Andrew Schaetzke, CFP® 7/25/25 Andrew Schaetzke, CFP® 7/25/25

From Capitol Hill to Main Street: How the Big Beautiful Bill Impacts Your Business

As we discussed in our last blog post, Congress passed the long-anticipated One Big Beautiful Bill Act (OBBBA). True to its name, this legislation covers a wide range of tax and financial provisions. And for business owners in particular, the impact is meaningful [1].

By Senior Advisor Andrew Schaetzke, CFP®

As we discussed in our last blog, Congress passed the long-anticipated One Big Beautiful Bill Act (OBBBA). True to its name, this legislation covers a wide range of tax and financial provisions. And for business owners in particular, the impact is meaningful [1].

We know new legislation brings new questions. That’s why we’ve cut through the fine print and highlighted the updates that matter most for business owners and entrepreneurs. Here are some of the most important features of the bill:

The 20% deduction for Qualified Business Income (QBI) under Section 199A is now permanent for pass-through entities. This includes expanded phase-out thresholds for service businesses—and even a $400 minimum deduction for those with at least $1,000 in QBI [6].
Why it matters: This offers long-term planning clarity for LLCs, S Corps, partnerships, and sole proprietors—especially those concerned about prior sunset provisions.
The rules for Qualified Small Business Stock (QSBS) under Section 1202 just became more flexible—and more favorable.
- 50% of gains are excluded if the stock is held for 3+ years
- 75% of gains are excluded if held for 4+ years
- 100% exclusion still applies after 5+ years
In addition, two key thresholds have expanded:
- The gain exclusion cap is now the lesser of 10x basis or $15 million (up from $10 million), with both figures indexed for inflation
- Companies with up to $75 million in assets (up from $50 million) are now eligible [2]
Why it matters: This modernized framework may make QSBS more accessible and more beneficial for founders, early-stage investors, and business owners considering equity-based succession strategies. The new tiered holding periods also allow for partial exclusions on shorter timelines—a notable change from the traditional 5-year requirement.
Starting January 19, 2025, 100% bonus depreciation is back for non-real property. The prior phase-down schedule is scrapped [2].
Why it matters: This allows businesses to immediately write off the full cost of qualifying assets, boosting after-tax cash flow and incentivizing investment.
100% bonus depreciation now extends to certain production and refining facilities—split proportionally between operational and administrative areas [4].
Why it matters: Capital-intensive industries may see significant tax savings, particularly when upgrading or expanding plant infrastructure.
Section 179 limits increased to $2.5 million, with phase-outs starting at $4 million [2].
Why it matters: Small and mid-sized businesses have more flexibility to expense capital investments—without worrying about hitting outdated limits.
Domestic research and experimentation costs no longer require amortization, reverting to pre-2017 rules. Businesses may also retroactively expense R&D costs dating back to 2021. (Note: Foreign R&D still requires 15-year amortization.) [3][4]
Why it matters: This is a major win for innovative companies—especially those in engineering, technology, and manufacturing—who have been burdened by post-TCJA amortization rules.
Corporations may now only deduct charitable contributions above 1% of taxable income, though the existing 10% cap remains. Unused deductions can be carried forward [3].
Why it matters: This change could alter how C corporations structure philanthropic commitments—especially those with lower taxable income.
The excess business loss limitation is no longer temporary. Carryforward rules are clarified and locked in, adding predictability [2].
Why it matters: Business owners facing irregular income years will need to plan carefully—but the permanence of the rule helps with long-term modeling.
The pass-through entity tax (PTET) strategy—where states allow entities to pay income tax at the business level—remains intact [2].
Why it matters: This is still a viable workaround for state and local tax (SALT) deduction caps, especially in high-tax jurisdictions.
The interest expense limitation is now permanently based on EBITDA, rather than EBIT [2].
Why it matters: This provides more flexibility for capital-intensive businesses, especially those leveraging financing to fund growth.
Employee Retention Credit (ERC) claims for Q3 and Q4 of 2021 can no longer be filed after January 31, 2024 [4].
Why it matters: If you missed the deadline, no further claims can be submitted. If you filed already, consult your tax advisor on potential audit exposure.
The Opportunity Zone program is now permanent, with a rolling 10-year designation window starting in 2027 [2][5].
Why it matters: This helps create more long-term predictability for tax-deferred (or tax-free) investing in designated areas—potentially aligning with broader growth or real estate strategies.

So What Does This Mean for Business Owners?

Whether you're operating a closely held business, running multiple entities, or preparing for a transition, the long-term clarity in this bill creates real planning opportunities.

From expanded deductions and restored expensing rules to clear guidance on loss limitations and investment incentives, OBBBA offers a more stable tax planning environment.

We’re Here to Help You!

If you’re wondering how these updates may affect your business or personal financial plan, let’s talk. Your SJS advisor is ready to collaborate with your CPA or legal team to help you structure decisions around these new provisions—strategically, and in sync with your broader goals.

Important Disclosure Information & Sources:

“H.R.1 - One Big Beautiful Bill Act”. 119th Congress, 01-Jul-2025, congress.gov.
Mayer Brown, “One Big Beautiful Bill Act Introduces Significant Domestic and International Tax Changes” July 9, 2025.
RSM US, “New Tax Law Introduces Big Changes for Exempt Organizations,” July 14, 2025.
Doeren Mayhew, “Breaking Down ‘The One, Big, Beautiful Bill Act,’” June 10, 2025.
Bi-Pacific (BIPC), “One Big, Beautiful Bill … Simplified,” July 2025.
Tax Foundation, “199A Deduction: Pass-Through Business | Big Beautiful Bill,” June 2025.

There is no guarantee investment strategies will be successful. Past performance is no guarantee of future results. Diversification neither assures a profit nor guarantees against a loss in a declining market.

Advisory services are provided by SJS Investment Services, a registered investment advisor (RIA) with the SEC. Registration does not imply a certain level of skill or training. SJS Investment Services does not provide legal or tax advice. Please consult your legal or tax professionals for specific advice.

Statements contained in this article that are not statements of historical fact are intended to be and are forward looking statements. Forward looking statements include expressed expectations of future events and the assumptions on which the expressed expectations are based. All forward looking statements are inherently uncertain as they are based on various expectations and assumptions concerning future events and they are subject to numerous known and unknown risks and uncertainties which could cause actual events or results to differ materially from those projected.

Thomas Kelly, CFA 12/16/22 Thomas Kelly, CFA 12/16/22

5 Investing Lessons Learned & Re-learned In 2022

The end of the year provides a great time for us to reflect on recent experience to divine lessons to help us going forward.

By Chief Investment Officer Tom Kelly, CFA & Investment Associate Bobby Adusumilli, CFA.

The end of the year provides a great time for us to reflect on recent experience to divine lessons to help us going forward. We want to highlight five lessons that we have learned and re-learned throughout 2022.

Volatility Can Happen Quickly

From a year-to-date performance perspective through November, 2022 has been the worst year for global stocks since the Great Recession from 2007-2009.[1] After more than a decade of positive performance, we knew that global stocks (as measured by the MSCI All Country World Index (ACWI)) having a down year was entirely possible.[1] What has been particularly unusual about 2022 is that U.S. bonds (as measured by the Bloomberg U.S. Aggregate Bond Index) have experienced their worst calendar year performance in the history of the index going back to 1976.[2]

Stock market volatility is to be expected - it is one of the trade-offs in pursuing higher expected returns, as this graph demonstrates:[1]

Source: Morningstar, as of November 30, 2022. Returns are based on total return of the MSCI All Country World Index, which is a free float-adjusted market capitalization weighted index designed to measure the equity market performance of developed and emerging markets. Intra-year drops refers to the largest market drops from a peak to a trough during the year. For illustrative purposes only. See Important Disclosure Information.[1]

In comparison, bond markets typically have much lower volatility than stocks. However, due to higher-than-expected inflation in 2022, the U.S. Federal Reserve has raised interest rates dramatically throughout 2022, which has led to an upward shift in interest rates across maturities:[2][3]

*Source:* *Department of U.S. Treasury, as of November 30, 2022. See Important Disclosure Information.*

As a consequence of the rapid increase in U.S. interest rates, existing U.S. investment grade bonds have had to decline in price in order to compensate prospective investors to buy existing bonds versus new bonds with higher interest rates. This is partially why the U.S. investment grade bond market has suffered this year:[2]

Source: Morningstar, as of November 30, 2022. Returns are based on total return of the Bloomberg US Aggregate Bond Index, which is a broad base, market capitalization-weighted bond market index representing intermediate term investment grade bonds traded in the United States. Intra-year drops refers to the largest market drops from a peak to a trough during the year. For illustrative purposes only. See Important Disclosure Information.[2]

Unfortunately, it is very difficult to know when volatility will occur and what changes to make to investment portfolios ahead of time. While sometimes client portfolios experience short-to-medium-term pain, we believe that strategically designing portfolios for the long-term is most likely to benefit the majority of our clients.

For Investment-Grade Bonds, Duration Is Critical

While current yield is a good predictor of return for investment-grade bonds over their maturities (which tend to be higher-quality bonds with low expected risk of default), duration is the most important factor that influences investment-grade bond prices over the short-term.[4] Duration measures a bond portfolio’s price sensitivity to interest rate changes. Because interest rates have risen dramatically throughout 2022, higher-duration bonds have experienced significantly worse performance than shorter-duration bonds in 2022:

Sources: Morningstar, S&P as of November 30, 2022. Duration measures a bond’s or fixed income portfolio’s price sensitivity to interest rate changes. The S&P indices are broad, comprehensive, market-value weighted indices that seeks to measure the performance of their respective markets. See Important Disclosure Information.

Given recent performance, you may be wondering: if the U.S. Treasury yield curve is nearly flat, meaning investors are getting paid nearly the same interest regardless of maturity, why would you buy longer-term bonds? There are two important factors to consider:

The future is uncertain. It is very difficult to predict how interest rates will change relative to what the market is already pricing in. With longer-duration investment grade bonds currently yielding higher than the market’s priced-in expected inflation rates, we think it makes sense for long-term investors to have some exposure to longer-duration bonds.[5][6] Additionally, shorter-duration bonds have reinvestment risk, meaning that if interest rates have fallen by the time the bond matures, then new bonds may have to be purchased at lower interest rates. Longer-maturity investment grade bonds can allow you to “lock-in” an interest rate for longer.
If / when the U.S. Federal Reserve reduces interest rates, longer-duration bonds will likely benefit more in price compared to shorter-duration bonds.

As investment advisors, we continuously monitor duration and credit quality across the bond investments that we recommend. While this year has been rough, we believe the outlook is significantly brighter for bond investors.

Alternatives Are Becoming More & More Important

Alternative investments include asset classes that behave differently than publicly-traded stocks and bonds. Some of these asset classes include private equity, private debt, real estate, infrastructure, natural resources, insurance / reinsurance, and other more complex trading strategies.

High-quality alternative investments have historically been primarily offered to ultra-high net worth institutions and families. Many of the world’s top investors have had significant allocations to alternatives for decades.[7] With advances in investment technology, more and more investors now have access to alternative investments. As a result, the demand for alternative investments is expected to increase in the coming years.

Alternative investments have important tradeoffs to consider. They typically cost more in fees, are more complex, and are less transparent compared to publicly-traded stocks and bonds. Additionally, alternative investments often have lock-up periods, tax inefficiencies, and usually involve more account management. As a result, it is critical to do thorough due diligence before choosing an alternative investment.

In late 2021, SJS added the Stone Ridge Diversified Alternatives Fund (SRDAX) to MarketPlus Investing models.[8][9] While the timing was fortunate given the recent struggles of publicly-traded stocks and bonds, we believe that alternative investments can provide meaningful diversification benefits to client portfolios over the long-term.[8] We are focusing most of our investment research and due diligence efforts on alternatives, with the hope of finding more beneficial investments for our clients.

There Is Always Something Smart To Do

Even when stocks and bonds are struggling, there are smart things that investors can do to potentially help their investment portfolios over time:

Rebalancing means selling investments that are higher than your target allocations, and buying investments that are under-allocated, with the goal of maintaining your target level of risk.
Tax loss harvesting for taxable accounts allows for realized net capital losses to be used to offset current / future capital gains, sell investments that you no longer want to hold, and offset up to $3,000 of your federal taxable income for the current year and future years.
Adding to investments that have attractive expected risk/return characteristics. For example, we believe that allocating to what we think are high-quality alternative investments may be able to help client portfolios over time, though there are no guarantees. Additionally, we previously wrote about Series I Savings Bonds, which are bonds offered by the U.S. government that pay you interest based on the CPI-U inflation index.
Revisiting asset location, which involves placing the most tax-inefficient investments in tax-advantaged accounts. For example, most alternative investments tend to be tax-inefficient, paying high amounts of dividends, interest, and capital gains. Therefore, we have prioritized placing these alternative investments within tax-advantaged client accounts when possible.

Long-Term Investors Have An Advantage

One theme that shows up over and over again in research and our experience with clients is that investors with long time horizons (10+ years) have an advantage over those with short time horizons (<5 years) when it comes to withstanding volatility in order to capture market performance over time.[10][11] Beyond just their time horizon, we have found that investors who are able to keep recent events within perspective of long-term history are better able to stay committed to their investment plan even in the midst of difficulty. For example, despite experiencing 15 recessions, societal changes, and periods of political difficulties, the U.S. stock market (as measured by the S&P 500) has still grown over 10,000-times its initial value from January 1926 through November 2022, as depicted in this graph:

-*Sources: NBER, Morningstar, as of November 30, 2022. Recession start and end dates are based on the* *US Business Cycle Expansions and Contractions data* from the NBER. Gray shaded areas represent periods of recession. The S&P 500 Index is a free float-adjusted market-capitalization-weighted index of 500 of the largest publicly traded companies in the United States. The S&P 500 total return index assumes reinvestment of all distributions. See Important Disclosure Information.

While there are no guarantees that the stock market going forward will experience positive performance like the past, we believe in the global economy and innovation. As a result, we believe that stocks and bonds can continue to provide positive returns over the next 10+ years on average, though volatility will cause year-to-year performance differences. While nothing is certain, we are optimistic about the future.

