News & Views

It’s Not to Early to Start Thinking about a Midyear Financial Review

The Although temperatures in many parts of the US recently felt summer-like, several weeks of spring remain. Consumer price inflation and asset market volatilities probably make those temps feel even hotter. These phenomena may have resulted in relatively large changes in incomes, expenses, as well as the sources of these incomes and expenses. As such, for many of us the next few weeks before summer and, hopefully, vacations arrive, may prove fruitful for midyear financial plan reviews.

I recommend commencing a review by creating a checklist with timeline-delineated items:

  • Near-term
  • Medium-term
  • Long-term

Typically, breaking jobs down into smaller tasks aids in execution. Additionally, using a timeline, with the most important items near the top, offers a risk-based manner to address items just in case the process gets pushed to the back-burner by more pressing items.

Near-Term Financial Review Items:

Near-term items for review fall into three main categories: 1) Income, 2) Expense, and 3) Benefits. Checking income for most of us should be a relatively quick exercise involving cursory reviews of a recent paystub and the bank account into which your employer regularly deposits your earnings.  Providing those figures meet (or hopefully exceed) expectations, the review could progress on to evaluating expenses. If a budget exists, which I recommend, reconciliation of checking, savings, and investment account balances with mid-year expectations offers a potential roadmap for identifying “gaps” in the income-expense relationship. Potential next steps could involve evaluating credit card statements and/or bank account withdrawals for the sources of any gaps. While that paystub remains easily accessible, do a quick check-up on Flexible Savings and Health Savings Account balances, along with a review of tax withholding. This is a fine time to schedule any planned doctors’ or dentist’s visits yet to be booked as well.

A couple other items may be added to this Near-Term List as well. Given the prevalence of identity theft, a periodic credit report review is a financial review best practice. Thinking about charitable giving mid-year also may prove useful for you as well as for the recipients of your gifts.

Medium-Term Financial Review Items:

Quick glances at retirement, education, and emergency fund contributions and balances represent medium-term items for a productive financial review. Assure that deductions flow in the proper amounts to the proper accounts. Given the large moves thus far in 2022 for many assets classes, it likely will prove beneficial for many people to spend some time on their asset allocation plans. Reconcile that current account holdings compare well with target weightings by asset class and/or sector. A rule of thumb for emergency funds are that they cover three months of projected expenses: with inflation running hot maybe a little more needs to be held in reserve here. Finally, take looks at outstanding debt balances: mortgages, student loans, etc. to gauge payments made thus far in 2022 match with expected balances.

Long-Term Financial Review Items:

Confirmation that estate plans and wills reside where they are supposed to be come near the top of the Long-Term List. Similarly, assuring that safe deposit box keys, passwords, and similar items and information are where they are supposed to be remains a good idea. Reviewing beneficiary information for retirement and other financial accounts while documents are front-of-mind and accessible could save a great deal of time and frustration in the future.

“Tell Me More About Inflation,” Said No One

The Raise your hand if your sick and tired of hearing about inflation. Yeah, me too. I raised my hand and I’m sitting in a room, by myself.

So, I’ll go a step further and illustrate how Solyco Wealth attempted to “harden” its investors’ portfolios to endure the pernicious effects of inflation. A handful of other phenomena the same amount of people want to hear more about that want to listen to more commentary on inflation complicate the situation: rising interest rates, global political turmoil, supply chain snafus. My 13- and 14-year-old daughters can now recite intelligent memes on these topics as their so ubiquitous as to be on TikTok, whatever that is.

Let me first say that I largely avoided trading client portfolios through the deepest downturns of early March and late April 2022. I’ll take the “win,” but most portfolios entered 2022 with sizeable cash balances. With 8%+ inflation chewing away at probable future purchasing power, however, holding cash to avoid volatility seemed like admitting defeat to a self-proclaimed stock picker such as myself. Solution, I drew down cash and leaned into these downturns by investing a decent amount of these cash balances. In fact, for the Conservative Model Portfolio I reduced the target cash balance 500 basis points to 10% from 15%.

