What to Expect Going Forward - The Economy and Your Investments

Contributed by: Nicholas Boguth, CFA®

At the beginning of the month, RJ released some market commentary with the striking line…

"While inflation fears remain high, it is likely that we are past peak inflation and the largest interest rate increases are behind us."

This year has been riddled with reasons to worry about the economy and your investments, but some encouraging data has been released that may provide some optimism. Jobs surprised on the upside early in August, the stock market has bounced off of its lows, personal consumption remains high, and we've seen gas prices come down to provide relief at the pumps.  

RJ ends the commentary with some more encouragement…

"We likely have more weakness to endure, but Joey Madere, senior portfolio strategist, Equity Portfolio & Technical Strategy, says investors can expect positive returns over the next 12 months and beyond, given the view that economic weakness should be relatively mild and inflation will moderate. Long-term investors should anticipate an eventual rally on the other side of this weak trend and take advantage of potential buying opportunities. Bear markets go down 20% to 35% on average, but bull markets average roughly 150% returns.

While volatility feels uncomfortable, experience suggests that adaptability and a cool head will help weather any market environment and position for the future.”

It's been a rough year for most asset classes YTD. Still, the pain and uncertainty also provide opportunity as bond yields increase and stock valuations decrease, suggesting higher expected returns going forward. We're continually monitoring the changing environment and are happy to answer any questions you may have about how it all affects or doesn't affect your overall financial plan. 

Nicholas Boguth, CFA® is a Portfolio Manager at Center for Financial Planning, Inc.® He performs investment research and assists with the management of client portfolios.

This market commentary is provided for information purposes only and is not a complete description of the securities, markets, or developments referred to in this material. Any opinions are those of Nick Boguth, CFA® and not necessarily those of Raymond James. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Past performance does not guarantee future results. Diversification and asset allocation do not ensure a profit or protect against a loss.

Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. Investment advisory services are offered through Center for Financial Planning, Inc. Center for Financial Planning, Inc. is not a registered broker/dealer and is independent of Raymond James Financial Services.

5 Tips to Keep in Mind for Financial Awareness Day

Contributed by: Kali Hassinger, CFP®, CSRIC™

Sunday, August 14th, marks National Financial Awareness Day. For many, unless you decide to focus on finances at some point in your life or you're already working with a professional, you may be left unsure whether you're making the right decisions and progressing toward financial independence. The good news is that a few steps can be taken to help you get on a sound financial path. 

Tip #1: Make a budget. And stick to it.

This is one of the most challenging steps for many to accomplish. There are things we need to pay for like housing, food, insurance, gas, and utility bills, and then there are unessential, discretionary items like clothes, concerts, and going out for dinner and drinks. Therefore, it's important to track your spending. How much of your overall budget goes toward the essentials each month? How much are discretionary or lifestyle expenses? If there are areas within the discretionary bucket that can be reduced and could ultimately be allocated toward additional savings, commit to making that adjustment. Budgeting is the foundation of getting ahead financially and progressing toward your goals.

It's also a good idea to look at your net income. Subtract out your fixed and essential expenses, and then allocate the leftover money towards savings goals and discretionary spending. Consider an online budgeting tool or app to help you achieve this.

Tip #2: Save.

Sure this seems obvious, but it's common to feel unsure of how much to save and whether you're saving enough. Saving depends on your age and the amount you've accumulated so far. It also depends on how much you plan to spend in retirement or what your upcoming financial goals require. If your employer has a retirement plan in place, it's important to contribute at least enough to take advantage of the employer match.

Many would suggest that you should always try to contribute the maximum amount allowed into your employer's retirement plans. When you consider current and future tax rates, timeline to retirement, and savings balances today, it gets more complicated. If you're later in your career and have accumulated a good balance, you may have the flexibility to reduce your savings rate and possibly your income. If you're behind and need to catch up, pushing yourself out of your comfort zone and saving aggressively may be necessary. If you're just venturing into the workforce, your income may be lower now than in the future. In this example, you may want to work in Roth IRA or 401k savings instead of tax-deferred vehicles. 

Saving rates are personal. Life is about balance and saving the amount right for you, your family, and your goals. 

Tip #3: Invest. 

But only take on the amount of risk that you can afford. Determining the appropriate blend of stock, bonds, and cash is essential to both growing and preserving wealth. In recent years of stock market growth, picking a lemon of an investment has been challenging. 2022, however, has reminded us of the importance of diversification and your overall allocation mix. If you have an investment strategy in place, now is not the time to abandon that plan. High inflation, rising interest rates, and international turmoil have created a volatile environment, but it can also create opportunities. If you have yet to invest, there's no better time than now to get a plan in place.  