Important Disclosure Information & Sources:

[1] Source: Morningstar, Dimensional Returns Web, as of November 30, 2022. The MSCI ACWI Index is a free float-adjusted market capitalization weighted index designed to measure the equity market performance of developed and emerging markets.

[2] Source: Morningstar, Dimensional Returns Web, as of November 30, 2022. The Bloomberg US Aggregate Bond Index is a broad base, market capitalization-weighted bond market index representing intermediate term investment grade bonds traded in the United States.

[3] “Consumer Price Index for All Urban Consumers: All Items in U.S. City Average“. Federal Reserve Bank of St. Louis, 30-Nov-2022, fred.stlouis.org.

[4] “SJS 2021 Capital Markets Expectations: Making Sense Of The Future“. SJS Investment Services, 04-Feb-2021, sjsinvest.com.

[5] “5-Year Breakeven Inflation Rate“. Federal Reserve Bank of St. Louis, 30-Nov-2022, fred.stlouis.org.

[6] “10-Year Breakeven Inflation Rate“. Federal Reserve Bank of St. Louis, 30-Nov-2022, fred.stlouis.org.

[7] Pioneering Portfolio Management: An Unconventional Approach to Institutional Investment. David Swensen, 2009, Free Press.

[8] “Stone Ridge Diversified Alternatives Fund“. Stone Ridge Asset Management, stoneridgefunds.com.

[9] MarketPlus Investing® models consist of institutional quality registered investment companies. Investment values will fluctuate, and shares, when redeemed, may be worth more or less than original cost. There are limitations inherent in model allocations. In particular, model performance may not reflect the impact that economic and market factors may have had on the advisor's decision making if the advisor were actually managing client money. Not to be construed as investment advice.

[10] “Quantitative Analysis of Investor Behavior“. DALBAR, dalbar.com.

[11] “Are Stocks Riskier Than Bonds?“ Bobby Adusumilli, 07-May-2021, sjsinvest.com.

Statements contained in this article that are not statements of historical fact are intended to be and are forward looking statements. All forward looking statements are inherently uncertain as they are based on various expectations and assumptions concerning future events and they are subject to numerous known and unknown risks and uncertainties which could cause actual events or results to differ materially from those projected.

Hyperlinks to third-party information are provided as a convenience.

Thomas Kelly, CFA 11/3/22 Thomas Kelly, CFA 11/3/22

The Gold Rush?

History has shown that over long periods of time, gold has often failed to outpace inflation, even before considering fees.

By Chief Investment Officer Tom Kelly, CFA.

We all like to consider ourselves investors, but sometimes find ourselves speculators. It can be exciting to predict, tinker, and attempt to outsmart, trying to find the golden opportunities to strike it big. Sometimes it pays off, but many times it leaves us emptyhanded. Good investing is often boring: global diversification in cash flow-producing companies; holding for the long-term; patience in valuations. Anyone can do that, right? Many can, but few do.

Take, for example, the parties in the California Gold Rush of the mid-1800s. Prospectors from all over the world went to California with the hopes of finding that illustrious metal; few made it big, while most ended up with nothing.[1] However, retailers selling the prospecting supplies, merchants, and transporters benefited greatly from the growth of the economy. Samuel Brannan was said to be the wealthiest man in California at the time.[2] His profession? Publicizing the Gold Rush in newspapers and running a store selling picks, shovels, and pans. The difference in investing vs. speculating.

While you might have thought we learned our lesson, the original 49ers aren’t the only speculators in gold. To a large extent, the gold bugs of today are just as starry-eyed as those of the past, betting on gold as an inflation hedge. However, history has shown that over long periods of time, gold has often failed to outpace inflation, even before considering fees. Just look at inflation (as measured by the CPI-U index) vs. gold (as measured by the gold spot price from Bloomberg) returns since 1980.[3][4]

Sources: Morningstar, as of September 2022. Inflation is represented by the Consumer Price Index for All Urban Consumer (CPI–U), not seasonally adjusted. The Gold Spot Price is based on USD returns from composite prices from Bloomberg. See Important Disclosure Information.[3][4]

Since 1980, gold has failed to live up to its luster as an antidote to inflation. The U.S. stock market (as measured by the S&P 500) on the other hand: up nearly 9,000% over that same period.[5] However, it is important to note that the S&P 500 has had periods of up to 17 years when it has underperformed CPI-U inflation on an annualized basis.[6] Nonetheless, while past performance is no guarantee of future results, this may be a lesson the next time you hear others panning the stock markets.

Important Disclosure Information & Sources:

[1] “California Gold Rush“. History.com Editors, 10-Aug-2022, history.com.

[2] “Samuel Brannan: Gold Rush Entrepreneur“. PBS, pbs.org.

[3] The Consumer Price Index for All Urban Consumers: All Items (CPI-U) is a price index of a basket of goods and services paid by urban consumers, including roughly 88 percent of the total population, accounting for wage earners, clerical workers, technical workers, self-employed, short-term workers, unemployed, retirees, and those not in the labor force. Returns data sourced from Morningstar.

[4] The gold spot price is measured by composite USD price returns as measured by Bloomberg. Returns data sourced from Morningstar.

[5] The S&P 500 Index is a free float-adjusted market-capitalization-weighted index of 500 of the largest publicly traded companies in the United States. Returns data sourced from Morningstar.

[6] “Are Stocks Riskier Than Bonds?“ Bobby Adusumilli, 07-May-2021, sjsinvest.com.

Statements contained in this report that are not statements of historical fact are intended to be and are forward looking statements. All forward looking statements are inherently uncertain as they are based on various expectations and assumptions concerning future events and they are subject to numerous known and unknown risks and uncertainties which could cause actual events or results to differ materially from those projected.

Hyperlinks to third-party information are provided as a convenience.

Scott Savage 10/4/22 Scott Savage 10/4/22

This Too Shall Pass

As advisors and professional investors, we hold vivid memories of the times when markets are volatile and bear markets ensue.

By Scott Savage, CEO & Kevin Kelly, CFA, President.

Past as Prologue?

As advisors and professional investors, we hold vivid memories of the times when markets are volatile and bear markets ensue. So far, 2022 is going to be a year we won’t soon forget, joining 1987, 2000 through 2002, 2008 & 2009, and 2020, among others.

The primary culprit this year for lower bond and stock prices is an unexpected increase in short-term interest rates, reaching levels not seen in over fifteen years. The Federal Reserve that is responsible for the level of short-term rates has acted decisively, raising short term rates by 3.0% between March and September, attempting to halt and reverse the inflation rate from its current annual pace of 8%+. The Fed’s rate hikes flow directly to higher lending rates which tend to slow economic activity, thus increasing the risk of a recession.

All of this has been a significant headwind for stock and bond prices, giving the calendar year of 2022 its bear-market distinction.

Good Decisions vs. Good Predictions

Despite our opinions, we have never held ourselves out as predictors or market timers. However, we believe you rely on us to help make good decisions in a thoughtful and disciplined manner, in good markets and bad; decisions that involve re-balancing and making sure your long-term asset allocation targets are maintained. For your taxable accounts, we harvest losses where appropriate with the intention of deferring future taxes.

Last year at this time we made the decision to add a new alternative manager to our stable of asset managers. This decision has proved to be helpful thus far in 2022, adding some stability to the portfolio with our diversified alternatives fund (symbol: SRDAX) experiencing a nominal decline of 4% through September 30th, compared to much sharper drops of 25% for the MSCI ACWI and 15% for the Bloomberg U.S. Aggregate Bond Index. We continue to look for new managers and strategies that strive to improve the risk/reward profile of your portfolio.

The hard-to-find silver lining in such a difficult time is that going forward, the long-term expected rates of return on our capital market assumptions are higher than they were at the start of the year, due to more attractive price valuations as of September 30, 2022. Does this mean we are close to a bottom? That is never knowable in advance. But if history repeats, we want to make sure that your investments are well-positioned to benefit from rising asset prices, if and whenever that may come.

We remind ourselves, knowing that past performance is not indicative of future returns, that periods following past bear markets have offered very meaningful market returns, the historical “reward” in the risk reward trade-off:

*Source: Russell Indexes, Jan 1979 – Sep 2022.*

We can only speculate on the short-term vagaries of the markets, and in the meantime, we will keep making what we believe are the best decisions for you!

Important Disclosure Information:

Indices are not available for direct investment. Index performance does not reflect the expenses associated with management of an actual portfolio. Index performance is measured in US dollars. The index performance figures assume the reinvestment of all income, including dividends and capital gains. The performance of the indices was obtained from published sources believed to be reliable.

Bobby Adusumilli 8/30/22 Bobby Adusumilli 8/30/22

What Should You Do About A Recession?

We explore what is a recession, how the US stock market has performed before and after a recession, and how an investor can prepare for recessions.

By Investment Associate Bobby Adusumilli, CFA.

One common discussion topic with our clients recently is whether the US is in a recession. While it is commonly believed that a recession is a period of two or more consecutive quarters of negative economic (GDP) growth, that is not exactly how recessions are officially defined within the US. As of August 2022, the National Bureau of Economic Research (NBER) has not declared a recession in the US during any part of 2022.[1]

In an effort to better understand recessions, we explore how a recession is defined, what have been the recessions throughout US history, which indicators go in to determining a recession, how the US stock market has performed before and after a recession, and how an investor can prepare for recessions.

What Is A Recession?

The NBER's traditional definition of a recession is a significant decline in economic activity that is spread across the economy and that lasts more than a few months. The NBER believes that while each of the three criteria - depth, diffusion, and duration - needs to be met individually to some degree, extreme conditions revealed by one indicator may partially offset weaker indications from another.[2]

It is important to note that the start date for a recession is often declared in retrospect, meaning it is possible to be in a recession for a few months before it is officially declared.

Since 1928, there have been 15 recessions in the US lasting on average 12.5 months, according to the NBER.[1]

*Source: “US Business Cycle Expansions and Contractions“. NBER,* *nber.org*.

What Indicators Go In To Determining A Recession?

Data for all indicators can be found and downloaded from the Federal Reserve Bank of St. Louis FRED website. Indicators include:[2]

How Has The US Stock Market Performed Before A Recession?

Over the last 15 recessions, the S&P 500 has had an average annualized return of 15.80% during the two years before the start of a recession.[3] None of these two-year periods had a negative return. This is not a huge surprise, as the period before the start of a recession usually coincides with a peak in the business cycle.[1]

*Sources: Dimensional Returns Web, NBER, Morningstar. Recession start dates are based on the* *US Business Cycle Expansions and Contractions data* *from the National Bureau of Economic Research. The S&P 500 total return index assumes reinvestment of all distributions. See Important Disclosure Information.*

How Has The US Stock Market Performed After The Start Of A Recession?

Over the last 15 recessions, the S&P 500 has had an average annualized return of 5.97% during the two years following the start of recession.[3] While the average return is positive, the S&P 500 had a negative return in 5 of the 15 two-year periods. In some cases, the S&P 500 fell significantly (such as at the start of the Great Depression), fell but then rebounded quickly (such as during the start of the COVID-19 pandemic), or just didn’t really experience any outsized volatility (such as after World War II).[1]

Taking a longer-term view, the S&P 500 has eventually recovered and grown after all recessions over the past century, though in some recessions it has taken many years for this to happen.[3] The US stock market has been able to withstand the short-term volatility caused by recessions, growing significantly over time.

*Sources: Dimensional Returns Web, NBER, Morningstar. Gray shaded areas represent periods of recession. Recession start and end dates are based on the* *US Business Cycle Expansions and Contractions data* *from the National Bureau of Economic Research. The S&P 500 total return index assumes reinvestment of all distributions. See Important Disclosure Information.*

How Can You Prepare For A Recession?

Build Up Your Emergency Fund

An emergency fund can give you the ability and confidence to stick with your investment plan through a recession. The amount that you should save in your emergency fund partially depends on what would help you sleep comfortably at night if your investment portfolio begins to decline in value. Some people feel comfortable with an emergency fund with 6 months' worth of living expenses, while others prefer 1-2 years' worth of living expenses.

The idea behind an emergency fund as a way to make it through a recession is not new. Detailing his experiences living through the Great Depression, Benjamin Roth wrote in The Great Depression: A Diary, “This depression has indelibly impressed on my mind one thing - and that is the value of having on hand sufficient capital to cover emergencies. In the investment field it means the difference between success or failure to have enough capital to buy bargains when they are available or to hold on to investments thru thick and thin and not be forced to sell at a loss.“[4]

Diversify Across Stocks, Bonds, & Alternatives

Periods of negative US stock market performance are inevitable. By diversifying across global stocks, high-quality bonds, and alternative investments with low correlations to US stocks, you can help to limit the impact of a period of negative US stock market performance on your portfolio.

Review Your Asset Allocation Ahead Of Time

Your asset allocation refers to the amount of stocks, bonds, and alternatives that you hold in your investment portfolio. While it may be difficult to imagine how you may react to declines in your investment portfolio, we believe it is critical to choose a level of riskiness that you will be able to stick with during good investment times and bad.

Important Disclosure Information & Sources:

[1] “US Business Cycle Expansions and Contractions“. NBER, nber.org.

[2] “Business Cycle Dating Procedure: Frequently Asked Questions“. NBER, nber.org.

[3] The S&P 500 Index is a free float-adjusted market-capitalization-weighted index of 500 of the largest publicly traded companies in the United States.

[4] The Great Depression: A Diary. Benjamin Roth, 2010, Publicaffairs.

Hyperlinks to third-party information are provided as a convenience and we disclaim any responsibility for information, services or products found on websites or other information linked hereto.

Bobby Adusumilli 8/18/22 Bobby Adusumilli 8/18/22

Inflation Protection Through Series I Savings Bonds

Series I Saving Bonds provide many of the benefits of TIPS, but may be even more beneficial during times of heightened inflation.

By Investment Associate Bobby Adusumilli, CFA.