I retain allocations to fixed income ranging from 5% in my Aggressive Model Portfolio to 65% in that aforementioned Conservative Model Portfolio. However, I started out with a much shorter duration than that of the Bloomberg Aggregate Bond Index against which I benchmark my portfolios and I shortened that duration even further. Hopefully recognizing the value of a benign environment for company defaults and for adjustable-rate securities, I allocated 10% of the less-risky portfolios to publicly-traded, private capital providers Ares Capital (ARCC) and Hercules Capital (HTGC). As compared to the approximately 14.3% and 12.7% respective losses for the iShares 20+ Year (TLT) and 5-10 Year (IGIB) ETFs, ARCC and HTGC, respectively, offered returns of +5.9% and -3.2% while offering dividend yields multiples of those offered by those bond ETFs. Furthermore, I swapped out of TLT altogether in favor of more flex-rate debt with a the SPDR Blackstone Senior Loan ETF (SRLN). I anticipate the trade-off for the expected better price performances and higher yields from ARCC, HTGC, and SRLN, among the other credit-driven investments in the portfolios, being an intensified necessity of monitoring default probabilities.

With respect to picking stocks to counter the impacts of inflation, the overweight to Energy with which we initiated Solyco Wealth’s model portfolios compensated investors well for the risks incurred. Unfortunately, the Ukraine-Russia war elevated these gains, but to the detriments for much of the balance of the portfolios. I also augmented these Energy-related gains by selling covered calls in the options market in order to manage and benefit from higher volatilities. As the outlook for employment remains robust and healthcare facilities re-opened with diminishing COVID cases, Solyco Wealth overweighted Healthcare. While that sector enjoys some pricing power, facilities operators, like Universal Health Services (UHS), which is an Aggressive Model Portfolio holding, got severely clipped by significantly higher contract labor costs: win some, lose some. Finally, we also recently moved to an overweight on Industrials, anticipating that certain subsectors like defense, energy equipment, and automation, would offer outperformance opportunities. While near-term performances largely fell in-line with those of the broader equity market, order rates for companies like ABB and Chart Industries (GTLS) achieved record levels. We remain underweight Consumer Staples, anticipating that raw materials costs will inordinately pressure margins. Names like Archer Daniels (ADM), Bunge (BG), and Kroger (KR) certainly offer appeal, though. Despite their run-up to start 2022, we also continue to avoid Utilities, which generally underperform in rising rate environments as a function of minimal pricing power and diminished relative attractiveness of their dividends. I retained our Tech holdings, which basically round-tripped their late 2021 gains with 2022 declines, as the generally were among the high-margin, high-earning components of the sector. Notably, Amazon (AMZ) and Shopify (SHOP), which sit on the cusp of the Technology and Consumer Discretionary sectors, certainly left marks from their price declines.

A Yesteryear Name Focusing on Tomorrow: Old-School Tech

The 2022 wreck in Tech stocks, which declined ~19.8% as measured by the price change in Vanguard’s IT Index Fund (VGT), took a short reprieve yesterday (4/25/22). More share price pummeling commenced today (4/26/22), however, as one can see in the Yahoo! Finance chart below.

Much of this Tech stock price downdraft came amidst generally robust earnings and cash flow. In fact, the number of 4- and 5-star rated Tech stocks in Morningstar’s coverage universe, as reflected in the graph to the right, more than quadrupled from less than 20 for 1Q21 to almost 70 mid-week last week. Notably, that was before the acceleration of the price rout Friday, 4/22/22, and earlier this morning! Not known for being aggressive with its ratings and future estimates, such an increase in Morningstar’s highly rated Tech stocks obviously grabbed attention.

As I reviewed early 1Q22 earnings performances on Tech stock in particular also warranted interest: Corning (GLW). We neither advocate for buying to selling GLW shares, although we include them in our Conservative and Moderate Model Portfolios. Rather, we thought investors might be interested in a number of things about GLW. First, many may be surprised that the old-school glassmaker counts as a Tech stock. For 170 years, though, Corning’s been at the forefront of materials and glass technology counting cathode ray tubes for televisions, Gorilla Glass for iPhones, and fiber optics, among its inventions and improvements. Folks that buy and sell stocks irrespective of their industry classifications don’t care how S&P or whoever else categorizes companies by sector but doing so proves crucial in building and maintaining diversified portfolios.

