NWP Monthly Digest | October 2021
Living in a FOMO World
Foliage is here, and it's magnificent in Colorado. If you're in Colorado, head to Kenosha Pass and spend a day experiencing the season change with spectacular long-range views and a section of the Colorado Trail. Take breathtaking pictures while you immerse yourself in one of the top four seasons in Colorado. Don't miss this opportunity. You may regret squandering the chance to witness the fall colors when you notice those close to you were willing to seize the opportunity.
With the newborn at home, I watch as the world around me opens back up, and it seems like everyone is living their best lives. When was the last time you missed a hiking trip, birthday party, or another event only to see how much fun people had while attending the event? We've all been there. After you realize what you've missed, you may choose to take measures to ensure this never happens again. These decisions are motivated by your fear of missing out, also known as FOMO. If we focus on what we are missing, we may not realize what we have in front of us. For me, it's a beautiful baby boy, and the only FOMO I should feel pertains to the possibility of missing his life as he grows up.
Investors can apply this concept to their investment decisions. Frequently, investors suffer from regret aversion bias, which is a fancy term for FOMO. The investment decisions of these individuals are shaped by their fear of not participating in real estate, Bitcoin, the gains of the market, the hottest stock, and so on. But, maybe these investors need to look at the portfolio they own and not what it could be. Shifting the way investors view their portfolios could be a solution to mitigate bias and lead to positive investment outcomes. During periods of significant growth, investors become delusional and believe the growth will last forever. Investors almost categorically dismiss risk, while euphoria spreads, leading others to buy. Even though prices vastly exceed their fair values, investors are either unaware of the possibility of a bust or compelled by their fear of missing out, as they continue this irrational pattern. If these investors instead drew their attention to the quality companies they owned and their accumulated wealth, they would not be distracted by returns they could have had – or perhaps this behavior is just human nature and is inevitable.
Why do we always say ‘this time is different?’ It may stem from the fact we are human, and we will always make emotional decisions against our self-interest. Those are dangerous words, and it seems we never learn. However, I believe we can overcome our biases by learning from them and adjusting our behavior. It's not easy to remain calm, as investors are frantic. The best investors have learned to stay pragmatic during times of chaos, have had fantastic success avoiding this rat race, and have won by not losing. Take Warren Buffet in the 1990s, for example, when he wasn't worried about not participating in the gains of the technology bubble. He massively underperformed the S&P 500 in 1999, only to outperform the S&P 500 the next three years. Buffet does not own a single one of the top ten performing stocks in the S&P 500 over the past year, but we all know he will go down as one of the greatest investors of all time. Peter Lynch, another one of the best, famously said, "The trick is not to learn to trust your gut feelings, but rather to discipline yourself to ignore them." In other words – ignore the FOMO mentality and stick to your plan.
A Review of Last Month
The stock market (S&P 500) finished the month down 4.8% for September, and it was the worst September for the Dow since 2011. I just mentioned the famous last words - ‘this time is different.’ On September 1, 2021, Barrons released an article that presented an argument for positive returns last month, claiming, "History Says This Time Could Be Different." It seems like we never learn but the headline in today’s morning briefing from Barrons shows a more apprehensive approach. Last month, we also celebrated the 40th birthday of the greatest bull market on record for bonds. Yields and prices move inverse to each other. The backdrop for this historic secular bull market for bonds was formed when yields hit their summit on September 30, 1981, at a whopping 15.84% - what I wouldn’t give to have that today!
On September 30, 2021, just hours before the midnight deadline, a stopgap funding bill was signed by President Joe Biden to keep the government funded through December 3. Yesterday, the $1 trillion bipartisan infrastructure bill was called off as negotiations failed to progress.
Democrats released a tax proposal on September 13, which will have material impacts on wealthy individuals. Some individuals may need to take action before legislation is signed and certain planning windows are closed, or they may fall ill with a case of FOMO if these proposals become law. See the Noble Wealth Pro Tip of the Month for more information.
Last month, we witnessed the beginning stages of a grande bankruptcy - an Evergrande bankruptcy to be exact. On September 23, 2021, the cash-strapped China Evergrande Group missed a payment on dollar bonds with a face value of $2.03 billion. Bankruptcy is traditionally associated with capitalistic economies, but is not foreign to China, even though current bankruptcy law has only been around since 1986. Now, the Chinese government has a humdinger on its hands as it deliberates how to handle the Evergrande fallout. The government does not want to encourage frivolous and greedy behavior from executives. Still, they do not want their system to appear frail as it reflects poorly on their socialist economy. Furthermore, there are meaningful implications as real estate activities account for almost a third of Chinese GDP, and housing assets represent 76% of the total assets in China, compared to only 28% in the U.S. For this reason, the government may feel compelled to rescue the real estate behemoth. If Evergrande enters bankruptcy, contagion risks appear limited as U.S. banks have very little exposure, but we do not believe this is another Lehman Brothers moment. This time is different – only kidding 🤣
After a rough September, we can now look forward to October and the fourth quarter. Going back to 1950, stocks have risen 79% of the time with an average gain of 4% (Truist Securities). Our narrative has not changed and we remain cautiously optimistic. October has been a volatile month, corrections are normal, and we would not be surprised to see one. That said, we believe this expansion has legs and should last at least another year or two. In other words, things look golden this month but the season is changing 🍂
A Favor to Ask
Last month a client of mine chose to part ways with our firm. Even though I have had only two clients discontinue their service with our firm, with the first being in 2018, I can’t help but wonder what I could have done to keep them as a client? Yes, sometimes these things are out of our control, but the perfectionist in me is constantly seeking ways to improve and enhance our service to avoid this problem in the future. If you can spare a few minutes, please complete this client survey to help our firm improve our processes and elevate your experience working with Noble Wealth Partners. I greatly appreciate any time you spend on this survey and sincerely thank you for your input.