In the book In Pursuit of the Perfect Portfolio, MIT Professor Andrew Lo interviews pioneering individuals in the investment industry - including Vanguard Founder John Bogle as well as Nobel Prize winners such as Eugene Fama and Robert Shiller - in order to answer a question that has captivated investors for generations: what is the perfect portfolio? While each interviewee gives hints as to what they consider the perfect portfolio, Andrew Lo ultimately concludes that there is no such thing as an everlasting perfect portfolio, writing, “Our Perfect Portfolio today is really just a snapshot of what’s best for you at the moment and in the current environment. Expected returns are ever evolving…. The pursuit of the Perfect Portfolio is all about adapting to our current income, our spending habits, our financial goals, the environment, and expected returns.“[1]

Nevertheless, the interviewees do provide some investments to consider. Andrew Lo writes, “If there is one specific asset that a majority of our authorities recommended for your Personal Portfolio, it’s TIPS (Treasury Inflation-Protected Securities). Inflation in recent years has been stable and low, but there is always the risk of macroeconomic change.“[1] TIPS are U.S. government-issued securities that generally increase in value with inflation and decrease in value with deflation, as measured by the nonseasonally adjusted Consumer Price Index for all Urban Consumers (CPI-U) for all items.[2][3]

*Source:* *FRED, as of July 31, 2022. See Important Disclosure Information.*

Since the book came out in August 2021, U.S. inflation has risen significantly. As a result of this rise in inflation, TIPS (as measured by the Bloomberg U.S. TIPS Index 0-5 Years) have performed relatively well over the past year, outperforming the U.S. stock market (as measured by the Russell 3000) and the U.S. bond market (as measured by the Bloomberg U.S. Aggregate Bond Index), as shown in the below graph. However, because TIPS are subject to market demand as well as other structural features, TIPS have underperformed inflation (as measured by nonseasonally adjusted CPI-U) over the past year.

*Sources:* *Dimensional Returns Web*, *U.S. Bureau of Labor Statistics. See Important Disclosure Information.*

This lends the question: are there any investments that can provide more inflation protection than TIPS? Luckily, there may be.

Series I Saving Bonds provide many of the benefits of TIPS, but may be even more beneficial during times of heightened inflation.[4][5] Offered directly by the U.S Department of the Treasury through the treasurydirect.gov website, Series I Savings Bonds are 30-year government bonds designed to pay interest that matches (or even exceeds) inflation, as measured by the nonseasonally adjusted Consumer Price Index for all Urban Consumers (CPI-U) for all items.[4]

The interest on Series I Savings Bonds is composed of two parts: a fixed rate that lasts for the entire time that you hold the bond, and the inflation interest rate that resets every six months. The rates are set on May 1 and November 1, and you are guaranteed the stated inflation interest rate for the first six months that you hold the bond, and then you are guaranteed the next set inflation interest rate for the following six months, and so on. The interest rate on Series I Savings Bond cannot go negative (though a negative inflation rate can decrease your fixed rate for that six-month period to a minimum of 0%), which is beneficial considering that the specific CPI index includes the volatile food and energy sectors.[3][6]

You can choose to defer paying taxes on the monthly interest that you receive until you redeem the bond. The interest on Series I Savings Bonds is only subject to federal income taxes, not state or local income taxes. You can redeem Series I Savings Bonds directly with the U.S. government via the treasurydirect.gov website after one year, subject to some limitations listed below.[4]

While Series I Savings Bonds have many benefits, there are some drawbacks:[4]

Each eligible person and entity can only purchase up to $10,000 in Series I Savings Bonds per year, thus limiting usefulness for higher net worth people and entities.
Except in rare circumstances, you cannot redeem your Series I Savings Bond within the first year.
If you redeem your Series I Savings Bond within five years of purchase, you lose the most recent three months' worth of interest.
If you decide not to pay taxes on the annual interest while you hold the bond, then the year you redeem a Series I Savings Bond, you may add a significant amount to your federal taxable income, thus increasing your federal taxes in that year.
You must buy Series I Savings Bonds through the treasurydirect.gov website; you cannot buy through another custodian, and your financial advisor cannot buy these bonds on your behalf.
You can only specify one beneficiary (via the Registration List section on your treasurydirect.gov account) per Series I Savings Bond.
If inflation falls back to low levels, Series I Savings Bonds may pay little interest.

Prominent financial journalists including Jason Zweig, Christine Benz, and John Rekenthaler have written about Series I Savings Bonds in recent weeks, and it’s easy to see why given the current inflation interest rate of 4.81% for the first six months if you purchase prior to November 1, 2022.[4][7][8][9] We believe that Series I Savings Bonds can provide value for investors over the near-term as well as the long-term. Whether using for an emergency fund, saving for a big purchase such as a home, or wanting to add diversification to your overall investment portfolio, Series I Savings Bonds can provide a safe and stable way to save money while minimizing loss of U.S. dollar purchasing power. And if inflation ends up rising again in future years, then by accumulating Series I Savings Bonds over time, you can provide some stability and growth for your portfolio at a time when other investments may suffer.

Important Disclosure Information & Sources:

[1] In Pursuit of the Perfect Portfolio. Andrew Lo & Stephen R. Foerster, 2021, Princeton University Press.

[2] “Treasury Inflation-Protected Securities (TIPS)“. U.S. Department of the Treasury, Bureau of the Fiscal Service, treasurydirect.gov.

[3] “Consumer Price Index for All Urban Consumers: All Items in U.S. City Average“. Federal Reserve Bank of St. Louis, fred.stlouisfed.org.

[4] “Series I Savings Bonds“. U.S. Department of the Treasury, Bureau of the Fiscal Service, treasurydirect.gov.

[5] “Comparison of TIPS and Series I Savings Bonds“. U.S. Department of the Treasury, Bureau of the Fiscal Service, treasurydirect.gov.

[6] “Series I Savings Bonds Rates & Terms: Calculating Interest Rates“. U.S. Department of the Treasury, Bureau of the Fiscal Service, treasurydirect.gov.

[7] “Fight Runaway Inflation With I Bonds“. Jason Zweig, 29-Jul-2022, wsj.com.

[8] “Is It Too Late to Add Inflation Protection to Your Portfolio?“ Christine Benz, 22-Jul-2022, morningstar.com.

[9] “Run, Don’t Walk, for I Bonds“. John Rekenthaler, 10-Aug-2022, morningstar.com.

The Consumer Price Index for All Urban Consumers: All Items (CPIAUCSL) is a measure of the average monthly change in the price for goods and services paid by urban consumers between any two time periods. It can also represent the buying habits of urban consumers.

Russell 3000 TR USD Index is a market-capitalization-weighted index that measures the performance of the largest 3000 US companies representing approximately 98% of the investable US equity market.

Bloomberg US Aggregate Bond TR USD Index measures the performance of investment grade, U.S. dollar-denominated, fixed-rate taxable bond market, including Treasuries, government-related and corporate securities, MBS (agency fixed-rate and hybrid ARM passthroughs), ABS, and CMBS.

Bloomberg U.S. Treasury Inflation-Protected Securities (TIPS) 0–5 Year Index is a market-weighted index measures the performance of inflation-protected public obligations of the U.S. Treasury that have a remaining maturity of less than five years

Hyperlinks to third-party information are provided as a convenience and we disclaim any responsibility for information, services or products found on websites or other information linked hereto.

Bobby Adusumilli 6/30/22 Bobby Adusumilli 6/30/22

What Is Driving Inflation, And What Can You Do About It?

By Investment Associate Bobby Adusumilli, CFA.

It’s hard not to notice inflation these days - we see it in higher gas prices, higher grocery bills, and higher housing costs, among other areas. This is true beyond the U.S.: inflation rates in countries around the world are higher compared to recent history.[1]

For the one-year period ending May 31, 2022, the U.S. inflation rate (as measured by the CPI for All Urban Consumers Unadjusted Index) is 8.6%.[2] While most of the U.S. economy is experiencing some inflation, energy - which includes gasoline, oil, electricity, and other commodities - has experienced an outsized amount of inflation, approaching 35%.[2]

*Source: “Consumer Price Index Summary“. U.S. Bureau of Labor Services, 10-Jun-2022,* *bls.gov*. The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services. See Important Disclosure Information.

While these higher prices are difficult to handle right now, we believe there are some reasons for optimism regarding inflation. Energy prices spiked largely in response to effects from the COVID-19 pandemic as well as the war in Ukraine.[3] While we may experience elevated prices in the short-term, companies and markets tend to respond when there is high demand for a product, creating more competition and thus more supply, which should help constrain energy prices over time. Additionally, the Federal Reserve has been aggressively raising interest rates to combat inflation.[4] While this has hurt stock and bond prices recently, we believe this will help decrease inflation over time.[4]

Global bond markets are also expressing optimism that the U.S. inflation rate will fall back to more normal levels. For example, the 10-year breakeven inflation rate - which is a measure of what bond investors expect U.S. inflation to be over the next 10 years on average - is 2.33% as of June 30th, 2022.[5] While this is higher than the Federal Reserve’s goal of 2.00% inflation, bond markets do not expect medium- to long-term inflation to be anywhere close to the recent inflation rate.[5][6]

*Source:* *FRED*, as of June 30, 2022. The breakeven inflation rate represents a measure of expected inflation derived from 10-Year Treasury Constant Maturity Securities and 10-Year Treasury Inflation-Indexed Constant Maturity Securities. The latest value implies what market participants expect inflation to be in the next 10 years, on average. See Important Disclosure Information.

Given all of this information, we have designed MarketPlus Investing portfolios to have some built-in inflation protection. For example, MarketPlus Investing model portfolios with fixed income allocations have exposure to U.S. Treasury Inflation-Protected Securities (TIPS) as well as short-duration (<5 years) bonds, which tend to provide some protection from inflation. And while global stocks can underperform inflation over the short-term (< 5 years), research has demonstrated that global stocks tend to provide inflation protection over the intermediate- (5-10 years) and long-term (10+ years).[7]

Investors looking for additional inflation protection can also consider purchasing Series I Savings Bonds, which are 30-year savings bonds offered by the U.S. government designed to match the Consumer Price Index for All Urban Consumers inflation rate. Each individual can buy up to $10,000 worth of these bonds per year, and you can sell after one year, subject to some conditions.[8] While SJS cannot buy these bonds for you directly, we are supportive of Series I Savings Bonds as potential investments for inflation protection. You can find additional information on the treasurydirect.gov website.

Global stock and bond markets have been tested by inflation many times in the past, and these markets have historically demonstrated their resilience in providing returns higher than inflation over time.[7] While it may be difficult in the short-term, we believe that staying invested is the key to getting through this market volatility and inflation.

Important Disclosure Information & Sources:

[1] “Inflation Rate - By Country“. Trading Economics, June 2022, tradingeconomics.com.

[2] “Consumer Price Index Summary“. U.S. Bureau of Labor Services, 10-Jun-2022, bls.gov.

[3] “How High Is Inflation and What Causes It? What to Know“. Gabriel T. Rubin & David Harrison, 10-Jun-2022, wsj.com.

[4] “Fed Raises Rates by 0.75 Percentage Point, Largest Increase Since 1994“. Nick Timiraos, 15-Jun-2022, wsj.com.

[5] “10-Year Breakeven Inflation Rate“. Federal Reserve Bank of St. Louis, 30-Jun-2022, fred.stlouisfed.org.

[6] “Why does the Federal Reserve aim for inflation of 2 percent over the longer run?“ Board of Governors of the Federal Reserve System, 27-Aug-2020, federalreserve.gov.

[7] Stocks for the Long Run. Jeremy Siegel, 2014, McGraw Hill.

[8] “Series I Savings Bonds”. U.S. Department of the Treasury, June 2022, treasurydirect.gov.

MarketPlus Investing® models consist of institutional quality registered investment companies. Investment values will fluctuate, and shares, when redeemed, may be worth more or less than original cost.

Hyperlinks to third-party information are provided as a convenience and we disclaim any responsibility for information, services or products found on websites or other information linked hereto.

Bobby Adusumilli 5/11/22 Bobby Adusumilli 5/11/22

What Makes A Great Investor?

In my opinion, investing is arguably the most competitive field in the world. So what differentiates a great investor from the rest?

By Investment Associate Bobby Adusumilli, CFA.

In my opinion, investing is arguably the most competitive field in the world. With financial and technological innovations in recent decades, almost anyone in most developed countries with a sum of money can buy and sell public stocks, bonds, mutual funds, ETFs, and other financial instruments. Additionally, regardless of their occupations, many people invest through 401(k)s, 403(b)s, 457 plans, IRAs, taxable accounts, and / or a number of other financial accounts. Even if their primary occupations take up most of their time, these people are also investors.

With billions (or even trillions) of dollars in potential gains at stake, investing has become increasingly competitive as time has gone on. Thousands of investment firms across the country employ smart people and cutting-edge technology, all in the pursuit of achieving higher returns. As a result, investment market prices are constantly adjusting from the buy and sell orders of sophisticated parties, making it very difficult for someone to outperform the market.[1][2]

So what differentiates a great investor from the rest?

Over a series of recent newsletters and articles, financial journalist Jason Zweig (author of Your Money and Your Brain, as well helped Nobel Prize-winning psychologist Daniel Kahneman write the bestselling book Thinking, Fast and Slow) details what he believes are the seven virtues of great investors.[3] We share these virtues below, providing our own experiences with each.

Discipline

Discipline is about creating a well-thought-out investment process appropriate for you, and then following your rules.[4] Discipline also helps you get out of your own way, particularly in the tough times. In our experience, the more disciplined an investor is, the better their investment returns tend to be. As John Bogle writes in his book Bogle On Mutual Funds: New Perspectives For The Intelligent Investor, “Successful investing involves doing just a few things right and avoiding serious mistakes.“[5]

Curiosity

Curiosity is driven by wanting to understand the world, wanting to get closer to what is true.[6] By being curious enough to understand what investment strategies work and why, you can potentially help yourself become a better investor.

