6

We take pride in assisting our clients with incorporating all aspects of their life into their Retirement Roadmap 360®. Take control of your financial future and give us a call at (734) 769-1719 today to see how we may be able to help you!  



Alex Ledsom. Forbes. Feb. 7, 2021. “New Study Shows That More Money Buys More Happiness, Even For The Rich.” https://www.forbes.com/sites/alexledsom/2021/02/07/new-study-shows-that-more-money-buys-more-happiness/?sh=561c2ff770d5. Accessed March 1, 2021.

World Happiness Report. Feb. 24, 2021. “Let’s Build Back Happier!” https://worldhappiness.report/blog/lets-build-back-happier/. Accessed March 1, 2021.

Kathleen Coxwell. New Retirement. Jan. 9, 2020. “65 Retirement Tips for a Healthy, Wealthy and Happy Retirement!” https://www.newretirement.com/retirement/retirement-tips-healthy-wealthy-happy-retirement/. Accessed March 1, 2021.

Paula Pant. The Balance. Feb. 11, 2021. “Plan for Retirement Based on Lifestyle, Not Current Income.” https://www.thebalance.com/plan-for-retirement-based-on-lifestyle-not-current-income-453919. Accessed March 1, 2021.

Ken Hawkins. Investopedia. Jan. 4, 2021. “Common Post-Retirement Risks You Should Know.” https://www.investopedia.com/articles/retirement/08/post-retirement-risks-outlive-assets.asp. Accessed March 1, 2021.

Jerry Golden. Kiplinger. Nov. 4, 2020. “Find the Income to Insure Against Retirement Risks.” https://www.kiplinger.com/retirement/601671/find-the-income-to-insure-against-retirement-risks. Accessed March 1, 2021.

Investment Advisory Services are offered by Imber Financial Group, LLC., a Registered Investment Adviser firm. Insurance services are offered through Imber Wealth Advisors, Inc. Imber Financial Group, LLC. and Imber Wealth Advisors, Inc. are affiliated companies

 


Monday, March 22, 2021

That Pesky Early Withdrawal Penalty: It's There for a Reason


One way for the government to potentially earn more tax revenue is by eliminating the early withdrawal penalty. This is the typical 10%-tax penalty on distributions from retirement accounts by people younger than age 59 ½.1

If that penalty didn’t exist, investors may be more inclined to pull money out of their retirement accounts, whether to purchase necessities or to splurge on a luxury item. Without that penalty, they would pay only income taxes on the distribution, which seems somewhat equitable since they received a tax break on the contributions that went into the account. But paying 10% to the government on top of those taxes? It can be very discouraging.

On the one hand, that means the government will have to wait longer to receive tax revenues on those tax-deferred assets. On the other hand, it means the government will likely receive higher tax revenues because taxes will be due on long-appreciated capital gains. However, the other way the government benefits is because the more that people put away for retirement, the less they will have to rely on government benefit programs during retirement.

So, in many ways, the early withdrawal penalty is a win-win for both investors and the government, except during times when financial struggles are particularly difficult, such as during a pandemic. After the COVID-19 outbreak, millions of Americans lost income, and many had no choice but to pull money out of their retirement accounts to help make ends meet.

If you are considering making a withdrawal from your 401(k) — or any other investment account — to meet your current income needs, give us a call. We can review your financial situation to see if there may be a better way to leverage your assets that will help protect your potential for investment growth in the future.

Recognizing that Americans needed cash fast, the government stepped in with the CARES Act in the spring of 2020, permitting retirement account owners younger than age 59 ½ to withdraw up to $100,000 from their savings without paying the 10% penalty.2 That provision ended in 2020, but a major disaster declaration was signed into effect for account owners who experienced federally declared disasters, not including COVID. For example, during the Texas winter storm.3

However, Olivia S. Mitchell, executive director of the Pension Research Council at Wharton School of Business, says withdrawing money early from retirement accounts for any reason is a terrible idea. According to Mitchell, the biggest danger to doing so is the opportunity risk, and she cited the following example:

Assume a 40-year-old withdraws $50,000 from her retirement account today. By retirement at age 67, she would have given up more than $223,000 in retirement assets (assuming an annual return of 5.7%). Converted into annual benefits, that’s about a $14,000/year reduction in retirement income for the rest of her life.4

In other words, taking $50,000 out of your savings today may save you a 10% penalty, but it could potentially negatively affect your retirement lifestyle in the future.

If you did make a 401(k) distribution last year, note that the CARES Act also included a provision to help restore some of your potential investment gains. Investors have three years to pay the amount withdrawn back to the plan without any tax consequences — income taxes or the early withdrawal penalty.5 This is a substantial expansion period compared to the usual 60 days — and hopefully gives many retirement plan owners time to recoup and repay that “loan” to themselves.