If the idea of investing seems foreign, I suggest you review our Investor Basics blog series that our outstanding investment department provided a few years ago: 

• Stocks 101

• Bonds 101

• Drawdowns 101

Tip #4: Understand your credit score.

For a number that's so important to our ability to buy a home, purchase a car, or rent an apartment, credit scores can feel mysterious and sometimes frustrating. In reality, a formula is used to determine our credit score, and five main factors are considered. 

• 35% Payment History: Payment history is one of the most significant components of your credit score. Have you paid your bills in the past? Did you pay them on time?

• 30% Amounts Owed: Just owing money doesn't necessarily mean you are a high-risk borrower. However, having a high percentage of your available credit used will negatively affect your credit score.

• 15% Length of Credit History: Generally, having a longer credit history will increase your overall score (assuming other aspects look good). However, even people with a short credit history can still have a good score if they aren't maxing out their credit card and are paying bills on time.

• 10% New Credit Opened: Opening several lines of credit in a short period almost always adversely affects your score. The impact is even greater for people that don't have a long credit history. Opening multiple lines of credit is generally viewed as high-risk behavior.

• 10% Types of Credit You Have: A FICO score will consider retail account credit (i.e., Macy's card), installment loans, mortgage loans, and traditional credit cards (Visa/ MasterCard, etc.). So, having credit cards and installment loans with a good payment history will raise your credit score. 

It's important to manage your debt balance, only take out credit when necessary, and pay your bills on time. If you already have credit cards, student loans, and/or personal loans, try to pay off balances with higher interest rates to keep them from becoming unmanageable. Some people find it easier to pay off a smaller balance first, giving them a sense of progress and accomplishment. This is a more than acceptable start to proper debt management.

Tip #5: Work with a Professional.

There's no better time than now to build the foundation for financial security and independence. Working with a professional can help you answer questions and address the unknowns. By making smart decisions now, you're positioning yourself for future success. Use these helpful tips, and keep progressing toward the ultimate goal of a worry-free, financial future and retirement. 

Feel free to contact your team here at The Center with any questions. Take control now, and you'll rule your finances – not the other way around!

Kali Hassinger, CFP®, CSRIC™ is a Financial Planning Manager and CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® She has more than a decade of financial planning and insurance industry experience.

The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Kali Hassinger, CFP®, CSRIC™ and not necessarily those of Raymond James. 401(k) plans are long-term retirement savings vehicles. Withdrawal of pre-tax contributions and/or earnings will be subject to ordinary income tax and, if taken prior to age 59 1/2, may be subject to a 10% federal tax penalty. Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals are permitted.

Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. Investment advisory services are offered through Center for Financial Planning, Inc. Center for Financial Planning, Inc. is not a registered broker/dealer and is independent of Raymond James Financial Services.

10 Investment Themes for Mid-Year 2022

Contributed by: Center Investment Department

Along with this investment commentary, we'll be answering your most commonly asked questions during market volatility, recession, and inflation in our BONUS on-demand webinar.

The first half of 2022 has seen a surge in interest rates, volatile equity and bond markets, and geopolitical conflict. All while investors have been recalibrating their expectations on the Fed’s timeline for interest rate increases. Economic data shows soaring prices and a very tight labor market, strengthening the case for the Fed to take aggressive action to tame inflation. Complicating matters for the global economy, China’s Covid-related shutdowns have exacerbated supply chain disruptions.

During these uncertain times, we want to highlight ten different themes we are thinking about right now and how they may impact your investments. However, despite these themes, it is important to remember that your financial plan is the most important theme to us through all market conditions. The financial plans we design are built to withstand markets like we are experiencing today and even worse. Everyone uses a different map to chart their destination. Some destinations are a week away, and some destinations are years away. Rest assured, your plan is designed with your final destination in mind, and this type of volatility is expected along the way!

Theme 1: Rising Risk of Recession

While no one has officially declared that the U.S. is in a recession yet, it is looking more likely that we could enter one. Two-quarters of negative GDP (one of which has already happened in the first quarter) is the traditional definition of a recession. Politics and mid-term elections will impact whether we hear recession rhetoric out of Washington, but the definition is pretty clear. The National Bureau of Economic research weighs jobs, manufacturing, and real incomes when assessing whether or not we are in a recession and not just real GDP, so this is important information to watch.  