Skepticism

Skepticism requires focusing on your foundational principles, and questioning arguments that differ from these principles.[7] For example, research demonstrates that most stock market investors underperform total stock market index funds, particularly over the long-term.[1] If someone tries to pitch you an investment that they say will outperform the stock market, and there is not enough good theory and evidence to back up their claim, then we would strongly caution you against purchasing that investment.

However, skepticism is not the same as pessimism. Skepticism also calls for open-mindedness when theory and evidence support a particular argument. As Howard Marks writes in his book The Most Important Thing, “Skepticism calls for pessimism when optimism is excessive. But it also calls for optimism when pessimism is excessive.“[8]

Independence

Independence means doing the right thing.[9] If others are doing the right thing, then independence doesn’t mean that you have to be alone. But if others around you are doing something that doesn’t align with your principles and investment strategy, then being independent means having the courage to stick with your investment plan, even if that means going against the crowd.

Humility

Humility means understanding the reality of your situation, not deceiving yourself.[10] Humility recognizes that you don’t control and know everything. As an investor, there will be times when you underperform others around you, and there will be times when you outperform. In our experience, performance is always subject to some degree of luck. Humility also means that there will be someone more successful at investing than you, and recognizing that that is okay as long as you have a sound investment strategy in place and you are making progress towards your goals.

Patience

The longer you invest, the more time you are giving your investments to potentially grow, as the graph at the bottom of this article demonstrates.[11] While each investor has different circumstances and goals, in our experience, many of the best investors give themselves as much time as possible to grow their money; they have the patience to have the longest view in the room.

Courage

It is hard to be a great or even good investor. It is hard to continue investing when the market is going down, and it is hard to be disciplined enough to stick with your investment strategy when other strategies are booming.[3] If you create a well-thought-out investment plan backed by theory and evidence, then in our experience, having the courage to stick to your investment plan in both good times and bad tends to work out for people in the long run.

So What Can You Do To Become A Great Investor?

Research shows that the vast majority of stock market investors underperform the stock market, with greater underperformance as the period of time studied is lengthened.[1] While there are some people who outperform for a period of time, it is very hard to know who these people are in advance. Even if you know who they are, as the period of time increases, some of these great investors no longer achieve the same level of outperformance.

So what can you do to become a great investor? One strategy is to aim to be an above-average investor each year for a very long period of time. For example, research shows that just owning the stock market through an index fund will help you outperform most investors in most years as well as over time.[1] For example, if you had been able to own the global stock market as measured by the MSCI ACWI Index from 1988 (the index inception) through April 2022 (assuming reinvestment of all distributions; no other expenses or taxes considered), an initial investment of $100,000 would have grown to over $1,400,000. While the definition of a great investor is ambiguous, this performance seems like a great outcome to me.

*Source: Dimensional Returns Web. See Important Disclosure Information.[12]*

While future performance will differ from past performance, and while it was more difficult to invest in global investment strategies in the past, investors today have the ability to nearly match many global stock and bond indices even after considering fees.[13] Therefore, we believe that investing in low-cost, low-turnover, broadly-diversified global mutual funds and ETFs is a sound investment strategy that can potentially help a lot of people over the long-term.[14] And if you stick with a sound investment strategy long enough, you may become a great investor yourself.

Important Disclosure Information & Sources:

[1] “2022 Quantitative Analysis of Investment Behavior Report”. DALBAR, 2022, dalbar.com.

[2] “Why Do Investors Underperform?“ Bobby Adusumilli, 24-Jun-2021, sjsinvest.com.

[3] “The Secret to Braving a Wild Market“. Jason Zweig, 02-Mar-2022, wsj.com.

[4] “2020: The Sequel?“ Jason Zweig, 12-Jan-2022, The Intelligent Investor Newsletter - wsj.com.

[5] “Bogle On Mutual Funds: New Perspectives For The Intelligent Investor“. John Bogle, 2015, Wiley Investment Classics.

[6] “'The First Great Investing Virtue“. Jason Zweig, 19-Jan-2022, The Intelligent Investor Newsletter - wsj.com.

[7] “A New Month, A New Market?“ Jason Zweig, 08-Feb-2022, The Intelligent Investor Newsletter - wsj.com.

[8] “The Most Important Thing: Uncommon Sense for the Thoughtful Investor“. Howard Marks, 2011, Columbia Business School Publishing.

[9] “Stepping Away from the Herd“. Jason Zweig, 15-Feb-2022, The Intelligent Investor Newsletter - wsj.com.

[10] “On Humility and Independence“. Jason Zweig, 22-Feb-2022, The Intelligent Investor Newsletter - wsj.com.

[11] “Patience Amid Turbulence“. Jason Zweig, 02-Mar-2022, The Intelligent Investor Newsletter - wsj.com.

[12] The MSCI ACWI Index is a free float-adjusted market capitalization weighted index designed to measure the equity market performance of developed and emerging markets, consisting of 47 country indices comprising 23 developed and 24 emerging market country indices. Indices are not available for direct investment. Index performance does not reflect the expenses associated with management of an actual portfolio. Index performance is measured in US dollars. The index performance figures assume the reinvestment of all income, including dividends and capital gains. The performance of the indices was obtained from published sources believed to be reliable but which are not warranted as to accuracy or completeness.

[13] “Index funds“. Vanguard, vanguard.com.

[14] “MarketPlus Investing“. SJS Investment Services, sjsinvest.com.

Hyperlinks to third-party information are provided as a convenience and we disclaim any responsibility for information, services or products found on websites or other information linked hereto.

Thomas Kelly, CFA 4/5/22 Thomas Kelly, CFA 4/5/22

Market Corrections & Market Highs

We believe that trying to time when to get in and out, or what to buy and sell, represents little more than gambling.

By Chief Investment Officer Tom Kelly, CFA.

In 2021, the global stock market (as measured by the MSCI ACWI Index) continued to reach new high after new high, but this year is off to a different start.[1][2] After the slow and steady rise in 2021, the rather opposite slow and steady fall occurred throughout the first quarter of 2022.[1] Though some recovery happened in the last three weeks, market headlines continue to point out all the things to worry about such as war, inflation, and recession.[1] Challenging times may be ahead, especially with the continued conflict between Russia and Ukraine.

While not diminishing those challenges and the people affected, it may be an opportune time to take a step back for a wider perspective. When looked at as a whole, the stock market can sometimes seem tame and uninteresting during times of lesser volatility, and all fraught with despair during periods of higher volatility and drawdowns. However, the drawdown of 13% so far this year for the global stock market is not uncommon at all, and we often see intra-year drawdowns well into the double digits even when the end-of-year returns end up positive.[2] Over the last 20 years in the global stock market, intra-year drawdowns averaged 16%, yet calendar year returns were positive in 15 out of 20 of those years.[2] A gentle reminder to stay the course.

*Source: Morningstar. See Important Disclosure Information.[2]*

It is interesting to note that the “market” as a whole often masks the ups and downs of its individual stock components. Within the MSCI All Country World Index, 94% of the nearly 3,000 companies experienced a drawdown of at least -10% during 2021, and about half drew down 25% or more.[2] This in a year when there was lower volatility, limited geopolitical events, and the global stock market as a whole up 19%![2] This suggests the value of broad diversification.

When evaluating the underlying returns, there is often plenty to worry about and temptation to tinker. We believe that trying to time when to get in and out, or what to buy and sell, represents little more than gambling. MarketPlus Investing on the other hand is a disciplined process, centered around research and evidence, with diversification at the core.

Important Disclosure Information & Sources:

[1] “SJS Weekly Market Update”. SJS Investment Services, 2021-2022, sjsinvest.com.

[2] Morningstar. The global stock market is represented by the MSCI ACWI Index, which is a free float-adjusted market capitalization weighted index designed to measure the equity market performance of developed and emerging markets. The MSCI ACWI Index consists of 47 country indices comprising 23 developed and 24 emerging market country indices.

Hyperlinks to third-party information are provided as a convenience and we disclaim any responsibility for information, services or products found on websites or other information linked hereto.

Kirk Ludwig, CFIP, AIF® 4/4/22 Kirk Ludwig, CFIP, AIF® 4/4/22

The Fed Poked The Bear

Rising interest rates are not always a bad thing. As interest rates move higher, the drop in value can be concerning, but in the longer-term, higher rates mean higher expected returns for investors, as bonds begin to produce more income.

By Senior Advisor Kirk Ludwig, CFIP, AIF®.

March 20th was the celebration of the Vernal Equinox and the Earth’s axis has once again shifted us into a new season. From the green pop of tulips sprouting to the warmth of the sunshine spilling through the windows, the United States began celebrating one of their most beloved seasons: The NCAA March Madness Basketball Tournament, or as many of us like to call it… Spring! Along with spring comes the chirping of migrating birds and the waking of hungry bears. This spring the Fed gave the “bond bear” a bit of a poke to get the season rolling.

After a two-year hibernation of zero percent interest rates, the Fed has embarked on the challenging mission of hiking interest rates to combat elevated inflation levels while not inducing a recession at the same time.[1] By increasing short-term interest rates and reducing the size of their balance sheet, the Fed will attempt to orchestrate a soft economic landing.[1] So how many times will they need to raise interest rates to accomplish their goal?

Now for the bad news “bear”… The Fed indicated their intent to continue raising rates into the near future.[1] As of the end of March, the market is expecting the Fed to raise rates eight to nine more times in 2022.[2] This number has changed multiple times in the past few weeks and will likely continue to adjust in the coming months.[2] As new information is presented to the market, bond yields will quickly reflect the possible changes which may occur as a result.

Why are rising rates viewed negatively by the market? Let’s revisit how bond values can change based on the change of market interest rates. Like a teeter-totter, when rates rise, bond values fall and vice versa. Additionally, the sensitivity of the price change is primarily impacted by the term length (maturity) of the bond. The longer the maturity, the more sensitive the price of the bond will likely be. With this recent move higher in yields, the S&P U.S. Aggregate Bond Market Index dropped 5.57% in the first three months of 2022.[3] One of the worst starts of the year on record.[3]

However, rising rates are not always a bad thing. As interest rates move higher, the drop in value can be concerning, but in the longer-term, higher rates mean higher expected returns for investors, as bonds begin to produce more income. The chart below shows the change in yields for three different time periods; 1.) 09/30/21 - before the Fed indicated their plan on raising rates, 2.) 12/31/21 – early stage of the Fed’s plan, and 3.) 03/31/22 – the market’s interpretation of future rates as of the end of the quarter:[2]

*Source: “Daily Treasury Par Yield Curve Rates“. U.S. Department of the Treasury,* *treasury.gov*.

As illustrated in the graph, current interest rates have moved markedly higher since the start of the year. Short-term rates - inside three years - have had the most dramatic move as the market prepares for future rate hikes. The longer maturities, which often provide more information about future growth and inflation expectations, have experienced a parallel shift higher. The shape of the yield curve prices in the future expected events, i.e. rate hikes, inflation, economic growth to name a few.

With all the uncertainties surrounding today’s markets, the day-to-day news can be distracting to investors. If you’re worried about how many more times the Fed is going raise rates, know that the market has already priced in that risk. Future inflation? Same answer. Possibility of future recessions… same! Therefore, trying to make long-term decisions on short-term news can often lead investors down the wrong path.

‘Ok, so what should we do now?’ SJS does not react to the short-term noise, but we do evaluate the longer-term expected risk and return characteristics of each segment of the portfolio and manage to those risks. Some of the adjustments that we have made on behalf of our clients:

Maintaining a shorter duration than the total bond market: We believe this reduces interest rate risk relative to the total broader US bond market, while still maintaining broad diversification.
Investing in shorter-term inflation-protected securities: We believe this hedges the portfolio against sharp increases in inflation, while still maintaining a relatively short duration.
Adding diversified alternative investments: We believe investing in diversified alternatives with low correlation to US stocks and bonds can help to redistribute expected risk, broaden diversification, and increase expected returns compared to US fixed income over the long-term.

While you are enjoying the shift into this new season, be comforted in knowing that SJS is continuously monitoring the market and keeping your best interests top of mind. As markets experience higher levels of uncertainty, the best course of action is to maintain a strong discipline with broad diversification. Yes, the hungry bear may seem scary, and you will likely want to run, but the market will eventually find its balance so we can all get back to monitoring our college basketball brackets.

Important Disclosure Information & Sources:

[1] “Fed Raises Interest Rates for First Time Since 2018“. Nick Timiraos, 17-Mar-2022, wsj.com.

[2] “Daily Treasury Par Yield Curve Rates“. U.S. Department of the Treasury, treasury.gov.

[3] “S&P U.S. Aggregate Bond Index“. S&P Dow Jones Indices, spglobal.com/spdji/en. The S&P U.S. Aggregate Bond Index is designed to measure the performance of publicly issued U.S. dollar denominated investment-grade debt.

MarketPlus Investing® portfolios consist of institutional quality registered investment companies. Investment values will fluctuate, and shares, when redeemed, may be worth more or less than original cost.

Hyperlinks to third-party information are provided as a convenience and we disclaim any responsibility for information, services or products found on websites or other information linked hereto.

Thomas Kelly, CFA 2/25/22 Thomas Kelly, CFA 2/25/22

The Certainty of Uncertainty - Your Investments During Geopolitical Events

On the conflict in Ukraine, how that may impact investment markets, and what you can control within your investment portfolio.

By Chief Investment Officer Tom Kelly, CFA.

With conflict between Russia and Ukraine escalating in recent days - unfortunately leading to an invasion and war between the nations - we are reminded of the never-ending risks in the world.[1] Just as the light at the end of the tunnel of the pandemic begins to appear, the next global challenge presents itself. The only thing predictable is the unpredictability of the world.

From an investment perspective, global ramifications of war are certainly hard to determine. Military events - just like economic disruptions, natural disasters, and social turmoil - affect the stock market in many unpredictable ways. The tendency for investors is to try to predict and adjust based on events, but we believe markets are continually pricing in expectations and likelihoods of further developments, whether positive or negative.

One of the hardest things to do as an investor is to stay invested and committed to your investment plan, particularly during periods of great uncertainty. However as this graph demonstrates, markets have rewarded investors over long periods of time.[2] In our experience, the discipline to stick to their investment plan through the periods of greatest uncertainty often differentiates great investors from the rest.

