More than a year has passed since COVID-19 upended financial markets and global economies.
While many developed economies are reopening, the ripples of the pandemic are continuing to shape the investment landscape headed into the second half of 2021. New variations of the virus continue to place a layer of uncertainty on equity markets, and our cautious, well diversified approach to owning fractional interests in established businesses is the optimal way to face this turbulence.
Monetary and fiscal support are ample and economic growth is quickening. Many global stock benchmarks sit near all-time highs while bond yields remain stubbornly low. The varying pace of vaccinations worldwide, the rates at which consumers spend, and pandemic-related supply chain bottlenecks have all contributed to an unusually volatile period – during which our approach exhibited the resilience which we aim to provide.
Inflation is elevated but there are many reasons to believe that it is transitory rather than fundamental – and in any event owning fractional interests in companies that are generally able to pass through their increased costs to customers is an effective insulation against inflationary effects on portfolios, over time.
Ready to Boom, Zoom and Consume
1. Strong Consumer Spending
Perhaps the most immediate driver of both economic growth and stock prices is a continuation of strong consumer spending, thanks to additional fiscal stimulus hitting the wallets of lower-income U.S. consumers. The vaccine rollout and resulting reopening of the U.S. economy could also drive further spending on a variety of services, especially from higher-end consumers. Rising labor income and governmental largesse has boosted the buying power of U.S. households and excess saving remains an important cushion.
Conditions today contrast with 2008, when the housing market was the epicenter of the financial crisis. This time around, most consumers are not dealing with high debt or defaults, and banks remain financially strong and eager to lend, having rebuilt their balance sheets after the Global Financial Collapse and being subject to heightened oversight and regular “stress testing”.
2. An Expansion of the Digital Economy: The 4th Industrial Revolution
While we may dine out more and (maybe) venture to the movies, the world is not going back to exactly how it was in 2019. The forces of digital transformation already dominated consumer and corporate spheres prior to COVID-19—and the pandemic has only hastened this multiyear trend toward digitization and a permanent increase in tech adoption and spending is entrenched in the “new normal”. The adaption of digital transformation has impacted every aspect of life – and has been enormously profitable for corporate America with wider adoption of technologies such as cloud computing, collaboration tools, automation and data analytics.
With the pandemic pushing office employees to work from home, the past year saw a sharp 30% increase in corporate spending on tech hardware, and this trend is firmly in place as the economy continues to recover and companies adapt and adjust. Sectors, such as financials, industrials and health care, are defining this cycle, in contrast to the consumer focus that dominated the previous tech cycle.
3. An Emerging Generation of Millennial Investors
Notwithstanding headlines about stock rallies fueled by young traders using social media, a much larger trend has actually arrived: the broadening of the equity investor base to include younger generations. In 2019, millennials, those born between 1981 and 1996, overtook baby boomers as the largest demographic cohort in the U.S. population, accounting for 22%. Gen Z, born after 1996, account for another 20%. The first Millennials turn 40 this year, and their investment path looks similar to what Boomers experienced during their peak investing years in the 1980s and 1990s. Currently, only 6.5% of Millennials’ assets are in equities, similar to the 6.0% allocation Boomers had at age 40. In subsequent years, the Boomers’ allocation to equities grew to over 25%,implying further stock-market inflows may be in store.
A commonly used measure of anticipated inflation is to compare yields on a traditional 10 Year Treasury with the yield on a 10 Year Treasury Inflation Protected Security. They are essentially identical assets with the exception of how interest payments are computed and because the latter has returns pegged to inflationary expectations, the chart below illustrates indicated expectations annually by the marketplace for the next decade, currently at around 2.25%.
We have long viewed the Big Mac Index as an interesting measure of the ability of companies to flow through their increased costs to their customers and in many cases even more than inflationary increases are achieved. It is a product that has remained consistent over time, thus enabling a realistic comparison of prices unlike for example computers, television sets, cell phones, automobiles and most other products which are simply incomparable in terms of added features and enhancements.
RVW equity portfolios seek broad diversification with an emphasis of overweighting companies exhibiting attributes that have historically indicated higher expected returns.
As a refresher we have provided below some of the most compelling charts to support the various elements which form part of the RVW Wealth Optimization Methodology:
The Case for Long-Term Equity Investing
Note that Small Cap equities have historically provided superior returns, but the price paid has been greater volatility. Equities have significantly outpaced bonds returns and inflation.
The Perils Of Stock Picking
Note that not a single company that was ranked in the top 10 in 1980 appeared in the 2020 list.
RVW Wealth selects groups of companies held through ETFs that are rules-based and internally dynamic so that over time, each portfolio automatically seeks to minimize exposure to yesterday’s winners as they fade and adds tomorrow’s. We think of this as a Darwinian approach.
Most Valuable Companies In The World Ranked By Market Capitalization:
Most active managers under-perform their own benchmark index, showing the futility of stock picking and market timing.
In addition to the underperformance shown below, additional trading costs and income tax further impede growth:
The Case For Global Investing
There are typically long cycles where domestic v. international investing rotate. RVW diversifies globally to ensure that our investors participate in global equity markets.
The Perils Of Market Timing
The cost of being out of the market for even a few good trading days significantly impacts long term performance:
Diversification Can Transform Risk Into Volatility
The case for broad diversification illustrated:
One Of The Factors We include Is A Group Of Companies That Pays Growing Dividends.
It is an attribute that has historically provided both growing cash flow annually and enhanced value.
Why Investing In Just The S&P 500 Can Be Sub-Optimal
In the first decade of this millennium, the S&P 500 significantly underperformed all the other indexes cited below.