Theme 2: Inflation

Inflation has been more persistent than many anticipated this year (including the Fed). Government stimulus money is still in bank accounts, driving our desire to purchase, which hasn’t fully been spent. This past quarter is the first time in a long time that we have finally seen this number start to level off and come down. This is likely due to higher prices. Supply chain disruptions are still present, but we are feeling some relief. Remember the chart earlier in the year that we referenced showing over 100 container ships waiting outside Los Angeles and Long Beach, California (one of the biggest ports in the country)? That number is down to 34 as of May. Chip shortages continue to persist with no end in sight, forcing companies to innovate as much as possible to manufacture items like cars with fewer chips.

Theme 3: Interest Rates

In June, the Fed responded to the higher-than-expected inflation number with a .75% rate increase, bringing the Fed funds target rate to 1.75% after .25% and .5% rate increases earlier in the year. The Fed has shown that it is ready to fight inflation and update its plan accordingly as new information becomes available. The bond market is also expecting a .5%-.75% rate increase in July. The U.S. is not alone, as 45 central banks in other nations have also increased interest rates. If inflation starts to quiet and recession data starts to accelerate, the Fed could begin to pull back on its rate-hiking plans. Quantitative tightening (Q.T.) has also begun.

The chart below shows the rate of Q.T. for the $1 trillion run rate that is anticipated. In most months this year, the Fed will let the maturities happen and not replace those bonds. Most months show more maturities than is needed, so the Fed will still be buying bonds in these months. There are only two months this year where the Fed will need to actively trim some bonds from their balance sheet (the blue bar each month shows the amount of bonds maturing on their own, and the orange bar is the amount that the Fed would need to reduce by)

Theme 4: Geopolitical Conflicts

Sadly, the Russia/Ukraine conflict continues with no resolution in sight. While these headlines are not directly impacting day-to-day market moves anymore, their repercussions from sanctions on Russia continue to affect other macro-economic factors such as rising energy prices, which directly impact inflation.

Theme 5: Mid-Term Elections

As we look at the mid-term elections this November, it does look like the Blue Wave of Democratic control is on thin ice. The three things that are against the Democrats are:

History: History suggests that the incumbent party loses around 25- 30 seats during the mid-term elections.

President’s Approval Rating: The lower the President’s approval rating, the more significant the losses. With President Biden’s approval rating around 42%, that would suggest losses closer to the 30-seat level as it is lower than usual. But the question is - will his approval rating continue to languish in the low 40s?  

Retirement: This is also a headwind from Democrats’ bid to maintain the House, as 25 sitting Democrats are retiring. This is the largest number of Democrat retirements with a Democrat in office since 1996. 

Theme 6: Cryptocurrency Volatility

Cryptocurrencies continue to make headlines. This time, however, the headlines are related to the meltdown experienced. Last year, many people touted Cryptocurrencies as the only true inflation hedge…until they were not. In the past quarter, most Cryptocurrencies have dropped more than 50%. Coinmarketcap.com shows the total market cap of all cryptocurrencies reaching a high point of $2.9 trillion last November. As of the end of the quarter, that number fell to $850 billion – a 70% crash. Additionally, some individual cryptocurrencies have fallen over 90% just this year! Speculation and volatility are and will continue to be a hallmark of this asset. Proceed with caution if you do so on your own, as this is not an asset we recommend holding as part of your long-term asset allocation!

Theme 7: Do Something or Do Nothing?

Please continue reading to see what we are doing in portfolios right now. Investors often feel the need to do something when markets are volatile, as the fight or flight instinct has been ingrained into our being for hundreds of years. If you are doing something, ensure it is driven by the right reasons, as doing the wrong things can be very costly to your long-term financial success. The graph below shows that investors, as a whole, get the timing wrong by selling low and buying high. Following the herd can result in achieving almost 50% less return (orange bar below - 5.5%) than a buy and hold investor (yellow bar below - 10.7%). Let us worry about when it is time to do something as it is often best to buy and hold.

Theme 8: Elevated Oil Prices

Energy has by far been the best performing sector in the market, but this does not mean it will be the best performing sector in the future. Usually, by the time something is making headlines, the returns have already been booked. However, looking ahead, this bought of high gas prices will do more to spur our country toward utilizing renewable resources than any lobbying group or politician could hope to accomplish on their own. As fossil fuel prices continue to rise, alternative fuels are more cost-effective and can accelerate

Theme 9: Diversification

U.S. Large Cap stocks have been the darling asset class of the past decade, which has tempted many investors to ditch other asset classes in favor of more U.S. stocks. But as 2022 has shown, there is a considerable risk in concentrating your investments into one asset class if that asset class ends up being one of the worst performers of the year. We consider it especially risky to load up on a single asset class AFTER we have already seen a vast period of outperformance like in the U.S. stock market over the past ten years. 