*Source: Morningstar Direct, S&P data © 2022 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. See Important Disclosure Information.[2]*

Unfortunately, there have been many major armed conflicts over the last century to look to and see how markets might behave. As this table demonstrates, both US stock and bond markets still achieved positive returns during the years associated with major wars of the past.

*Sources: “What Happens to the Market if America Goes to War?“ Mark Armbruster,* *cfainstitute.org*. Dimensional Returns Web. The indices used for each asset class are as follows: the S&P 500 Index for large-Cap stocks; CRSP Deciles 6-10 for small-cap stocks; long-term US government bonds for long-term bonds; five-year US Treasury notes for five-year notes; long-term US corporate bonds for long-term credit; one-month Treasury bills for cash; and the Consumer Price Index for inflation. All index returns are total returns for that index. Returns for a war-time period are calculated as the returns of the index four months before the war and during the entire war itself. Returns for “All Wars” are the annualized geometric return of the index over all “war-time periods.” Volatility is the annualized standard deviation of the index over the given period. Past performance is not indicative of future results. See Important Disclosure Information.

For investors historically, wars have not been detrimental to long-term investment performance. We do not believe the current situation will be detrimental to long-term investors going forward. While no two conflicts are the same - and each more unfortunate than the last regarding the continued loss of human life and havoc on nations - humanity (and the markets) remain resilient. Industry and innovation continue. We hope and pray this time is the same.

For those who have a sound, diversified, personalized investment plan in place, we do not believe that now is the time to make any major changes. Instead of focusing on how external forces that you do not control may impact your investments, we recommend that you focus on what you can control. For our clients, we are doing the following on your behalf:

Investing, Not Speculating

As anyone who invested through the COVID-19 pandemic knows, investment markets can be highly volatile, and regularly move in ways that we don’t expect.[3] Instead of making it up as we go along, we think that creating an investment plan ahead of time and sticking to it during down markets is most likely to benefit most investors over the long-term. We believe in long-term investing, not short-term speculating.

Rebalancing

During most volatile market periods, stocks tend to be more negatively impacted in the short-term compared to bonds. Therefore, you can potentially rebalance back to your target allocations by selling some bonds and buying some stocks. This can allow you to buy stocks when they are at lower valuations as well as rebalance your total portfolio to its target risk allocation, which may potentially help improve your risk-adjusted expected returns over the long-term.[4]

Tax Loss Harvesting

Volatile investment periods tend to provide more tax-loss harvesting opportunities within taxable accounts. You can potentially sell an investment now at a capital loss and buy a similar (though not a “substantially identical” investment per the Wash Sale Rule) investment.[5] Then in the future, you can realize capital gains in your taxable accounts and use the past capital losses to lower your tax burden, which can potentially increase long-term after-tax expected returns.

We don’t know what will happen, but we will control what we can in efforts to help your investment portfolio. As always, if you have specific questions or concerns related to your portfolio, please call us. We’re always here to listen and assist.

Important Disclosure Information & Sources:

[1] “Russia Invades Ukraine, Aims to Oust Leadership“. By Yaroslav Trofimov, Alan Cullison, Brett Forrest, & Ann M. Simmons, 24-Feb-2022, wsj.com.

[2] The S&P 500 Index is a free float-adjusted market-capitalization-weighted index of 500 of the largest publicly traded companies in the United States.

[3] “Started From the Bottom”. Nick Maggiulli, 23-Mar-2021, ofdollarsanddata.com.

[4] “Opportunistic Rebalancing: A New Paradigm for Wealth Managers.” Gobind Daryanani, fpanet.org.

[5] “Wash-Sale Rule“. Jason Fernando, 17-Feb-2022, investopedia.com.

Hyperlinks to third-party information are provided as a convenience and we disclaim any responsibility for information, services or products found on websites or other information linked hereto.

Bobby Adusumilli 2/17/22 Bobby Adusumilli 2/17/22

The Growth of Real Estate

As anyone who was looking to purchase or sell a home in 2021 knows, the US real estate market grew a lot in value in 2021. Will this continue?

By Investment Associate Bobby Adusumilli, CFA.

As anyone who was looking to purchase or sell a home in 2021 knows, the US real estate market grew a lot in value in 2021. For example, the US publicly-traded real estate market, as measured by the Dow Jones US Select REIT Index, returned nearly 46% in 2021, the best year since the index began in 1987.[1]

One driver of REIT performance is property and housing values. Heavily driven by the decline in interest rates resulting from the COVID-19 pandemic, Americans spending more time working remotely, as well as record amounts invested from investment firms, home purchases have been driven by a surge in demand combined with a relatively steady supply.[2][3]

*Source: S&P Dow Jones Indices LLC,* *S&P/Case-Shiller U.S. National Home Price Index [CSUSHPISA], Federal Reserve Bank of St. Louis, 16-Feb-2022,* *fred.stlouisfed.org*.

In the second edition of his famous book Irrational Exuberance that was released in 2006, Nobel Prize-winning economist Robert Shiller wrote, “It is true that for the United States as a whole real home prices were 66% higher in 2004 than in 1890, but all of that increase occurred in two brief periods: the time right after World War II (with the first increases occurring in the early 1940s, just before the war ended) and a period that appears to reflect a lagged response to the 1990s stock market boom (or a response to its boom and crash), with the first signs of increase occurring in 1998. Other than those two periods, real home prices overall have been mostly flat or declining.“[4]

The above data suggests that this past decade - particularly in 2020 and 2021 - are a third such period of a rise in real home prices in the United States.

However, we believe that some of the factors driving this rise are unsustainable. According to the Wall Street Journal as of late 2021, the median time a home stays on the market in the US is around one week, which is a record low.[5] Many purchasers today are no longer taking advantage of low interest rates, often paying all-cash at a price above listing in order to beat out other purchasers.[5] In a sign of exuberance, many homebuyers are not even inspecting these homes as a contractor would recommend.[5]

With short-term interest rates expected to increase significantly throughout 2022, as well as an already growing home supply projected over the next few years, we do not expect this current housing boom to sustain its pace.[6][7] As a result of this and other evidence, we believe that publicly-traded REIT investments will have lower expected returns over the medium-term compared to the last ten years, though we still expect returns to remain positive over the medium- to long-term.

Important Disclosure Information & Sources:

[1] Source: Dimensional Returns Web. The Dow Jones U.S. Select REIT Index tracks the performance of publicly traded REITs and REIT-like securities and is designed to serve as a proxy for direct real estate investment, in part by excluding companies whose performance may be driven by factors other than the value of real estate.

[2] “U.S. Existing-Home Sales Reached a 15-Year High of 6.1 Million Last Year“. Nicole Friedman, 20-Jan-2022, wsj.com.

[3] “Building and Renting Single-Family Homes Is Top-Performing Investment“. Will Parker, 09-Nov-2021, wsj.com.

[4] Irrational Exuberance. Robert Shiller, 2006, Crown Business.

[5] “Homes Now Typically Sell in a Week, Forcing Buyers to Take Risks“. Nicole Friedman, 11-Nov-2021, wsj.com.

[6] “Fed Signals Rate Increase in March, Citing Inflation and Strong Job Market“. Jeanna Smialek, 26-Jan-2022, nytimes.com.

[7] “New Privately-Owned Housing Units Started: Total Units“. Federal Reserve Bank of St. Louis, 31-Dec-2021, fred.stlouisfed.org.

Indices are not available for direct investment. Index performance does not reflect the expenses associated with management of an actual portfolio. Index performance is measured in US dollars. The performance of the indices was obtained from published sources believed to be reliable but which are not warranted as to accuracy or completeness.

Hyperlinks to third-party information are provided as a convenience and we disclaim any responsibility for information, services or products found on websites or other information linked hereto.

Bobby Adusumilli 2/2/22 Bobby Adusumilli 2/2/22

What's Happening With The Chinese Stock Markets?

China has been growing rapidly from an economic perspective. So what’s happening with the Chinese stock markets?

By Investment Associate Bobby Adusumilli, CFA.

2021 was a turbulent year for Chinese stocks. Partially due to concerns about government involvement in businesses, human rights, and the repercussions of the COVID-19 pandemic, the MSCI China Index declined nearly 22% in 2021, compared to a 10% gain for the MSCI Emerging Markets ex China Index.[1][2][3] To demonstrate the significance of China to emerging markets stock performance, the MSCI Emerging Markets Index fell roughly 2.5% in 2021, of which Chinese stocks make up approximately 29%.[4]

*Source:* *MSCI, as of December 31, 2021. Please see Important Disclosure Information.*

As the above illustrates, Chinese stocks and emerging markets stocks more generally have had rough performance relative to the United States over the past ten years.[5] However, that does not mean that investors should abandon emerging markets stocks. As the above fundamentals demonstrate, emerging markets (including China) stocks are significantly cheaper than US stocks. Additionally, even with the poor performance in 2021, Chinese stocks have outperformed other emerging markets stocks over the past ten years while also having similar forward-looking valuation metrics, suggesting Chinese stocks can help emerging markets investments.

Demographic trends seem to indicate there will be more economic growth in emerging markets like China compared to more developed markets such as the US.[6] To illustrate this trend, the below graph shows the gross domestic product (GDP) - a measure of the goods and services produced in a country during a period of time - of China and the US. In 1980, China’s GDP was 11% of the United States' GDP; by 2021, China’s GDP had grown to 86% of the United States' GDP.[7]

*Source: “GDP, current prices“. International Monetary Fund,* *imf.org/en/Home. Please see Important Disclosure Information.*

Many of the world’s top investors are also investing heavily in China. For example, according to the Wall Street Journal, venture-capital investors invested $129 billion into more than 5,300 startups in China in 2021.[8] These investments made up roughly 20% of the approximately $643 billion in global venture capital investments in 2021.[8][9] For comparison, Chinese stocks currently only make up 4% of global stock market capitalization as measured by the MSCI All Country World Index (ACWI).[10] This venture capital activity suggests that the aggregate market capitalization of Chinese stocks will grow considerably in the years to come.

While the various investor concerns about China are legitimate, it is important to note that among companies on stock exchanges in developed markets (including the US), nearly 20% of their revenues come from emerging markets, with China being the single-biggest revenue source.[11] Given the global nature of business today, it is very difficult to invest in stocks without having direct or indirect exposure to China. Investors worried about certain practices in Chinese companies can invest in ESG (Environment, Social, & Governance)-focused emerging markets mutual funds and ETFs, which can help people decrease exposure to companies that don’t match their values. Or investors can invest in emerging markets mutual funds and ETFs that exclude Chinese stocks.

China has been growing rapidly from an economic perspective, with the amount of people in the middle class rising significantly, as well as innovative companies starting in China at a number only rivaled by the United States.[12][7] Given all of the above, we believe Chinese stocks are positioned to have positive expected returns over the intermediate- and long-term.

Important Disclosure Information & Sources:

[1] “Chinese Companies Listed at Home Surge While Crackdowns Clobber Those Abroad“. Rebecca Feng, 03-Jan-2022, wsj.com.

[2] “MSCI China Index (USD)“. MSCI, 31-Dec-2021, msci.com. The MSCI China Index captures large and mid cap representation across China A shares, H shares, B shares, Red chips, P chips and foreign listings (e.g. ADRs). The index covers about 85% of this China equity universe. Currently, the index includes Large Cap A and Mid Cap A shares represented at 20% of their free float adjusted market capitalization.

[3] “MSCI Emerging Markets ex China Index (USD)“. MSCI, 31-Dec-2021, msci.com. The MSCI Emerging Markets ex China Index captures large and mid cap representation across 24 of the 25 Emerging Markets (EM) countries excluding China. The index covers approximately 85% of the free float-adjusted market capitalization in each country.

[4] “MSCI Emerging Markets Index (USD)”. MSCI, 31-Dec-2021, msci.com. The MSCI Emerging Markets Index captures large and mid cap representation across 25 Emerging Markets (EM) countries. The index covers approximately 85% of the free float-adjusted market capitalization in each country.

[5] “MSCI USA Index”. MSCI, 31-Dec-2021, msci.com. The MSCI USA Index is designed to measure the performance of the large and mid cap segments of the US market. The index covers approximately 85% of the free float-adjusted market capitalization in the US.

[6] “Real GDP growth“. International Monetary Fund, imf.org/en/Home.

[7] “GDP, current prices“. International Monetary Fund, imf.org/en/Home.

[8] “China’s Startups Are Awash With Money as Beijing Shifts Focus to ‘Hard Tech’“. Liza Lin, Jing Yang, & Keith Zhai, 13-Jan-2022, wsj.com.

[9] “Global Venture Funding And Unicorn Creation In 2021 Shattered All Records“. Gene Teare, 05-Jan-2022, crunchbase.com.

[10] “MSCI ACWI Index (USD)“. MSCI, 31-Dec-2021, msci.com. The MSCI ACWI captures large and mid cap representation across 23 Developed Markets (DM) and 25 Emerging Markets (EM) countries. The index covers approximately 85% of the global investable equity opportunity set.

[11] “The Ever Given, Suez Canal and Impact of One Stuck Ship on the Global Economy“. Avantis Investors, March 2021, avantisinvestors.com.

[12] “China’s Influence on the Global Middle Class“. Homi Kharas & Meagan Dooley, October 2020, brookings.edu.

Hyperlinks to third-party information are provided as a convenience and we disclaim any responsibility for information, services or products found on websites or other information linked hereto.

Kirk Ludwig, CFIP, AIF® 10/14/21 Kirk Ludwig, CFIP, AIF® 10/14/21

There's Always Something To Worry About

There will always be something to worry about, but with the right portfolio design and disciplined approach, you can whether almost any storm.

By SJS Investment Services Senior Advisor Kirk Ludwig CFIP, AIF®.

When it comes to the financial markets, there’s always something to worry about. In today’s “uncertain” market, people are worried about the COVID resurgence, stock market valuations, long-term trend of inflation, the Fed’s plans on monetary and fiscal policy, potential tax law changes, and debt ceiling negotiations. Many investors become so worried about risks and uncertainty that they sell out of the market.

