3 Things 5-2
05/02/2022 Although MAS is a financial services company, not everything published herein will be about numbers or investing. But no matter the topic, we hope for three things: 1) That you find the time you spend engaged worthwhile. 2) That you’ll reach out to us for help in any of our areas of expertise if something we discuss creates an urging in you to do so. 3) That you’ll share this with somebody new each time you read it. Thing One Stay The Course We‘ve mentioned multiple times the notion that the market will be volatile. There’s no real wisdom in that statement. The history of the stock market tells us it’s a fact. Just as a quick reminder, the S&P 500 index closed April of 2022 at 4131. Ten years ago it closed April at 1310. It’s up over 3 times in 10 years. Still, it would have been quite easy to become unnerved over the last ten years as you lived through the downs. As hard as it may be, you should resist the selling urge that often accompanies that anxiety. That’s not to say you should go on a buying spree every time the market goes down. Buying “the dips” is not always prudent. What is always prudent, assuming you have a long-term investment outlook, is utilizing the well-known investment technique called dollar-cost averaging. See the summary of the technique below taken from Investopedia.com: "...DCA is a practice wherein an investor allocates a set amount of money at regular intervals, usually shorter than a year (monthly or quarterly). DCA is generally used for more volatile investments such as stocks or mutual funds, rather than for bonds or CDs, for example. In a broader sense, DCA can include automatic deductions from your paycheck that go into a retirement plan. For the purposes of this article, however, we will focus on the first type of DCA. DCA is a good strategy for investors with lower risk tolerance. If you have a lump sum of money to invest and you put it into the market all at once, then you run the risk of buying at a peak, which can be unsettling if prices fall. The potential for this price drop is called a timing risk. That lump sum can be tossed into the market in a smaller amount with DCA, lowering the risk and effects of any single market move by spreading the investment out over time. For example, suppose that as part of a DCA plan you invest $1,000 each month for four months. If the prices at each month's end were $45, $35, $35, $40, your average cost would be $38.75. If you had invested the whole amount at the start of the investment, your cost would have been $45 per share. In a DCA plan, you can avoid that timing risk and enjoy the low-cost benefits of this strategy by spreading out your investment cost..." To summarize the point in a different way, I’ll share a story about a fishing lesson I once received. I was having a conversation with a much older guy that I once worked with who I happened to know was an avid fisherman. Being an eager novice myself, I asked him, “when is the best time to go fishing?”. I was expecting to hear things about the water temperature, the wind direction, the moon phases, etc. Instead, in a very matter-of-fact manner, he replied, “whenever you can.” His reply made me laugh but he wasn’t joking. Over a series of fishing trips that I went on with him, I would come to appreciate that he completely understood what fishing was and he knew how to go about it in any and all conditions. So, when should you invest? Whenever you can, as long as you understand what investing is and you know how you’re going to go about it.
Thing Two A Qualified Exception To The Advice On Bonds Last week we pulled a blog post from the vault that talked about the danger of buying bonds in a rising interest rate environment. We stand by that assessment but offer a qualified exception in the form of Series I Bonds. Series I bonds are 30-year bonds issued every six months on the first business day of May and November. They can be purchased at any time but you will be buying the most recent issue date whenever you make your purchase. We call this type of bond a qualified exception because the basic argument we made is still true. If interest rates rise, the value of existing bonds falls – including Series I bonds. But with Series I bonds, you get what is called a composite earnings rate rather than just a straight interest rate. The composite rate is made up of a fixed rate and an inflation rate. The current fixed rate is 0% and the current inflation rate is 3.56%. That makes the composite rate on the November issued bond 7.12%. The estimated composite rate on the bonds to be issued on May 1 is 9.62%. That rate applies to the first 6 months you own the bond. At the end of the 6-month period, the inflation rate is adjusted (up or down) to reflect current conditions. As far as how the interest works, here’s the rundown per treasurydirect.gov: "...An I bond earns interest monthly from the first day of the month in the issue date. The interest accrues (is added to the bond) until the bond reaches 30 years or you cash the bond, whichever comes first. The interest is compounded semiannually. Every six months from the bond's issue date, interest the bond earned in the six previous months is added to the bond's principal value, creating a new principal value. Interest is then earned on the new principal. You can cash the bond after 12 months. However, if you cash the bond before it is five years old, you lose the last three months of interest. Note: If you use TreasuryDirect or the Savings Bond Calculator to find the value of a bond less than five years old, the value displayed reflects the three-month penalty; that is, the amount of the penalty has been subtracted already...+ All that said, Series I bonds might make some sense in the current environment. Keep in mind though that you can only buy $10,000 per person, per year plus up to an additional $5,000 if you are due an income tax refund and you use the proceeds to purchase them.
Thing Three Just A Thought "Your life is the sum result of all the choices you make, both consciously and unconsciously. If you can control the process of choosing, you can take control of all aspects of your life. You can find the freedom that comes from being in charge of yourself." - Robert Foster Bennett