That was the week that was!
“Uncomfortable” is a reasonable description of how most Americans feel, and certainly our clients feel, after this past week.
We generally remain neutral with our political opinions when discussing our clients’ financial plans, and we continue to retain that approach, though we want to highlight a few of the events that recently took place:
We mention the international markets and bonds given the exposure to both asset classes in our clients’ portfolios. These positions do not excel when US stocks boom (as we saw in 2023 and 2024). The purpose of this diversification is to cushion the blow when US stocks fall as we saw over the last 8 weeks.
The events of 2025 are a good reminder of the power of portfolio rebalancing. Specifically, we have an asset allocation that equal weights growth exposure (which could include companies such as Apple, Amazon, Meta) and value stocks (including firms like JP Morgan, Eli Lilly, McDonalds), underweights large cap stocks (household name companies), and overweight mid and small cap companies (lesser known, faster growing).
For younger clients in their 20’s and 30’s, we rarely recommend bonds. As clients age into their 40’s and 50’s, we push the bond allocations to 15-20%, to 30% for clients in their 60’s and to 35-40% for retired clients. In doing so, we give away the higher returns of stocks for the lower volatility of bonds.
Our definition of risk is: “the chance money won’t be there when you need it.” Younger clients with income from work have the cash they need already, so we want the maximum growth of equities. Older clients need a reliable income stream, hence the percentage in bonds.
Many clients called this week asking whether their monthly draw was secure. Yes! With feeling. We typically have a year’s worth of cash flow in low risk, short term government securities, 4 years of cash flow in bonds, which means we can survive a 5-year drought in equity returns.
That strategy has worked so far this year, in 2022 when stocks fell 22% as the Fed raised rates, in 2020 when stocks fell 35% as we learned about COVID and in in 2008-9, when stocks fell 55% during the Financial Crisis.
Last year, the Magnificent 7 stocks of Apple, Microsoft, Google, Amazon, Nvidia, Meta (Facebook) and Tesla, accounted for 1/3 of the value of the US Stock market – a dangerous concentration in large cap growth. For the second half of the year, as we rebalanced portfolios, we generally pared back on large cap growth, placed the proceeds in value stocks, mid and small cap stocks, international stocks and bonds.
More recently, given the relative performance of international stocks (up) and large cap growth (down), we have scaled back on international and bought back into large cap growth.
In other words, systematic portfolio rebalancing is an automatic process of “selling high and buying low.”
Given the recovery so far, can we rest easy on our investments? No. As we always say, when you have a heart attack, you don’t go back to the gym the next day.
Typically, after a bear market, stocks ebb and flow for a while. Given the changes coming from the Trump administration at a rapid pace, there remains much uncertainty.
We remind our clients that, from January 1981, the inauguration of the Reagan administration, stocks gained 13,000%, which is to say that a $10K investment under Reagan is currently worth $1.3 million despite the occurrence of wars, recessions, assassinations, and a pandemic.
We survived all those bear markets and thrived, and we’ll survive this week as well.
As always, we welcome your questions and conversation. Please let us know if there's anything you need.