Global valuations are much cheaper than they are here in the U.S. Studies have shown that lower valuations tend to suggest higher returns, which is another major reason to hold your international investments. 

Grandeur Peak, one of our international investment managers, referenced this quote in their quarterly letter that we believe applies to the question of U.S. vs. international investments today: 

“The mood swings of the securities markets resemble the movement of a pendulum. Although the midpoint of its arc best describes the location of the pendulum ‘on average,’ it actually spends very little of its time there. Instead, it is almost always swinging toward or away from the extremes of its arc. But whenever the pendulum is near either extreme, it is inevitable that it will move back toward the midpoint sooner or later. In fact, it is the movement toward an extreme itself that supplies the energy for the swing back.” (Howard Marks, Memo to Clients, 4/11/1991)

2022 has been painful for investment performance across almost every asset class. The silver lining, in our opinion, is that diversification is still a success story. A diversified set of asset classes has dampened the drawdown so far this year, making the hard investment times a little less painful. 

Diversification is a core principle of the Center’s investment process, making international stocks, bonds, and other alternative asset classes key components of our portfolios going forward. 

Theme 10: Portfolio Management During Market Drawdowns

We have been busy behind the scenes tax-loss harvesting, thinking about timely Roth conversions, if that is a strategy you are employing, rebalancing, and ensuring cash needs are met. We are also monitoring factors that may tell us when to lighten up on or add to equities. While these factors are meant to trigger rarely, as there is a shift in incoming information from our broad set of barometers, there may be changes in our outlook and strategy.

We encourage you to watch our on-demand webinar if you are interested in hearing more. To access the webinar, enter your email address and the webinar will be accessible immediately after!

As always, feel free to reach out if you have additional questions. We are happy to help! Until next time, enjoy your summer.

Any opinions are those of the author(s) and not necessarily those of Raymond James. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. There is no assurance any of the trends mentioned will continue or forecasts will occur. The information has been obtained from sources considered to be reliable, but Raymond James does not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. The MSCI EAFE (Europe, Australasia, and Far East) is a free float-adjusted market capitalization index that is designed to measure developed market equity performance, excluding the United States & Canada. The EAFE consists of the country indices of 22 developed nations. The Bloomberg Barclays US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary. Past performance does not guarantee future results. Diversification and asset allocation do not ensure a profit or protect against a loss. Dividends are not guaranteed and must be authorized by the company's board of directors. Special Purpose Acquisition Companies may not be suitable for all investors. Investors should be familiar with the unique characteristics, risks and return potential of SPACs, including the risk that the acquisition may not occur or that the customer's investment may decline in value even if the acquisition is completed. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Past performance is not a guarantee or a predictor of future results. Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional.

Securities offered through Raymond James Financial Services, Inc. member FINRA/SIPC. Center for Financial Planning, Inc. is a Registered Investment Advisor. Investment advisory services are offered through Center for Financial Planning, Inc. Center for Financial Planning, Inc. is not a registered broker/dealer and is independent of Raymond James Financial Services.

Part 2: Are International Equities Dead?

Contributed by: Nicholas Boguth, CFA®

In part 1 of this 2-part blog series, we discussed the importance of diversified investing despite the recent pain that many asset allocations have felt. We're now turning our attention to a key asset class when thinking about diversification…international stocks.

The S&P 500 (U.S. Large Stocks) returned over 14% annualized for the past ten years. The MSCI EAFE (International Large Stocks) returned a "mere" 7% annualized over the same period. 

This run of outperformance from U.S. stocks has been nothing short of astounding. Between the past outperformance and the current geopolitical conflict overseas, you might feel pressure to throw in the towel on international stocks and invest all of your money in the U.S. stock market. Still, we're here to share some perspectives on why that may not be to your benefit. 

My colleague, Jaclyn Jackson, CAP®, Senior Portfolio Manager and Investment Representative, RJFS, shared some research and statistics on the benefits of diversification in a total portfolio. Spreading bets across many asset classes has historically provided a smoother ride for investors and ultimately led to a higher expected value for portfolios.  

The same principle applies within asset classes. History has repeatedly shown that owning many types of stocks, rather than concentrating on one type of stock, may help maximize investors' chances of achieving return goals and limits the chances of major financial loss.

Beyond the timeless lesson from diversification, international stocks are trading at a larger discount to U.S. stocks than we've seen in a long time. History has also shown us that neither asset class has held a permanent premium when comparing U.S. to international. Lower valuations now suggest higher returns in the future, so valuation is a compelling story if you're looking for a reason to stick to your international allocation. 