Yet risk is the nature of markets, and that’s a good thing! Can you imagine a stock market with nothing to worry about? It would essentially mean there would be no perceived risk for investors. What’s the expected return for investments with little or no risk?

The One-Month Treasury Bill is considered one of the lowest risk investments available in the public markets and carries an annual yield of 0.03% as of October 12, 2021.[1] In this case, the expected return for little or no perceived risk is near 0%. There’s a simple rule in investing – risk and return are related! If you want return, there must be a level of risk you’re willing to accept.

Source: Avantis Investors, Bloomberg, as of 30-Sep-2021. The US Treasury yield curve compares the yields of maturities from short-term Treasury bills (<1 year) to long-term Treasury notes and bonds (>10 years). — *Source:* *Avantis Investors*, *Bloomberg, as of 30-Sep-2021. The US Treasury yield curve compares the yields of maturities from short-term Treasury bills (<1 year) to long-term Treasury notes and bonds (>10 years).*

People dislike risk because they are worried about the uncertainty of the future. Yet from a broadly-diversified investing perspective, the greater the uncertainty, the higher the risk. Investors expect to be appropriately compensated for accepting risk. An investor who owns a One-Month Treasury Bill understands there’s very little to worry about when it comes to volatility, and agrees to give up expected return for the comfort of safety. We want stock market investors to understand that while the value of their investments can drop rapidly at times, investors tend to benefit significantly from this risk in stocks over the long-run.

For example, when COVID-19 first started spreading in the US, the S&P 500 fell roughly 34% from February 19, 2020 through March 23, 2020.[2] Even before the US reached its highest spike in COVID cases, the market started rebounding, and this year has continued to set new record highs.[2][3] As of October 12, 2021, the S&P 500 is up roughly 95% since the lows set on March 23, 2020.

Even with their knowledge of financial history, some investors are currently worried that the US stock market is overvalued. The Price / Earnings (P/E) ratio of the S&P 500 is around 25, which places this time period in the top 5 percentile of historical market valuations since 1930.[4] However, not all sectors of the US economy have equally high valuations. For example, the mega-cap growth space, driven by the FAAMG stocks, has a P/E around 39.[5] Conversely, the small value space, which is heavily weighted with financials and energy companies, has a P/E around 14.[6] As this accompanying graph demonstrates, the valuation spreads between growth and value stocks are near record highs around the world.[7]

Source: “Are Value Stocks Cheap for a Fundamental Reason?”. AQR Capital Management, 30-Aug-2021, aqr.com. Spreads are constructed using the Hypothetical AQR U.S. Large Cap, International, and Emerging Valuation Theme Models, and are adjusted to be dollar-neutral, but not necessarily beta-neutral through time. For illustrative purposes only and not representative of an actual portfolio AQR currently manages. — *Source: “Are Value Stocks Cheap for a Fundamental Reason?*”. *AQR Capital Management, 30-Aug-2021,* *aqr.com*. Spreads are constructed using the Hypothetical AQR U.S. Large Cap, International, and Emerging Valuation Theme Models, and are adjusted to be dollar-neutral, but not necessarily beta-neutral through time. For illustrative purposes only and not representative of an actual portfolio AQR currently manages.

General market commentary doesn’t always capture the full picture of the markets. When you dig further into the details, you’ll often find a different story.

Given all of this information, we do not anticipate a major stock market correction in the short-term. But markets are unpredictable, and it’s possible a stock market correction may occur. If so, we don’t think that you should be alarmed, because stock market corrections are relatively common.[8] Since 1946, the S&P 500 has experienced a 5% drawdown every 7 months on average.[8] Similarly, 10% corrections have occurred every 22 months, and 20% corrections every 76 months (6.33 years) on average.[8] Despite all of these corrections, the S&P 500 has continued to march onward, returning 11% annually since 1946.[4]

In summary, there’s always something to worry about, but it’s rare that a well-known issue causes a major stock market correction. Most issues are well-known and analyzed by markets participants at every moment. Typically, it’s a surprise event that serves as the catalyst for a market selloff. Despite all of the surprise events of the past, global stock markets have remained resilient and have rewarded investors over the long-run.[9]

We believe that the best course of action for managing unexpected events is through controlling what you can, such as broad diversification with the appropriate balance of growth and stability in your portfolio. You can use market volatility as an opportunity to rebalance to your target asset allocation. As certain asset classes increase in value, you can look to reduce exposure, and as asset classes decline in value, you can look to add; the simple notion of selling high and buying low. There might also be an opportunity for tax loss harvesting.

By focusing on the long-term goals of your portfolio, you can reduce the temptation of making major changes based on short-term news events. There will always be something to worry about, but with the right portfolio design and disciplined approach, you can whether almost any storm.

Important Disclosure Information & Sources:

[1] “Daily Treasury Yield Curve Rates“. U.S. Department of the Treasury, 12-Oct-2021, treasury.gov.

[2] “S&P 500 (^GSPC)“. Yahoo Finance, 12-Oct-2021, finance.yahoo.com.

[3] “COVID-19 Projections”. Institute for Health Metrics and Evaluation, healthdata.org.

[4] “S&P 500”. Morningstar Direct, January 1930 - September 2021.

[5] “CRSP US Mega Cap Growth Index“. Morningstar Direct, 30-Sep-2021. The CRSP US Mega Cap Growth Index includes the largest U.S. companies, with a target of including the top 70% of investable market capitalization, ranked by various metrics to consider valuations.

[6] “CRSP US Small Cap Value Index“. Morningstar Direct, 30-Sep-2021. The CRSP US Small Cap Value Index focuses on the bottom 2% - 15% of US stocks by market capitalization, ranked by various metrics to consider valuations.

[7] “Are Value Stocks Cheap for a Fundamental Reason?“. AQR Capital Management, 30-Aug-2021, aqr.com.

[8] “Putting Pullbacks in Perspective“. Guggenheim Investments, August 2021, guggenheiminvestments.com.

[9] “Stocks for the Long Run”. Jeremy Siegel, 2014, Wharton School Press.

Hyperlinks to third-party information are provided as a convenience and we disclaim any responsibility for information, services or products found on websites or other information linked hereto.

SJS 2021 Capital Markets Expectations: Making Sense Of The Future

SJS uses our 2021 Capital Market Expectations to help design a portfolio that is appropriate for you, and to share insights from the SJS Investment Committee.

To read the full SJS 2021 Capital Markets Expectations, please click here.

SJS works with clients to specify investment goals, and then advises on assets in which to invest, in what percentages, and in which accounts to place these investments. There are many tradeoffs, some of which are known and some that cannot be fully predicted. Using the Four Core Fundamentals of MarketPlus Investing - 1) Markets are efficient and priced fairly; 2) Speculating is futile; 3) Global stocks and bonds have rewarded investors over the long term; 4) Portfolio design matters most - SJS designs low-cost, diversified global portfolios across stock, bond, and alternative asset classes in order to manage the relationship between expected risk and expected return.

One part of this portfolio design process is to project potential expected return and expected risk (volatility) scenarios for each asset class over long term (10+ years) periods. Investing is about forward-looking information. While we learn much from what happened in the past, asset prices are based on expectations of future economic conditions and company fundamentals. These expectations are inherently uncertain, as investors do not know what exactly will happen in the future. Therefore, we believe that providing a range of potential expected returns for each asset class is appropriate, as using a single number may lead to biases or unrealistic & unrealized expectations.

SJS considers numerous factors when designing capital market expectations, including academic research, historical trends, and the current market environment. For example, while the market risk premium (the return of the stock market over the Treasury Bill rate) has been approximately 8% over the last 90 years, muted inflation, slowing growth prospects, and stretched stock market valuations contribute to return expectations being on the lower end of their historical averages.[1] The US Stock Market has far exceeded that market risk premium since 2009 (in large part due to the omission of price declines during the financial crisis while experiencing price gains during the recovery), but international developed and emerging market stocks had a tough decade in comparison, so we would not be surprised to see non-US stocks with greater relative gains in the 2020s. While small value stocks historically captured returns superior to large growth stocks, it was not the case at the end of the last decade. Nevertheless, we remain confident in the statistical evidence and rationale to maintain disciplined exposures to small and value stocks. Finally, with strong bond returns in 2020 and the U.S. Federal Reserve planning to keep interest rates low, bond investors should be prepared for correspondingly low returns.[2]

Every MarketPlus Investing portfolio is globally diversified across and within asset classes, industries, and securities through the use of low cost institutional-class mutual funds and ETFs. Assets are invested where return premiums have historically occurred, and where market indicators imply they will continue. Portfolios are designed for lower turnover by rebalancing based on logical systematic criteria and staying invested regardless of market volatility, which can lead to lower transaction costs. We believe performance lies in the portfolio design itself, rather than stock picking or market timing, and that investors should focus on controlling what they can control. The nominal annualized return on US stocks (as measured by the S&P 500) from 1928 through 2020 was about 10%. But if you had gone to cash and missed the best 76 of the 23,361 trading days (0.33% of trading days), you would have missed all of the return.[3] We do not know ahead of time which days (or months or even years) will have the highest market returns, but through MarketPlus Investing, SJS will continue to support clients by applying these capital markets expectations and using them primarily for long-term strategic planning rather than short-term market decisions.

2021.02.01 SJS Long-Term Capital Market Expectations.png

Source: Morningstar. Asset Classes are represented as follows – US Stock - Russell 3000 TR USD; International Developed Stock - MSCI EAFE GR USD; Emerging Markets Stock - MSCI EM GR USD; Real Estate - S&P Global REIT TR USD; Alternatives - Wilsh… — Source: Morningstar. Asset Classes are represented as follows – US Stock - Russell 3000 TR USD; International Developed Stock - MSCI EAFE GR USD; Emerging Markets Stock - MSCI EM GR USD; Real Estate - S&P Global REIT TR USD; Alternatives - Wilshire Liquid Alternative TR USD; US Aggregate Bond - BBgBarc US Agg Bond TR USD; US Treasury Bond - BBgBarc US Treasury TR USD; US Corporate Bond - BBgBarc US Corp Bond TR USD; Global Aggregate Ex-US Bond - BBgBarc Gbl Agg Ex USD TR USD; Cash / Money Market - USTREAS T-Bill Sec Mkt 3 Mon; Inflation - US BLS CPI All Urban SA.

To read the full SJS 2021 Capital Markets Expectations, please click on the image below.

2021.02.04 SJS Capital Markets Expectations Cover Page.JPG

Important Disclosure Information & Sources:

[1] Source: Dimensional Fund Advisors. Arithmetic average of annual premiums of the Fama/French Total US Market Index minus one-month US T-Bills (1928-2019).

[2] “Fed Signals Low Rates Likely to Last Several Years.” Nick Timiraos, 16-Sep-2020, wsj.com.

[3] Source: Yahoo Finance; S&P Data. See Important Disclosure Information.

Statements contained in this report that are not statements of historical fact are intended to be and are forward looking statements. Forward looking statements include expressed expectations of future events and the assumptions on which the expressed expectations are based. All forward looking statements are inherently uncertain as they are based on various expectations and assumptions concerning future events and they are subject to numerous known and unknown risks and uncertainties which could cause actual events or results to differ materially from those projected.

Advisory services are provided by SJS Investment Services, a registered investment advisor with the SEC. Registration does not imply a certain level of skill or training. SJS Investment Services does not provide legal or tax advice. Please consult your legal or tax professionals for specific advice. This material has been prepared for informational purposes only.

Hyperlinks to third-party information are provided as a convenience and we disclaim any responsibility for information, services or products found on websites or other information linked hereto.

Indices are not available for direct investment. Their performance does not reflect the expenses associated with management of an actual portfolio. Mutual fund investment values will fluctuate, and shares, when redeemed, may be worth more or less than original cost.

All returns represent total return for stated period provided by Morningstar Direct.

Indexes are as follows:

US Stock (Russell 3000 TR USD Index measures the performance of the largest 3000 US companies representing approximately 98% of the investable US equity market. It is market-capitalization weighted.); The S&P 500 Index is a free float-adjusted market-capitalization-weighted index of 500 of the largest publicly traded companies in the United States. Intl Development Stock (MSCI EAFE GR USD Index measures the performance of the large and mid cap segments of developed markets, excluding the US & Canada equity securities. It is free float-adjusted market-capitalization weighted.); The MSCI World ex USA Index captures large and mid-cap representation across 22 of 23 Developed Markets countries, excluding the United States. The index covers approximately 85% of the free float-adjusted market-capitalization in each country. Emerging Markets Stock (MSCI Emerging Markets GR USD Index measures the performance of the large and mid cap segments of emerging market equity securities. It is free float-adjusted market-capitalization weighted.); Alternatives (Wilshire Liquid Alternative TR USD Index measures the collective performance of the five Wilshire Liquid Alternative strategies that make up the Wilshire Liquid Alternative Universe. The Wilshire Liquid Alternative Index is designed to provide a broad measure of the liquid alternative market by combining the performance of the Wilshire Liquid Alternative Equity Hedge Index, Wilshire Liquid Alternative Global Macro Index, Wilshire Liquid Alternative Relative Value Index, Wilshire Liquid Alternative Multi-Strategy Index, and Wilshire Liquid Alternative Event Driven Index. The Wilshire Liquid Alternative Index is double-cap adjusted AUM weighted and rebalanced semi-annually); Real Estate (S&P Global REIT TR USD Index measures the performance of publicly traded REITs and REIT-like securities listed in both developed and emerging markets. The index is designed to serve as a proxy for direct real estate investment, in part by excluding companies whose performance may be driven by factors other than the value of real estate); US Aggregate Bond (Bloomberg Barclays US Aggregate Bond TR USD Index measures the performance of investment grade, U.S. dollar-denominated, fixed-rate taxable bond market, including Treasuries, government-related and corporate securities, MBS (agency fixed-rate and hybrid ARM passthroughs), ABS, and CMBS. It rolls up into other Barclays flagship indices, such as the multi-currency Global Aggregate Index and the U.S. Universal Index, which includes high yield and emerging markets debt.); US Treasury Bond (BBgBarc US Treasury TR USD Index measures US dollar-denominated, fixed-rate, nominal debt issued by the US Treasury. Treasury bills are excluded by the maturity constraint, but are part of a separate Short Treasury Index. STRIPS are excluded from the index because their inclusion would result in double-counting.); US Corporate Bond (BBgBarc US Corporate Bond TR USD Index measures the investment grade, fixed-rate, taxable corporate bond market. It includes USD denominated securities publicly issued by US and non-US industrial, utility and financial issuers.); Global Aggregate Ex-US Bond (Bloomberg Barclays Global Aggregate TR USD Index measures the performance of global investment grade fixed-rate debt markets, including the Pan-European Aggregate, the Asian-Pacific Aggregate, Global Treasury, Eurodollar, Euro-Yen, Canadian, and Investment Grade 144A index-eligible securities.); Cash / Money Market (US Treasury T-Bill Secondary Market 3 Month rates are the daily secondary market quotation on the most recently auctioned Treasury Bills for the 13 week maturity for which Treasury currently issues new Bills. Market quotations are obtained at approximately 3:30 PM each business day by the Federal Reserve Bank of New York. The rate at which a Bill is quoted in the secondary market and is based on the par value, amount of the discount and a 360-day year.) Inflation (US Bureau of Labor Statistics Consumer Price Index All Urban Seasonally Adjusted is a measure of the average monthly change in the price for goods and services paid by urban consumers between any two time periods. It can also represent the buying habits of urban consumers. This particular index includes roughly 88 percent of the total population, accounting for wage earners, clerical workers, technical workers, self-employed, short-term workers, unemployed, retirees, and those not in the labor force.)