We Are Fiduciaries
RVW makes no secret commissions, kickbacks or incentives. There is no small print in any of our contracts or agreements.
Our interests are fully aligned with yours and we are your trusted advisors.
Did you know? Most “wealth advisors” are not fiduciaries and adhere to a far more lenient and self-serving “suitability” standard.
RVW Wealth Curated Readings
Inflation and Sky High Car Prices
Here’s a shocker. In both June and April, the spike in used-vehicle prices accounted for about one-third of the overall increase in the cost of living.
Just how unusual is this?
In the first six months of 2021, the cost of used cars and trucks has soared by 32%. By contrast, their prices fell by an average of 0.6% a year from 2009 to 2019.
The cost of used vehicles has skyrocketed because of an unusual combination of high demand and low supply brought on by the pandemic.
The roots of the problem sprouted last year after rental car agencies slashed purchases of new cars and trucks and automakers responded by cutting production. Early in the pandemic few people were driving regularly or traveling. As automakers ramped up again late last year, they ran into a global shortage of computer chips that are essential in every new vehicle these days. As a result, rental agencies could not buy all the cars they needed as Americans began to lease more vehicles again. Hertz and others were forced to dip into the used-vehicle market to rebuild their fleets. Flush with government stimulus money, many consumers who also wanted to buy new cars were forced to look at used options. At the same time, lots of people who no longer wanted to take public transportation or who moved out of cities for fear of the virus also began looking to buy a new or used car.
Morgan Housel’s Top 10 Money Rules:
- What money can and can’t do for you isn’t intuitive, so most people are surprised at how they feel when they suddenly have more or less than before.
- Money makes it easy to mistake optimism (good) with gullibility (dangerous) and overconfidence (disastrous).
- Getting rich and staying rich are different things that require different skills.
- The formula for how to do well with money is simple. The behaviors you battle while implementing that formula are hard.
- “Save more money and be more patient” is too simple for most people to take seriously, but it’s the best solution to most financial problems.
- Expectations move slower than reality on the ground, so it’s easy to become frustrated when clinging to the economic trends of a previous era.
- Everything is relative. John D. Rockefeller was asked how much money was enough and said, “Just a little bit more.” Everyone, at every income, tends to feel the same.
- Spending money to show people how much money you have is the fastest way to have less money.
- Debt removes options, savings add them.
- No one is impressed with your possessions as much as you are.
Simple – But Not Easy
- A long-term focus is essential for portfolio returns because of the magic of compounding – the gains from one year are added to the total and become part of the investing principal that (hopefully) grows the next year.
- That seems straightforward, but, using Warren Buffett terms, in practice it’s “simple but not easy.” As venture capitalist and finance author Morgan Housel noted in “How to Do Long Term,” it’s analogous to standing at the bottom of Mount Everest as indicating the peak as the end destination. Thinking long-term is a goal that takes constant and significant effort.
- Mr. Housel provides useful perspective to help investors keep their financial end goals in sight. His first recommendation is that investors recognize that a long term outlook requires “[enduring] a never ending parade of nonsense.”
- Another term for nonsense here is “market noise” – fixations and punditry on events and trends that have little or no bearing on decade-long equity market returns. Mr. Housel has previously advised investors to ignore any issue that they likely won’t care about a year later.
- The column also notes that while an extended investing time horizon can provide solace in times of volatility, it also means that more apparently-disastrous market events are likely.
- Mr. Housel also warns that a long-term investing can be just as subject to chance as a short term trading. He notes that an investor with a 10-year time horizon in early 2010 would have done great until 2020 when the pandemic hit and most of the gains were wiped out. The ability to maintain focus on financial goals during these periods is a key element of investing.
- Academic research has shown a consistent inverse correlation between the number of portfolio transactions and returns – the more an investor buys or sells assets to react to short term volatility, the lower the performance over time. This is another reason to maintain a longer-term perspective.
Doing Nothing Is Hard Work
Successful investing tends to be boring and long-term in nature but it’s hard to look cool with a boring, long-term strategy. Where’s the fun in that?
100 Very Short Rules for a Better Life:
Ryan Holiday’s favorite lessons on success, relationships, and being a good human:
In his essay On the Happy Life, the philosopher Seneca makes an extended list of rules for living a good life. It’s everyone’s wish to live better, he says, but we are often in the dark on how to do so.
Except… we’re not. At least, we don’t have to be. So many people have struggled in the dark before us, and their experiences and lessons have created light. Living a good life starts with learning from one another.
With that in mind, here are 100 rules that have helped me live the life I want. Some have come from my own experiences. Others are pieces of advice I’ve been given, or wisdom from things I’ve studied. Your mileage may vary for each of these, but hopefully some of them will help you in your own pursuit of living a good life.
Thank you for entrusting your nest-egg to our stewardship. Please contact us if there is any change in your situation that impacts the allocation of your portfolio. As trained Personal Financial Planners, our team stands ready to provide guidance and counsel in all related matters.
Your RVW Team: Selwyn Gerber, Jonathan Gerber, Stephen Seo, Loren Gesas, Ofer Ben-Menahem, Mary Ann Moe, Simon Liu, Jesse Picunko, Lisa Blackledge, Monica Erps, Kelly Richards, Teresa Green, and Mike Chen
FOR IMPORTANT CURRENT COMPLIANCE AND DISCLOSURE INFORMATION GO TO http://www.rvwwealth.com/compliance
NOTE: The information provided above is not complete, may be erroneous, and omits important data. The charts are estimates and may contain inaccuracies or distortions.
Read and rely exclusively on actual offering documents and on statements received directly from your custodian. Investments are not guaranteed and may lose value. Past performance is not indicative of likely future returns.