Second, by virtue of its creative applications of materials and glass technologies GLW built a very diverse set of end markets that not only benefits its financial performance and its investors, but also that yields solid observations on the state of these end markets. These observations, in our experience, often prove valuable for insights and conclusions for investments in Tech and other sectors. In its latest release of financial and operating results for 1Q22, for instance, GLW noted a 28% year-over-year increase in Optical Communications revenue. No guarantees here, but this significant increase could bode well for Telecom Equipment providers (Cisco, Arista Networks), cell-tower companies (American Tower, Crown-Castle SBA Communications), and/or enterprise cloud service providers (Microsoft, Amazon, Alphabet). Display Technologies also posted a double-digit, 11%, increase in sales for 1Q22 vs. 1Q21 with management specifically calling out positive exposure to Samsung’s Galaxy S22 Series smartphone. Maybe this indicates a little market share erosion for Apple: no way to tell for certain but it bears watching. Another interesting point on the diversity of GLW’s product portfolio that contributed to upside business results: Corning’s Life Sciences segment produced the vials from which 5.5 billion doses of COVID-19 vaccines were delivered.

Now, at this point, a discriminating investor might ask: “As the world hopefully won’t need 5.5 billion doses of any vaccines in the near future, won’t declines in this business hurt GLW’s future performance?” In response we anticipate that GLW’s management would reply that it expects the company’s Automotive segment, which saw revenue drop 9% from 1Q21 due to semiconductor availability and supply-chain issues, to more than make up for any loss in its Life Sciences segment. Just our guess, though. Anyway, here’s a breakdown of GLW’s 1Q22 sales by segment with prior period comparisons.

Going Contrarian for Conservative Investors

A little while back I decided it time to go contrarian for Solyco Wealth’s Conservative Model Portfolio. I dropped its Cash allocation to 10% from 15%, added that 5% to its Equity weighting, and reallocated its long-term domestic bond exposure to floating rate senior loans. With the already low-yielding iShares 20+ Year Treasury Bond ETF (TLT) down a double-digit percentage to start the year amidst the Fed just commencing its interest rate hiking cycle in response to escalating inflation, it felt right go at least a little bit on the offensive.

For investors with a risk-averse, conservative style I see three factors on the horizon potentially causing them disproportionate harm:

  1. Exiting risk assets altogether and going to cash,
  2. Holding this massive cash balance as inflation significantly erodes the future purchasing power of the cash, and
  3. Failing to re-enter the stock and bond markets until they recover and, thereby, missing the most attractive opportunities to recoup their early 2022 losses.

I addressed Point #1 by deploying more cash and not falling victim to a perceived “flight to safety.” High quality equities with strong balance sheets and pricing power define excellent opportunities foe conservative investors to benefit from inflationary environments. I don’t think upping Solyco Wealth’s Equity allocation to 25% from 20% places the portfolio at an outsized level of risk. In fact, thus far in 2022 the Conservative Model Portfolio’s Equity allocation is only down 5.2%, 230 basis points ahead of the S&P 500 and 330 basis points ahead of the 8.5% loss for the supposed-to-be-conservative iShares Core US Aggregate Bond ETF (AGG).  As always, however, past performance is no guarantee of future results…

Not only did I choose to put more cash to work for the Conservative Model Portfolio in my efforts to battle the deleterious impacts of rising rates on bond prices and purchasing power but also, I rejiggered the fixed income allocation for the portfolio to take advantage of highly likely future interest rate increases. This action firmly addresses, in my mind, both points #1, and #2 above. In anticipation of higher interest rates, I initiated the Model Portfolio on 9/8/21 holding 5% allocations to private capital providers Ares Capital Corp. (ARCC) and Hercules Capital (HTGC), which trade like equities but manage multi-billion dollar portfolios of primarily adjustable rate loans to smaller private companies. Year-to-date ARCC and HTGC generated total returns of +5.4% and +15.1%, respectively, including dividend yields of 7.9% and 10.4%. In the current environment of low loan default rates, these companies should enjoy relatively smooth operations. As defaults rise – an all-to-frequent response to rising rates and marginalizing economic growth – the attraction of companies like ARCC and HTGC drops dramatically, however. We also pivoted out of the long-end of yield markets, selling the Model Portfolio’ 5.1% holding in TLT in exchange for a 5% position in the SPDR Blackrock Senior Loan ETF (SRLN), which offers floating-rate loan exposure to companies that, generally, maintain higher credit profiles than those services by ARCC or HTGC. Thus far in 2022, SRLN is down 0.4%.