Large Growth (Fama/French US Large Growth Research Index) & Small Value (Fama/French US Small Value Research Index): Composition: The index portfolios for July of year t to June t+1 include all NYSE, AMEX, and NASDAQ stocks for which we have market equity for December t-1 and June of t, and (positive) book-to-market equity data for fiscal year ending in t-1. Exclusions: ADRs, Investment Companies, Tracking Stocks, non-US incorporated companies, Closed-end funds, Certificates, Shares of Beneficial Interests, and negative book values. Sources: CRSP databases for returns and market capitalization: 1926 -present Compustat and hand-collected book values: 1926- present CRSP links to Compustat and hand-collected links: 1926- present Breakpoints: “The size breakpoint is the market capitalization of the median NYSE firm, so the big and small categories contain the same number of eligible NYSE firms. The BtM breakpoints split the eligible NYSE firms with positive book equity into three categories: 30% of the eligible NYSE firms with positive BE are in Low (Growth), 40% are in Medium (Neutral), and 30% are in High (Value).” Rebalancing: Annual (at the end of June) 1926-Present Fama/French and multifactor data provided by Fama/French.

GameStop Mania: Another Lesson On Short-Term Speculation

We don’t think that growing revenue, growing profits, or undervaluation can adequately explain GameStop’s valuation growth. Instead, we think short-term price speculation explains the majority of the dramatic growth.

By SJS Senior Advisor Andrew Schaetzke, CFP®.

If you invested in GameStop Corporation (Ticker: GME) five years ago, your holding’s growth would probably look something like the below.

Source: Google Finance, as of 29-Jan-2021. — *Source:* *Google Finance, as of 29-Jan-2021.*

What usually causes such growth? It could be that the company’s revenue has dramatically increased in recent years, and thus people want to invest now in the hopes of significant profits in the future. It may be that the company has become significantly more profitable, either via growing revenue, shrinking costs, or both. It could also be that the company was significantly undervalued in the past, and now the stock price is finally realizing the company’s intrinsic value.

In the case of GameStop, we don’t think that any of these explanations fit. From fiscal years (FY) 2015-2019, GameStop’s net revenue has decreased by roughly 28%.[1] GameStop went from a $379.2 million net profit from continuing operations in FY 2015 to $(464.4) million in net losses from continuing operations in FY 2019.[1] Additionally, GameStop has less total assets, as well as similar liabilities, in FY 2019 relative to FY 2015.[1] Preliminary financial data from GameStop suggests these trends are continuing for FY 2020.[2]

Source: GameStop 2019 Annual Report, Page 22. — *Source:* *GameStop 2019 Annual Report, Page 22.*

If growing revenue, growing profits, or undervaluation cannot adequately explain GameStop’s dramatic valuation growth, what else can explain it?

We think the explanation is short-term price speculation. Price speculation is not new: it has happened many times in the past, and it has many names. For example, in 1936, John Maynard Keynes defined The Castle-In-The-Air Theory.[3] In the book A Random Walk Down Wall Street, Burton Malkiel explains The Castle-In-The-Air Theory as follows:[4]

2021.01.28 The Castle-In-The-Air Theory.png

This price speculation strategy has worked for GameStop stock over the past few years.[5] Famous investors such as Michael Burry (of “The Big Short“ fame) made significant investments into GameStop, while smaller individual investors have collaborated via Reddit and Robinhood to drive up the price.[6] Contrarily, some investors have decided to short the stock (profiting when the stock declines), and have declared their actions quite publicly.[7] Particularly for smaller stocks, in our anecdotal experience, when strong vocal investors publicly argue with strong vocal short sellers, short-term stock price volatility often follows. So far, this volatility has benefitted GameStop investors.

This recent GameStop situation shows the upside of price speculation. However, we do not believe that price speculation works for the vast majority of investors over the long-term. For example, as of 31-Dec-2019, DALBAR found that the average equity mutual fund investor underperformed the S&P 500 (a benchmark for the US stock market) by nearly 5% annually over a 30-year span.[8] For a $100,000 initial investment, that’s a 30-year ending portfolio balance of $437,161 for the average equity mutual fund investor compared to $1,726,004 for the S&P 500.[8] DALBAR argues that price speculation partially contributes to the average investor equity fund investor underperformance relative to the S&P 500.[9]

Other studies have also found significant underperformance for the average investor who invests in individual stocks as well as who engages in short-term price speculation.[10][11] If most investors underperform broad market indices by so much, why do these investors continue to price speculate? We think it’s a combination of psychology - such as not wanting to miss out on big opportunities, wanting to follow others, and not wanting to regret decisions (further defined below) - combined with significant investment costs such as transaction fees (including bid-ask spreads), expense ratios, and unnecessary taxes.

We think that investing well over the long-term is tough, but we think price speculating over the long-term is even harder. As hard as it is to watch stocks such as GameStop go up, we think the evidence is clear: investing in low-cost, tax-efficient, broadly-diversified mutual funds and ETFS will help our clients outperform the vast majority of investors over the long-term.

Important Disclosure Information and Sources:

[1] “GameStop Corp. - 2019 Annual Report“. GameStop, 2020, news.gamestop.com.

[2] “GameStop Corp. - Form 10Q”. GameStop, December 2020, news.gamestop.com.

[3] “The General Theory of Employment, Interest, and Money“. John Maynard Keynes, 1936.

[4] “A Random Walk Down Wall Street: The Time-tested Strategy for Successful Investing”. Burton Malkiel, 2016, W. W. Norton & Company.

[5] “GameStop Shares Fall as Some Brokers Curb Trades.“ The Wall Street Journal, 28-Jan-2021, wsj.com.

[6] “'Big Short' investor Michael Burry made a 1,500% gain on GameStop during its Reddit-fueled rally“. Theron Mohamed, 26-Jan-2021, businessinsider.com.

[7] “The GameStop Short Squeeze Shows an Ugly Side of the Investing World“. Gregory Zuckerman and Geoffrey Rogow, 28-Jan-2021, wsj.com.

[8] “2020 QAIB Report”. DALBAR, 2020, wealthwatchadvisors.com.

[9] “2019 QAIB Study“. DALBAR, 2019, cswadvisors.org.

[10] “Unconventional Success: A Fundamental Approach to Personal Investment“. David Swensen, 2005, Free Press.

[11] “Money: Master The Game“. Tony Robbins, 2016, Simon & Schuster.

Indices are not available for direct investment. Their performance does not reflect the expenses associated with management of an actual portfolio.

The S&P 500 Index is a free float-adjusted market-capitalization-weighted index of 500 of the largest publicly traded companies in the United States.

Hyperlinks to third-party information are provided as a convenience and we disclaim any responsibility for information, services or products found on websites or other information linked hereto.

While You Weren't Sleeping - Performance Of Markets In 2020

Ignorance is bliss. At least that’s how we feel about the markets in 2020. The person who did not look at the news or troubles of the world was rewarded with an incredible year in the markets.

By SJS Chief Investment Officer Tom Kelly, CFA.

Ignorance is bliss. At least that’s how we feel about the markets in 2020. The person who did not look at the news or troubles of the world was rewarded with an incredible year in the markets. A good investment approach to 2020 would have been to fall asleep on January 1 and wake up on December 31, with a sleepwalk or two consisting of tax harvesting and rebalancing along the way.

Don’t get us wrong—we know that 2020 brought challenges for many, many people. But if we had told you at the beginning of the year that 2020 would bring a global pandemic that would cripple the U.S. gross domestic product (GDP) by 31% in the second quarter, cause 20 million lost jobs in April, and lead to a contested presidential election in November, chances are you would have sold all your stock.[1][2][3] You and us both!

Source: Dimensional Fund Advisors. See Important Disclosure Information [4] for index information. — *Source:* *Dimensional Fund Advisors. See Important Disclosure Information [4] for index information.*

But that is indeed what happened, and it sure would have been foolish to be wise. In 2020, the broad U.S. stock market went up over 20% and international markets went up over 7%; even bonds had strong positive returns. About the only thing that didn’t go up is real estate, which went down 9% for the year, but ended strong with a 12% return in the fourth quarter. The benefits of a well-diversified portfolio were realized as well, with large caps and small caps trading punches as the months rolled on but sharing similar total year results.[4]

While 2020 was nowhere near perfect, we hope it allowed you to grow closer to loved ones, appreciate the little conveniences a little more, and become a bit more resilient with whatever comes your way. Who knows what’s in store for 2021? Whatever it brings, leave the worrying to us, knowing that your MarketPlus Portfolio is battle tested, incorporating academic advances in portfolio design with our 25-plus years of real-world investment experience to help you achieve your specific financial goals.

Important Disclosure Information and Sources:

[1] “Gross Domestic Product.” U.S. Bureau of Economic Analysis, bea.gov.

[2] “Payroll employment down 20.5 million in April 2020.” U.S. Bureau of Labor Statistics, 12-May-2020, bls.gov.

[3] “Electoral College makes it official: Biden won, Trump lost.” Mark Sherman, 14-Dec-2020, apnews.com.

[4] Source: Dimensional Fund Advisors, Morningstar. Market segment (index representation) as follows: US Stock Market (Russell 3000 Index), International Developed Stocks (MSCI World ex USA Index [net div.]), Emerging Markets (MSCI Emerging Markets Index [net div.]), Global Real Estate (S&P Global REIT Index [net div.]), US Bond Market (Bloomberg Barclays US Aggregate Bond Index), and Global Bond Market ex US (Bloomberg Barclays Global Aggregate ex-USD Bond Index [hedged to USD]).

There is no guarantee investment strategies will be successful. Past performance is no guarantee of future results. Indices are not available for direct investment. Their performance does not reflect the expenses associated with management of an actual portfolio. In US dollars. The index performance figures assume the reinvestment of all income, including dividends and capital gains.

Hyperlinks to third-party information are provided as a convenience and we disclaim any responsibility for information, services or products found on websites or other information linked hereto.

Should You Change Your Financial Plan Because Of A One-Party Government?

It appears that Democrats will control the Presidency and Congress. Naturally, the question many clients have been asking is “What does this mean for my portfolio?”

By SJS Chief Investment Officer Tom Kelly, CFA.

We’re just a few days in to 2021, and the excitement has already begun. With the Senatorial runoff election in Georgia, the next leaders of Washington are set to be sworn in. It appears that Democrats will control the White House, Senate, and House of Representatives.[1] Naturally, the question many clients have been asking is “What does this mean for my portfolio?”

First, we want to emphasize that this has happened before. As the chart below shows, Democrats have controlled the Presidency and Congress (House & Senate) for a combined 16 years since 1960.[2]

Source: “Types of Cybercrime and How to Protect Yourself Against Them.“ Esteban Borges, 09-Jul-2019, securitytrails.com.

While we believe that speculating about short-term market movements is futile due to the noise and thousands of variables that go into market movements, it never hurts to take a look at the data. If the past is any indication of what is to come, your portfolio will do just fine. Since 1926, the average annualized return of the S&P 500 when both the President and Congress were held by Democrats is over 15%.[3]

Source: S&P data © 2020 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. In US dollars. See Important Disclosure Information. — *Source:* S&P data © 2020 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. In US dollars. See Important Disclosure Information.

Nevertheless, we believe that recent election results will lead to significant consequences for investors. For example, we would not be surprised if federal income tax rates for high net-worth individuals, federal capital gains & dividend tax rates, and the U.S. corporate tax rate increase. From a financial planning perspective, we believe these potential changes would make tax management even more important.

Through MarketPlus Investing, we do all of these tax smart things for our clients:

Source: “Warren Buffett’s historic ride at Berkshire has taken the stock from $19 to $300,000.“ Shawn Langlois, 12-May-2018, marketwatch.com.

Use Tax-Advantaged Investment Accounts

Via tax-deferred (401(k), 403(b), 457, IRA, Keogh, etc.) and / or tax-exempt (Roth 401(k), Roth 403(b), Roth 457, Roth IRA, 529, HSA, etc.) investment accounts, eligible investors can use tax-advantaged investment accounts to decrease intermittent tax payments, thus allowing more time for investments to compound.

Choose Tax-Aware Investments

In order to lower taxable capital gains and dividend distributions, we typically advise taxable clients to invest in lower turnover, broadly-diversified, tax-aware mutual funds and ETFs.