Chasing performance is a significant pitfall of both novice and professional investors, but rarely leads to improved investment outcomes. The recent, prolonged outperformance of the U.S. stock market may make it tempting to think that the U.S. will continue to outperform indefinitely, but history suggests otherwise. We don't believe international equities are dead, and we'll continue to stick to the timeless practice of diversification in our portfolios.

Nicholas Boguth, CFA® is a Portfolio Manager at Center for Financial Planning, Inc.® He performs investment research and assists with the management of client portfolios.

The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of Nick Boguth, CFA® and not necessarily those of Raymond James. Investing involves risk and you may incur a profit or loss regardless of strategy selected, including diversification and asset allocation. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary.

The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. Standard deviation measures the fluctuation of returns around the arithmetic average return of investment. The higher the standard deviation, the greater the variability (and thus risk) of the investment returns.

The MSCI is an index of stocks compiled by Morgan Stanley Capital International. The index consists of more than 1,000 companies in 22 developed markets.

The MSCI EAFE (Europe, Australasia, and Far East) is a free float-adjusted market capitalization index that is designed to measure developed market equity performance, excluding the United States & Canada. The EAFE consists of the country indices of 22 developed nations.

Part 1: Are International Equities Dead?

Contributed by: Jaclyn Jackson, CAP®

This is part one of a two-part blog series. We'll talk about diversification generally in this blog, then zoom in on international equity diversification during the second part of the series.

Amid geopolitical tension and pandemic backlash, equities have taken a beating; bond prices have fallen as the Fed raises rates, and even cash under the mattress is no match for inflation. Looking at our current market environment, I am reminded of the Motown classic sung by Martha and The Vandellas, "Nowhere to Run." For decades, investment professionals have preached the merits of asset allocation and portfolio diversification, but what do you do when it all stinks?

The answer is simple (but the action is hard): Stay the Course! That advice doesn't feel helpful during market turbulence, but honestly, it's the best advice for long-term investors. Let me explain…

Why Diversification Works

Craig L. Israelsen, Ph.D. and Executive-in-Residence in the Personal Financial Planning Program at Utah Valley, did compelling research around portfolio diversification worth reviewing. He compared five portfolios representing different risk levels and asset allocations over 50-years, from 1970 to 2019. While there is much to glean from his research, let's focus on his comparison of two moderately aggressive portfolios (as they most closely resemble the average investor experience):  

• Traditional “Balanced” Fund: 60% US stock, 40% bond asset allocation

• Seven Asset Diversified Portfolio: 14.3% allocation to seven different asset classes (asset classes included large U.S. stock, small-cap U.S. stock, non-U.S. developed stock, real estate, commodities, U.S. bonds, and cash)

In 2019, a year dominated by the S&P 500, the Traditional "Balanced" Fund (having a larger composition of the S&P 500) predictably outperformed Seven Asset Diversified Portfolio. On the other hand, over the 50-year period, the latter had a similar annualized gross return with a lower standard deviation. An investor with a diversified portfolio experienced comparable returns without taking as much risk.

Grounding his research in numbers, Israelsen evaluated a $250,000 initial investment for each portfolio over 26 rolling 25-year periods from 1970 to 2019 and assumed a 5% initial end-of-year withdrawal with a 3% annual cost of living adjustment taken at the end of each year. The Traditional "Balanced" Fund had a median ending balance of $1,234,749 after 25 years compared to the Seven Asset Diversified Portfolio median ending balance of $1,806,565.  

The research illustrates why planners have a high conviction in diversification. The Seven Asset Diversified Portfolio provided risk mitigation (as measured by standard deviation) and supported robust returns even with annual withdrawals.

Stay Tuned

We've discussed the merits of diversification in a general sense. In part two of the series, we'll speak more directly about international equities and explain why we believe it is still a diversifier worth holding.

Jaclyn Jackson, CAP® is a Senior Portfolio Manager at Center for Financial Planning, Inc.® She manages client portfolios and performs investment research.

The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of Jaclyn Jackson, CAP®, and not necessarily those of Raymond James. Investing involves risk and you may incur a profit or loss regardless of strategy selected, including diversification and asset allocation. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary.

The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. Standard deviation measures the fluctuation of returns around the arithmetic average return of investment. The higher the standard deviation, the greater the variability (and thus risk) of the investment returns.