Noble Wealth Pro Tip of the Month
Implications of the Tax Proposal
On September 13, 2021, the House Ways and Means Committee released their tax proposals. The tax changes could have material impacts on your financial plan. Here are some of the key items in the proposal:
39.6% top marginal rate
Estate and gift tax exemptions back to pre-2017 levels (inflation-adjusted)
25% top capital gains rate
Expansion of Net Investment Income Tax (NIIT) impacting S Corporation owners
A new 3% surtax on ultra-high earnings
Elimination Backdoor Roth Contributions
Restricting Roth Conversions for high earners
New RMD requirements for IRA and Roth IRA accounts (the Peter Thiel rule)
Additional modifications to common estate planning techniques
And more…
Given the possibility of these changes, it may be prudent to take advantage of Roth conversions (including Backdoor Roth contributions), use the applicable exclusion amount, harvest gains, take proactive measures to accelerate income into 2021, and revisit your estate plans.
Open Enrollment Period of Medicare Recipients
Beginning October 15, those of you already enrolled in Medicare benefits can make changes to your Medicare benefits. Those looking to switch from a Medicare Advantage Plan (also known as Part C) to original Medicare or vice-versa. If you join, switch, or drop a plan, the changes will be effective January 1 of next year. Please reach out if you have any questions. We do not sell insurance products but we are happy to provide you with an unbiased opinion to be helpful.
Series I Bonds
If you can't find a home for your excess cash. Series I Bonds could be a solution for you. These are sold by the U.S. government directly to investors through Treasury Direct. These bonds do not pay a fixed interest rate but have a variable rate adjusted twice a year tied to current inflation levels. The embedded inflation adjustment can help you avoid losing the purchasing power of your savings.
Interesting Findings
The first half of 2021 recorded the biggest U.S. inflow into long-term mutual funds and exchange-traded funds since at least 1993, according to Morningstar.
Timeshares lose most of their value the minute you sign the contract. Those shares are commonly offered for free online because that is the actual value of the product and there are far more people looking to sell than are browsing for resale timeshares – Brian Rogers, Timeshare User Group.
Breakthrough cases among those who are fully vaccinated account for less than 1% of Covid hospitalizations and close to zero deaths (Kaiser Family Foundation).
The S&P 500 has had 54 record closes in 2021. The most of any year going all the way back to 1995.
If the S&P 500 maintains a positive return in 2021 (the index is up 22% as of 9/3/2021) it will be the index’s 17th positive return in the last 19 years.
In August, Social Security trustees announced the trust fund backing the benefits would be zero in 2033. But that does not mean the benefits would go to zero. Instead, benefits would drop to 76% of originally promised levels. The issue stems from the fact the future anticipated taxes fall short of the future benefits expected to be paid out. This shortfall or deficit (currently $19.8 trillion) could be eliminated if the Social Security payroll tax rate increased to 15.76% from 12.40% or if benefits were immediately reduced by 21% for current and future beneficiaries (Social Security Trustees 2021 Report).
In fact, however, intermediate-term Treasurys produced an annualized total return of 7% for the 17 years through the end of 1982 (Ibbotson Associates).
Things We’re Reading and Enjoying
Limitless | Jim Kwik
The author discovered how to make full use of your brain’s incredible capabilities. Learn how to unlimit your brain and gain the power to achieve anything. You just need to cultivate your individual abilities and motivation. Learn how to problem solve by finding different ways of thinking. Discover what type of intelligence you possess and begin to think exponentially.
What Every Investor Should Understand About Stagflation—but Often Doesn’t | Mark Hulbert
There are several misconceptions about asset returns during periods of meager economic growth and high inflation. Wall Street Journal printed a great article analyzing the asset returns during the period from 1966 through 1982. Some may be surprised to learn bonds had adequate returns during this period and commodities may not produce strong returns if current inflation levels persist.
How I Invest My Money | Joshua Brown and Brian Portnoy
This book isn’t about the right way of planning your financial future. Instead, it offers a rare insight into what financial industry insiders do with their own money. So how do the pros play the market? Well, it turns out there’s no single answer to that question. How they invest depends on who they are and their values and goals.
Until next month,
-Your team at Noble Wealth Partners
“There is nothing noble about being superior to your fellow man. True nobility is being superior to your former self.” Ernest Hemingway