Long-Term Investing Focus

Within the U.S., higher net-worth investors tend to have lower capital gains and distribution marginal tax rates if they hold an investment for more than one year. Additionally, investing for the long-term allows investments to compound with potentially lower intermittent tax payments.

Asset Location

In order to maximize after-tax expected returns, we believe that tax-inefficient investments should be invested in tax-advantaged accounts when possible. We work with clients to design personalized asset location strategies based on their available options and limitations.

Tax Loss Harvesting

As part of a robust rebalancing process, opportunistically realizing losses in your portfolio can help to offset current and future realized gains, thus potentially lowering short-term tax payments and allowing more time for your investments to compound.

Charitable Contributions

Many investors have charitable intentions. By creating a well-designed financial plan for charitable giving, and using available tax-advantaged techniques (such as donor-advised funds), investors can increase the wealth that goes to the causes that they care about.

Source: Dimensional Fund Advisors. In US dollars. Growth of wealth shows the growth of a hypothetical investment of $1 in the securities in the Fama / French US Total Market Research Index. See Important Disclosure Information. — *Source:* Dimensional Fund Advisors. In US dollars. Growth of wealth shows the growth of a hypothetical investment of $1 in the securities in the Fama / French US Total Market Research Index. See Important Disclosure Information.

Ever-changing economic, political, and investing environments inspire SJS professionals to continually improve upon our investment processes, controlling what we can in efforts to maximize our clients' after-tax share of returns. We have been doing this for over 25 years, and it’s what we love to do. Regardless of election outcomes and political landscape in Washington, we believe that your SJS MarketPlus Investing strategy is designed to handle market movements of all kinds.

If you have any questions on how potential upcoming legislation may impact you, please reach out to us. We are always here to listen and assist.

Important Disclosure Information And Sources:

[1] “Updating: The Latest From Washington — And Georgia.“ FiveThirtyEight, 06-Jan-2021, fivethirtyeight.com.

[2] “Divided government in the United States.“ Wikipedia, en.wikipedia.org.

[3] The S&P 500 Index is a free float-adjusted market-capitalization-weighted index of 500 of the largest publicly traded companies in the United States.

Indices are not available for direct investment. Their performance does not reflect the expenses associated with management of an actual portfolio. In US dollars. The index performance figures assume the reinvestment of all income, including dividends and capital gains. The performance of the indices was obtained from published sources believed to be reliable but which are not warranted as to accuracy or completeness.

The growth of wealth chart begins with the start of the first full presidential term (March 4, 1929) for which Fama / French Total US Market Research Index data is available and ends on June 30, 2020. Data presented in the growth of wealth chart is hypothetical and assumes reinvestment of income and no transaction costs or taxes. The chart is for illustrative purposes only and is not indicative of any investment.

The Fama / French Total US Market Research Index is a value-weighed US market index is constructed every month, using all issues listed on the NYSE, AMEX, or Nasdaq with available outstanding shares and valid prices for that month and the month before. Exclusions: American depositary receipts. Sources: CRSP for value-weighted US market return. Rebalancing: Monthly. Dividends: Reinvested in the paying company until the portfolio is rebalanced.

Hyperlinks to third-party information are provided as a convenience and we disclaim any responsibility for information, services or products found on websites or other information linked hereto.

Are You Starting To Invest? Some Considerations

We think having the next generation beginning to invest is a great thing. We believe these points can help you as you start your investment journey.

By SJS Associate Advisor Michael Savage.

During the COVID-19 pandemic, there has been a mass movement by younger people to establish investment accounts.[1] They see the potential value of taking extra cash from work, economic stimulus checks, etc., and putting it to work in investments.[1] Online investment services like our own MarketPlus Online offering, Acorns, Betterment, Wealthfront, Robinhood, and others are allowing younger generations to easily establish investment accounts. For example, online brokers such as Charles Schwab, TD Ameritrade, and eTrade have seen major increases in new account openings in 2020, with some online brokers experiencing year-over-year new account growth of more than 100%.[1] Many if not most of these new accounts have been opened by millennials (ages 24-39 in 2020).[1][2]

We think having the next generation beginning to invest is a great thing. They (We) will develop years of experience and knowledge on the markets. We previously wrote about strategies to help create solid investment plans for young professionals, emphasizing the following:

Building off of the above, investors have experienced a lot over the past year. 2020 has been one of the most volatile years - in particular, March was the most volatile month - in U.S. stock market history.[3] Many growth stocks have experienced a lot of volatility, and yet have grown significantly over the past year.[4] Other stocks have not experienced similar success.[4] Particularly over the short-term, so much can happen in the stock market that doesn’t necessarily align with what is happening in the economy and society at large, as partially evidenced by how global stock markets have provided positive returns in 2020 despite the COVID-19 pandemic and associated shutdowns.[5] We think investors can learn a lot from uncertain and volatile times, and we believe the below points can help you on your investment journey.

Sources: Statista, U.S. FBI Internet Crime Complaint Center. See Important Disclosure Information for additional details.[4]

Invest For The Long-Term

Albert Einstein once said, “Compound interest is the eighth wonder of the world. He who understands it, earns it…. He who doesn’t, pays it.“[6] We believe that the longer you invest in a well-designed portfolio, the more you can increase your chances of positive expected returns and higher portfolio values.

For example, Warren Buffett, the famous 90-year-old investor with an estimated net worth around $85 billion in 2020 (even after donating $37 billion to charities since 2006), has repeatedly said, “If you aren't willing to own a stock for ten years, don't even think about owning it for ten minutes.“[7]

Beware of Taxes and Dividends

Dividends may seem like the best thing about investing. Lets say you have a stock worth $10 and you receive a dividend of $1. At first glance you may think “Hey, I just got a free dollar!”.

The truth to the matter is you didn’t. If a company pays $5 million in dividends, then the enterprise value (market value of equity + market value of debt) of that company would decrease by $5 million dollars. The stock value declines, in your case, by $1 to create an equal transaction. So, theoretically you still have a stock worth $10.

But we aren't done yet. Within taxable accounts, that $1 dividend will then be taxed. If your dividend income is taxed around 20%, that leaves you with $0.80. So in reality your $10 just turned in $9.80.

Additionally, if you sell a stock for a capital gain, you may end up paying taxes on the gain. You also pay more taxes if you held the stock for < 1 year.

While selling a stock for a gain may make sense under various circumstances, and while dividends can help prevent companies from spending too much money, young investors should be careful with taxes and dividends within taxable accounts.

Contribute to and Invest via a Traditional IRA and / or Roth IRA

To decrease the amount of taxes you pay, contributing to and investing via a Traditional IRA and / or Roth IRA can help you set yourself up for long-term success in the future.

Depending on your current income, when you contribute part of your income (up to $6,000) to a Traditional IRA, you don’t pay taxes on the contributions and growth until you begin withdrawing some time after turning 59 1/2. When you contribute part of your income to a Roth IRA (up to $6,000), you pay taxes now on the contribution, but do not pay taxes on the contributions and earnings as long as you wait until 59 1/2 to withdraw. This website from the U.S. IRS summarizes important information about IRAs.

Beware of Margin Trading

Margin means borrowing money, often to invest. Margin trading can amplify your gains, but it also amplifies your losses, particularly during volatile market periods like March 2020.[3] Additionally, investors usually have to pay interest on the margin, thus decreasing investment returns. Margin usually ends up hurting investors when they are not cautious using it. Just be aware that you are paying interest on the cash you borrow, and stay on top of it.

“Free Trades” Are Great, But Don’t Get Carried Away

Many investing platforms offer “free trades“, meaning that investors don’t have to pay a commission per trade. However, there are still less obvious costs to any stock trade, including bid-ask spreads, moving market prices, wash sales, capital gains taxes, etc. On its own, paying no commissions means lower costs for investors. However, since they no longer pay commissions, many investors are trading more and more, thus paying more of the less obvious costs. Additionally, increased trading can decrease the habit of investing for the long-term. Therefore, we advise people to not get carried away by “free trades.”

Summary

Starting to invest can be really valuable at a younger age. Your portfolio can grow or decline over time, and you will learn more and more as you keep investing and keep up with what is happening in the markets. We want you to be aware of what you are paying to enter the markets, do your due diligence on any investment service before opening an account, and remember that nothing is free or guaranteed.

If you would like to discuss how to better design and implement your investment portfolio, please reach out to us. We are always happy to listen and assist.

Important Disclosure Information And Sources:

[1] “Young investors pile into stocks, seeing ‘generational-buying moment’ instead of risk.“ Maggie Fitzgerald, 12-May-2020, cnbc.com.

[2] “Robinhood’s Addictive App Made Trading a Pandemic Pastime.“ Annie Massa & Sarah Ponczek, 22-Oct-2020, bloomberg.com.

[3] “The Craziest Month in Stock Market History.“ Nick Maggiulli, 01-Apr-2020, ofdollarsanddata.com.

[4] “Growth versus value: Will the tides change?“ Vanguard, 02-Sep-2020, vanguard.com.

[5] “Performance Derby: Global Markets.“ Ed Yardeni & Joe Abbott, 25-Dec-2020, yardeni.com.

[6] “Albert Einstein - Compound interest.“ Quotesonfinance.com.

[7] “How Warren Buffett’s winning investing strategy can be applied to any purchase you make.“ Emmie Martin, 04-May-2018, cnbc.com.

Hyperlinks to third-party information are provided as a convenience and we disclaim any responsibility for information, services or products found on websites or other information linked hereto.

Investment Advice You Don’t Hear Every Day

Many SJS clients have generated their wealth through concentrated bets that began as very small investments, perhaps sweat equity, and grew over time.

By SJS Founder & CEO Scott Savage

Andrew Carnegie – steel tycoon, philanthropist, and one of the wealthiest businessmen of the 19th century – once commented about creating wealth:

“Put all of your eggs in one basket. Then, watch that basket!”

Does that advice surprise you? Well, prepare to be even more surprised – because we agree wholeheartedly. Many SJS clients have generated their wealth through concentrated bets that began as very small investments, perhaps sweat equity, and grew over time to become significant. In other cases, their baskets didn’t do a very good job of nurturing those eggs. Some of our clients can tell tales of complete failures along the road to success. That may surprise you, too. Viewing accomplishments from the present day has a way of smoothing out the memories of past hardships, just as viewing financial markets at their current levels tends to smooth over memories of past volatility. This perspective comes with the passage of time.

Regardless of the bumps along the way, individual talent, innovation, and hard work applied to America’s free economy have historically yielded many success stories. We have plenty of these stories to share and see no reason why the future should be any less full of promise.

For clients who have spent their lives building their wealth, it can sometimes be difficult to give up their perceived “control” of their basket – of a business interest, real estate, or concentrated stock held over generations – and let us handle their investments. This “control,” which may be somewhat illusory, gets replaced with the so-called risk inherent in the financial markets. Maybe you’ve experienced similar feelings? This is completely normal, and can be a huge emotional obstacle to overcome. Some people never get there.

But we strive to help these investors see the benefits of making this trade off when the time is right, to give up the concentrated bet for a diversified portfolio that may offer a smoother experience over time. While investors may start off with all of their investment “eggs” in one basket, academic research and empirical evidence strongly support widespread holdings in the publicly traded financial markets. And consistent exposure to areas of the market that systematically add value are time-tested strategies to preserve and protect wealth. These strategies are the foundation of MarketPlus Investing®.

How does MarketPlus Investing fit into your picture? Eventually, the day may arrive when you know it’s time to preserve and protect your wealth, and move your eggs from that single basket into many, many more.

So, how can we help you “preserve” your wealth? First and foremost, by keeping you informed so you’re less likely to react to your emotions and potentially harm your portfolio. Emotions can be the great enemy of successful investing. And how can we help you “protect” your wealth, and from what? You might think market volatility is the only danger, but historically, inflation – and the associated decreased purchasing power – can be the bigger and historically persistent risk. It’s the white noise playing in the background of every minute of every day, and often doesn’t get the media play that an old fashioned market correction gets. This is yet another reason why we believe a well-diversified portfolio, designed with calculated risk exposure, can be so important to maintain wealth for the future needs of your families and loved ones. And this is the reason why we created MarketPlus Investing in the first place.

QBI Deduction: Permanently Protected

QSBS: A Modernized Take on a Powerful Planning Tool

Bonus Depreciation Returns to 100%

Qualified Production Property: New Manufacturing Incentive

Section 179 Expensing: More Headroom

R&D Expensing: Retroactive Relief

Corporate Giving: A Shift in Strategy

Excess Business Loss Limitation: Now Permanent

PTET Workaround: Preserved

Interest Deduction: EBITDA Basis Locked In

ERC Deadline Has Passed

Opportunity Zones: Permanence with a Rolling Start

So What Does This Mean for Business Owners?

We’re Here to Help You!

Volatility Can Happen Quickly

For Investment-Grade Bonds, Duration Is Critical

Alternatives Are Becoming More & More Important

There Is Always Something Smart To Do

Long-Term Investors Have An Advantage

Past as Prologue?

Good Decisions vs. Good Predictions

What Is A Recession?

What Indicators Go In To Determining A Recession?

How Has The US Stock Market Performed Before A Recession?

How Has The US Stock Market Performed After The Start Of A Recession?

How Can You Prepare For A Recession?

Build Up Your Emergency Fund

Diversify Across Stocks, Bonds, & Alternatives

Review Your Asset Allocation Ahead Of Time

Discipline

Curiosity

Skepticism

Independence

Humility

Patience

Courage

So What Can You Do To Become A Great Investor?

Investing, Not Speculating

Rebalancing

Tax Loss Harvesting

Suggested Reading

Suggested Reading

Suggested Reading

Suggested Reading

Use Tax-Advantaged Investment Accounts

Choose Tax-Aware Investments

Long-Term Investing Focus

Asset Location

Tax Loss Harvesting

Charitable Contributions

Suggested Reading

Invest For The Long-Term

Beware of Taxes and Dividends

Contribute to and Invest via a Traditional IRA and / or Roth IRA

Beware of Margin Trading

“Free Trades” Are Great, But Don’t Get Carried Away

Summary

Suggested Reading

Suggested Reading

Subscribe to our Newsletter