Harvesting Losses in Volatile Markets

Contributed by: Kali Hassinger, CFP®, CSRIC™

During periods of market volatility and uncertainty, it's important to remain committed to our long-term financial goals and focus on what we can control. A sound long-term investment plan should expect and include a period of negative market returns. These periods are inevitable and often can provide the opportunity to tax-loss harvest, which is when you sell an investment asset at a loss to reduce your future tax liability.

While this sounds counter-intuitive, taking some measures to harvest losses strategically allows those losses to offset other realized capital gains. Any remaining excess losses are used to offset up to $3,000 of non-investment income. If losses exceed both capital gains and the $3,000 allowed to offset income, the remaining losses can be carried forward into future calendar years. This can go a long way in helping to reduce tax liability and improving your net (after-tax) returns over time. This process, however, is very delicate, and specific rules must be closely followed to ensure that the loss will be recognized for tax purposes.

Harvesting losses doesn't necessarily mean you're entirely giving up on the position. When you sell to harvest a loss, you can't purchase that security within the 30 days before and after the sale. If you do, you violate the wash sale rule, and the IRS disallows the loss. Despite these restrictions, there are several ways you can carry out a successful loss harvesting strategy.

Tax-Loss Harvesting Strategies

• Sell the position and hold cash for 30 days before re-purchasing the position. The downside here is that you're out of the investment and give up potential returns (or losses) during the 30-day window.

• Sell and immediately buy a similar position to maintain market exposure rather than sitting in cash for those 30 days. After the 30-day window is up, you can sell the temporary holding and re-purchase your original investment.

• Purchase the position more than 30 days before you try to harvest a loss. Then after the 30-day time window is up, you can sell the originally owned block of shares at the loss. Specifically identifying a tax lot of the security to sell will open this option up to you.

Common Mistakes to Avoid When Harvesting

• Don't forget about reinvested dividends. They count. If you think you may employ this strategy and the position pays and reinvests a monthly dividend, you may want to consider having that dividend pay to cash and reinvest it yourself when appropriate, or you'll violate the wash sale rule.

• Purchasing a similar position and that position pays out a capital gain during the short time you own it.

• Creating a gain when selling the fund you moved to temporarily wipe out any loss you harvest. You want to make the loss you harvest meaningful or be comfortable holding the temporary position longer.

• Buying the position in your IRA. This violates the wash sale rule and is identified by social security numbers on your tax filing.

Personal circumstances vary widely, as with any specific investment and tax planning strategies. It's critical to work with your tax professional and advisor to discuss more complicated strategies like this. If you have questions or if we can be a resource, please reach out!

Kali Hassinger, CFP®, CSRIC™ is a Financial Planning Manager and CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® She has more than a decade of financial planning and insurance industry experience.

The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of the Kali Hassinger, CFP®, CSRIC™ and not necessarily those of Raymond James. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.

The Basics of Series I Savings Bonds

Contributed by: Kelsey Arvai, MBA

Inflation has been steadily increasing, making Series I savings bonds (I bond), which are investments linked to inflation rates, a very attractive investment. I want to share some key points that will help you determine if it makes sense to consider adding them to your portfolio. 

I bonds are backed by the US Government and offered via Treasury Direct. I bonds earn interest based on both a fixed rate (0.0%) and a rate set twice a year based on inflation. The bonds earn interest until it reaches maturity at 30 years, or you cash it in, whichever comes first. 

Through October 2022, I bonds are earning an interest rate of 9.62%. Meaning that during the first six months that you own the bond, let's say from May 2022 through October 2022, your bond would earn interest at an annual rate of 9.62%. A new rate will be announced every six months based on your bond's fixed interest rate (0.00%) and inflation. The inflation rate is based on changes in the non-seasonally adjusted Consumer Price Index for all Urban Consumers (CPI-U) for all items, including food and energy.

I bonds are attractive but have many limitations and require a fair amount of legwork to acquire. The most significant restriction is that you can only buy $10,000 per year per person. You could also purchase $5,000 in a paper bond with your tax return if you're entitled to a return from the Federal government (although it's too late now unless you've filed an extension). 

To get started on purchasing an electronic I bond, you'd have to open an account with Treasury Direct online. Here is the website for more information.

There are some restrictions on who can own an I bond. You must have a Social Security Number and be a US citizen (whether you live in the US or abroad). You could also be a US resident or a civilian employee of the US, no matter where you live. Children under 18 are eligible for paper bonds as long as an adult buys the bonds in the child's name. Electronic bonds are available as long as a parent or other adult custodian opens a Treasury Direct Account that's linked to the adult's Treasury Direct account. If you'd like to see more about how to purchase a bond as a gift, you can watch a video here.