We take pride in assisting our clients with incorporating all aspects of their life into their Retirement Roadmap 360®. Take control of your financial future and give us a call at (734) 769-1719 today to see how we may be able to help you!  



Jim Blankenship. EFT Trends. Feb. 23, 2021. “16 Ways to Withdraw Money From Your 401(k) Without Penalty.” https://www.etftrends.com/16-ways-to-withdraw-money-from-your-401k-without-penalty/. Accessed Feb. 25, 2021.

Mark Paller. Forbes. Feb. 25, 2021. “How The CARES ACT Changed Retirement Plan Distribution Rules.” https://www.forbes.com/sites/forbesfinancecouncil/2021/02/25/how-the-cares-act-changed-retirement-plan-distribution-rules/?sh=6a4193b64add. Accessed Feb. 25, 2021.

Alex Briseno and Todd J. Gillman. The Dallas Morning News. Feb. 22, 2021. “Additional 31 Texas counties included in federal major disaster declaration.” https://www.dallasnews.com/news/politics/2021/02/22/additional-31-texas-counties-included-in-federal-major-disaster-declaration/. Accessed Feb. 25, 2021.

Knowledge@Wharton. Feb. 23, 2021. “Why Early 401(k) Withdrawals Are a Bad Idea.” https://knowledge.wharton.upenn.edu/article/why-early-401k-withdrawals-are-a-bad-idea/. Accessed Feb. 25, 2021.

Andrew Osterland. CNBC. Jan. 21, 2021. “Here are tax issues to consider if you tapped retirement account to weather 2020.” https://www.cnbc.com/2021/01/21/here-are-tax-issues-to-consider-if-you-tapped-retirement-account-in-2020.html. Accessed Feb. 25, 2021.

Investment Advisory Services are offered by Imber Financial Group, LLC., a Registered Investment Adviser firm. Insurance services are offered through Imber Wealth Advisors, Inc. Imber Financial Group, LLC. and Imber Wealth Advisors, Inc. are affiliated companies


Thursday, March 18, 2021

Shopping for Life Insurance During the Pandemic



It may come as no surprise to learn that there was a jump in life insurance applications during 2020.1 While contemplating one’s demise may feel like something you can delay when healthy, financial planning clearly weighed heavily on the minds of Americans during the current deadly pandemic.

Rest assured that for anyone who already owns a life insurance policy and then passes away due to a COVID-related condition, their beneficiaries will receive the death benefit (as long as premium payments are current). Once you purchase a life insurance contract, the terms are set and cannot be changed after purchase.

However, if you’re considering applying for life insurance while the pandemic is still ongoing, you can expect a few challenges. Because the coronavirus has had a high fatality rate among people age 65 and older, some insurers have temporary limited the age for which they will issue a new policy. Some won’t issue policies after age 70; others have cut the age limit to 60.2

If you have traveled out of the country recently, particularly if you’ve been to a country with a substantial outbreak, the insurer may require a quarantine period before considering your application. The same goes for if you are currently infected with the virus; you’ll have to wait until you are fully recovered to apply for life insurance.

Traditionally, life insurers generally required a physical exam as part of the application process to ensure the candidate wasn’t facing imminent death when he or she applied for a policy. However, because of today’s social distancing guidelines, many insurers have delayed that requirement — relying solely on a medical questionnaire. Those questionnaires will very likely ask if you have been treated for COVID-19.3

Even pre-existing health conditions such as diabetes and asthma, which are high-risk factors for serious COVID-19 cases, may be heavily weighted when determining your policy premium. While medical underwriting is no longer permitted to determine health insurance terms and rates, it is baked into the life insurance application process and can affect individual premiums.

In fact, in upcoming years, as insurers amass and evaluate medical data related to the coronavirus, they are apt to adjust policy terms and rates, particularly in anticipation of subsequent medical conditions suffered by COVID-19 survivors. This is perhaps reason enough to go ahead and apply for life insurance now — assuming you are relatively young and healthy — before those factors become an issue.

Finally, if you’ve lost your job and are worried about being able to keep up with life insurance payments, call your insurer about alternative payment options. Considering today’s high unemployment rate, some carriers are offering to defer premiums for up to 90 days.4

We take pride in assisting our clients with incorporating all aspects of their life into their Retirement Roadmap 360®. Take control of your financial future and give us a call at (734) 769-1719 today to see how we may be able to help you!  



Megan Leonhardt. CNBC. Sept. 1, 2020. “Applications for life insurance are on the rise—here’s what you should know before you buy.” https://www.cnbc.com/2020/09/01/what-to-know-about-buying-life-insurance-during-the-covid-19-pandemic.html. Accessed Feb. 23, 2021.