A few final notes to add, interest is compounded semi-annually. The bond's interest earned in the six previous months is added to the bond's principal value, creating a new principal value. Interest is then earned on the new principal. Rates can go up and down, but you must hold the bond for a minimum of one year, and if you cash out between the end of year one and year five, you could lose your prior three months of interest as a penalty. If inflation subsides, you could be staring at minimal interest rates. Zero is the lowest that the rate would go, so if we entered a period of deflation, there wouldn't be a negative interest rate. As always, consult your financial advisor before making any changes to your current portfolio.

Kelsey Arvai, MBA is an Associate Financial Planner at Center for Financial Planning, Inc.® She facilitates back office functions for clients.

The information contained in this letter does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Kelsey Arvai, MBA, and not necessarily those of Raymond James. Expression of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected, including diversification and asset allocation. Individual investor’s results will vary. Past performance does not guarantee future results. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation.

Focusing on What You Can Control

Contributed by: Josh Bitel, CFP®

May is Mental Health Awareness Month, and as we all know, managing stress can go a long way in improving mental health. Personally, I have always been a bit of a “worry wart” and often have to remind myself not to sweat the small stuff and focus on what I can control. And of course, as a financial planner, I find this very easy to relate to investing and saving for retirement! Below is a graphic from J.P. Morgan that I have shared many times with clients. Just as we try to do in our personal lives, managing what we can control and not worrying about other factors can go a long way in relieving some of the stress that comes with saving for retirement.  

The major area that we as investors often become fixated on (and rightfully so!) is market returns. Ironically, as the chart shows, this is an area we have no control over. The same goes for policies surrounding taxation, savings, and benefits. As you can see, employment and longevity are things we do have some control over by investing in our own human capital and our health. In my opinion, the areas that we have total control over—saving vs. spending and asset allocation and location—are what we need to focus on. We try to have clients focus on consistent and prudent saving, living within (or ideally, below) their means, and maintaining a proper mix of stocks and bonds within their portfolio. Over the course of 35+ years of helping clients achieve their financial goals, The Center has realized that those two areas are the largest contributors to a successful financial plan. 

With so many uncertainties in the world we live in that can impact the market, it is always a timely reminder to focus on the areas we have control over and make sure we get those right. If we do, the other things that we might be stressing over will potentially fall into place. If you need help focusing on the areas of your financial well-being that you CAN control, give us a call! We are always happy to help.

Josh Bitel, CFP® is a CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® He conducts financial planning analysis for clients and has a special interest in retirement income analysis.

The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of Josh Bitel, CFP® and not necessarily those of Raymond James.

How Do I Prepare my Portfolio for Inflation?

Contributed by: Angela Palacios, CFP®, AIF®

Inflation is common in developed economies and is generally healthier than deflation. When consumers expect prices to rise, they purchase goods and services now rather than waiting until later. Inflation has continued to trend higher here in the U.S. over the past year, and many are now asking, "Can this harm my portfolio's ability to help me achieve my goals?" Consider the following factors contributing to or detracting from the inflation outlook.

Our investment committee has discussed inflation at length for several years now. Here are some highlights from our discussion.

Factors influencing inflation in the short term and long term:

1. Large amount of monetary and fiscal stimulus

There has been a record amount of stimulus being pushed into the pockets of Americans by the government. The consumer is healthier than it has ever been and demanding to purchase.

2. Supply chain disruptions  

Due to shipping constraints or lack of manpower, companies can't make enough of many different products to meet current demand. Does this sound familiar? It should; because two years ago, all we could talk about was not having enough toilet paper and disinfectant wipes. People were paying high prices for even small bottles of hand sanitizer. Fast forward two years and the shelves are now overflowing with these items as prices have normalized. Once people have spent the money they accumulated over the past two years and can purchase the goods and services they want when they want to, demand will likely return to normal.

3. Starting from a very low base 

The point to which we are comparing current inflation is one of the biggest influences on the calculation. For year over year inflation, we were comparing to an economy that had very little to no economic activity occurring and was still digging out of the hole the pandemic created. When you compare something to nothing, it looks much larger than it is. Now we are starting to compare to a more normalized time, so we should see this number trend downward simply because of this anomaly.

4. Wage inflation 

One of the biggest factors in the lack of inflation over the past decade was a lack of wage inflation. We are now seeing wage inflation because companies can't hire enough people to meet the current demand for their goods or services. Wages are going up trying to entice people back to work. For many years, no wage inflation at lower-paying jobs has culminated in a resetting of wages recently (it is likely wages settle at a higher base than they were before, but it doesn't mean they will continue to rise at the pace they have been).  

5. A complete lack of velocity of money

While banks are flush with cash, they still aren't lending. Why? Because the banks, due to banking regulation changes over ten years ago, only want to loan large amounts of money to someone who is creditworthy. Creditworthy consumers are so healthy that they don't need to borrow money.

6. Technology increasing productivity

A large portion of the country increased productivity by reducing commute time via remote working capabilities over the past two years. Companies that would never have considered allowing remote work now find themselves reducing office space and making permanent shifts in working style. This is just one example of how growth in technology can increase productivity which, over time, puts downward pressure on prices. The Center is an excellent example of this. While our team is back in the office, we work a hybrid schedule of several days in the office and several days remotely.

It is important to understand what investments could do well if we are surprised and inflation is around the corner.

First of all, your starting point is very important. Are you starting from low inflation, or are your inflation levels already elevated? The answer is we are starting from a long stretch of time with very low inflation rates. So in the chart below, you would reference the lower two boxes. Then it would be best if you asked, "Is inflation rising or falling?” Low and rising inflation is in the bottom left box. You may be surprised to see the strong, average performance from varying asset classes in this scenario. Inflation that is reasonable and expected can be a very positive scenario for many asset classes.

The past year had inflation prints that many investors saw as unreasonable and unexpected. Stocks and bonds struggled because of inflationary pressures. If inflation starts to moderate, as I think it will, fear should start to diminish. In the meantime, commodity-linked sectors and countries benefitted through positions held in portfolios like real asset holdings. Diversification remains important!

Inflation assumptions are fundamental in the financial planning process. This is why it's important that we utilize Monte Carlo simulations, meaning we plan for some pretty bad scenarios in the planning process. If you would like to gather more insight or an update on your plan, don't hesitate to give us a call!

Angela Palacios, CFP®, AIF®, is a partner and Director of Investments at Center for Financial Planning, Inc.® She chairs The Center Investment Committee and pens a quarterly Investment Commentary.

The information contained in this letter does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Angela Palacios CFP® AIF®, and not necessarily those of Raymond James. Expression of opinion are as of this date and are subject to change without notice. There is no guarantee that these statement, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected, including diversification and asset allocation. Individual investor’s results will vary. Past performance does not guarantee future results. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Rebalancing a non-retirement account could be a taxable event that may increase your tax liability.

US GDP Unexpectedly Gives a Negative Reading

Contributed by: Angela Palacios, CFP®, AIF®

As the U.S. Market entered correction territory (down 10%), another warning sign entered the state of the economy. Gross Domestic Product (GDP) for the first quarter fell at a 1.4% annualized pace. The definition of a recession is two consecutive quarters of negative GDP growth. Below is a great visual of the makeup of GDP growth this past quarter, so we can dive deeper into what is making up the negative number.

Source: Washington Post

The consumer continued to hold up its end of the bargain fairly well, contributing to nearly 2% of GDP growth as shown by personal consumption. But much of the drag this quarter came from an excessive amount of net exports (pink area), which are a negative drag to GDP. These imports were the largest ever on record this quarter as businesses worried about Russia’s invasion of Ukraine and front-loaded their imports. Also, consider that we are comparing against quarter 1 of 2021, which had a direct cash infusion by the Federal Reserve into consumers’ bank accounts. This quarter’s reading encompassed bad news like the Russia-Ukraine conflict and the biggest spike in covid cases ever here in the U.S.

All of this negative news has weighed on investor sentiment. This reading is typically a contrarian indicator, the AAII Investor Sentiment Survey, but has recently registered the worst reading since 1992. Readings were not this bad during the 2008/2009 financial crisis! Usually, a reading like this is contrarian because a market bounce generally follows it to the upside. 

So, which indicator do you follow to make investment decisions? Often we get mixed signals from markets. It is best to determine what is important to pay attention to and what might be noise so that you can have an action plan built ahead of time during periods of stress. This is no easy task and is one of the main mistakes made by do-it-yourself investors. Planning is in our name, and the importance never diminishes. If you have questions and need to speak with someone, don’t hesitate to reach out to us!

Angela Palacios, CFP®, AIF®, is a partner and Director of Investments at Center for Financial Planning, Inc.® She chairs The Center Investment Committee and pens a quarterly Investment Commentary.

The forgoing is not a recommendation to buy or sell any individual security or any combination of securities. Be sure to contact a qualified professional regarding your particular situation before making any investment or withdrawal decision. The information contained in this blog does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Angela Palacios, CFP® AIF ®and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Individual investor's results will vary. Past performance does not guarantee future results. Investments mentioned may not be suitable for all investors.