Cynthia Paez Bowman. Bankrate. Oct. 29, 2020. “Can you get a life insurance policy during COVID-19?” https://www.bankrate.com/insurance/life-insurance/coronavirus-and-life-insurance/. Accessed Feb. 23, 2021.

Sterling Price. ValuePenguin. Jan. 15, 2021. “How Is the Coronavirus (COVID-19) Affecting Life Insurance? An FAQ.” https://www.valuepenguin.com/life-insurance-coronavirus-faq. Accessed Feb. 23, 2021.

Ibid.

Investment Advisory Services are offered by Imber Financial Group, LLC., a Registered Investment Adviser firm. Insurance services are offered through Imber Wealth Advisors, Inc. Imber Financial Group, LLC. and Imber Wealth Advisors, Inc. are affiliated companies


Monday, March 15, 2021

Is the Market Poised for a Value Shift?

 


The stock market continues to exhibit resiliency in the face of disrupting factors, ranging from a global pandemic to a severe economic decline to a controversial presidential election. For many years, Wall Street analysts warned a market correction was long overdue. Despite intermittent volatility, those concerns largely have not borne out.

You may be tired of worrying about a correction, but there’s no denying many share prices appear to have topped out, if not in an outright bubble.1 While growth-oriented investors may be willing to keep rolling the dice and hope prices rise even higher, a growing number are looking to transition to value stocks.

Value stocks are considered those priced lower than merited given certain company fundamentals, such as earnings, sales or book value. They are often believed to be overlooked in the market because their returns are relatively unimpressive. However, value stocks are kind of like the tortoise in the race against the hare (i.e., growth stocks). They may slowly plod along but, because they lack “flash” or volatility, can outpace their growth peers in the long term.2

Some stock analysts are starting to favor value stocks in the current landscape. They believe additional stimulus efforts will increase the money supply, and that will drive a commodity boost. Commodity outperformance, in turn, tends to be more positive for value stocks. One investment analyst recently projected value stocks could outperform growth stocks by as much as 30%, as measured from Q4 of 2020 through Q3 of 2024.3

Moving forward, the analysts at Russell Investments say they favor non-U.S. equities over U.S. equities, undervalued cyclical value stocks over expensive technology and growth stocks, and the value offered by emerging markets (EM) equities.4

From a performance standpoint, the long-term story is quite different from recent short-term numbers. In 2020, value funds on average lost more than growth funds in the first-quarter market collapse and continued to lag after the market bounced back. By year end, value stock funds posted one of their worst years on record relative to growth funds.5

However, when you compare very long-term performance, value stocks have doubled the success of growth stocks. According to Bank of America, since 1926, value investing has returned 1,344,600% compared to 626,600% by growth investing.6

We often recommend diversification among investment portfolios, and adding value stocks or value-oriented mutual funds/ETFs is another way to diversify an equity allocation. If you’d like more guidance about stocks and their role in a retirement portfolio, please feel free to contact us.

We take pride in assisting our clients with incorporating all aspects of their life into their Retirement Roadmap 360®. Take control of your financial future and give us a call at (734) 769-1719 today to see how we may be able to help you!  

Palash Ghosh. Forbes. Feb. 17, 2021. “Can Stocks Keep Rising Or Is A Correction Imminent? Here’s What To Expect, According To Market Experts.” https://www.forbes.com/sites/palashghosh/2021/02/17/can-stocks-keep-rising-or-is-a-correction-imminent-heres-what-to-expect-next-according-to-eight-wall-street-experts/?sh=3f43a7201fa8. Accessed Feb. 23, 2021.

2 Tim Smith. Investopedia. Nov. 26, 2020. “Value Stock.” https://www.investopedia.com/terms/v/valuestock.asp. Accessed March 9, 2021.

William Watts. Marketwatch. Feb. 22, 2021. “‘Excessive stimulus’ puts value stocks on track to outperform growth over next 4 years, says Stifel’s Bannister.” https://www.marketwatch.com/story/excessive-stimulus-puts-value-stocks-on-track-to-outperform-growth-over-next-4-years-says-stifels-bannister-11614020385. Accessed Feb. 23, 2021.

Russell Investments. Feb. 4, 2021. “2021 Global Market Outlook.” https://russellinvestments.com/ca/global-market-outlook. Accessed Feb. 23, 2021.

Peter Brennan. S&P Global. “Tide may eventually be turning for value stocks after strong end to gloomy 2020.” https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/tide-may-eventually-be-turning-for-value-stocks-after-strong-end-to-gloomy-2020-61992240. Accessed March 9, 2021.

Rob Berger. Forbes. Nov. 12, 2020. “Do Value Stocks Really Outperform Growth Stocks Over The Long Run?” https://www.forbes.com/advisor/investing/value-vs-growth-stocks-perfo[rmance/. Accessed Feb. 23, 2021.

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