Two primary risks I incurred in taking the above-detailed actions several days ago: 1) I miss – at some indeterminate point in the future – outperformance from TLT equal to or greater than the 11.5% loss the portfolio took while holding it and 2) The 5% increased allocation to Equities and the swap to SRLN fail to compensate for the missed opportunity presented by not retaining TLT through its recovery. Notably, the Conservative Model Portfolio, however, already, avoided an additional 700 basis points of losses from TLT while gaining 70 basis points of gains from holding SRLN. Better late than never…

Model Portfolios Outdistance Benchmarks in 1Q22 and Since Inception

As exhibited in the following data table, Solyco Wealth’s four model portfolios, which offer investors solutions across the risk spectrum, outperformed their benchmarks after fees in 1Q22 and since inception (9/8/2021). Performance for the Moderate and Moderately Aggressive models exceeded that of the S&P 500 since inception while performances for each of the for portfolios after fees exceeded that of the S&P 500 since the first of the year.

Solyco Wealth Model Portfolio Performance, After Fees, Since Inception and 1Q22

Period Performance Model Portfolios Major Indices
Conservative Moderate Moderately Aggressive Agressive S&P 500 Bloomberg Fixed Income ETF
Since Inception -1.35% 1.64% 4.97% 0.92% 1.03% -6.48%
vs. Benchmark 3.67% 6.39% 9.23% 4.89%  
vs. S&P 500 -2.38% 0.61% 3.94% -0.11%
Year-to-Date/1Q22 -2.83% -0.20% 1.83% -1.52% -4.84% -5.80%
vs. Benchmark 1.98% 4.76% 6.68% 3.47%  
vs. S&P 500 2.02% 4.65% 6.67% 3.32%
Equity Portion Since Inception 3.57% 8.25% 8.97% 2.00%
vs. S&P 500 2.54% 7.23% 7.94% 0.97%
Fixed Income Since Inception -2.53% -3.37% -0.45% -6.45%
FI vs. B-berg FI ETF 3.95% 3.11% 6.04% 0.04%
Equity Portion YTD/1Q22 -3.12% 3.49% 3.78% -1.11%
vs. S&P 500 1.73% 8.33% 8.63% 3.74%
Fixed Income YTD/1Q22 -2.73% -3.39% -1.28% -5.70%
FI vs. B-berg FI ETF 3.07% 2.40% 4.51% 0.10%

Past Performance Is Not Indicative of Future Results

Solyco Wealth used Morningstar Direct to calculate the above returns for since inception and 6-mpnth period from September 8, 2021, through March 31, 2022.
The above table reflects a 1% annual management fee, or 0.56% since exception and 0.24% year-to-date through 3/31/2022.
Actual client investment performance likely will differ from respective model portfolio performance due to several factors including: 1) Timing of securities purchases and sales, 2) Dividend reinvestment choices, 3) Securities held outside the model portfolio, 4) Weighting differentials for certain securities relating to whole versus partial share accounting, 5) Timing and pricing of rebalancing actions, and other minor factors.
Conservative benchmark = total returns for 10.0% Russell 3000 Index, 65.0% Bloomberg US Aggregate Bond Index, and 10.0% MSCI World ex-US Index and 15.0% cash allocations.
Moderate benchmark = total returns for 22.5% Russell 3000 Index, 45.0% Bloomberg US Aggregate Bond Index, and 22.5% MSCI World ex-US Index, and 10.0% cash allocations.
Moderately Aggressive benchmark
= total returns for 32.5% Russell 3000 Index, 25.0% Bloomberg US Aggregate Bond Index, and 32.5% MSCI World ex-US Index, and 10.0% cash allocations.
Aggregate benchmark = total returns for 45% Russell 3000 Index, 5.0% Bloomberg US Aggregate Bond Index, 45% MSCI World ex-US Index, and 5.0% cash allocations.

Relatively strong equity performances benefited Solyco Wealth’s model portfolios across all four strategies with stock picks in the Moderately Aggressive and Moderate models performing particularly well. Fixed income allocations, generally, remained challenged in both the since inception and the 1Q22 time periods.

In the Aggressive model allocations to Shopify, YETI, and Viatris hampered performance while positive contributions from Earthstone, Schlumberger, Sociedad de Quimica y Minera, and Vertex Pharma, offset those headwinds. In the Moderately Aggressive portfolio positive contributions from Schlumberger, Pioneer Natural Resources, Sociedad de Quimica y Minera, and Vertex Pharma, easily made up for the downside moves from Nike, Comcast, Autodesk, and American Tower. Similarly, the Moderate model experienced negative contributions from its holdings in Comcast, Taiwan Semi, and Blackrock, that Schlumberger, Pioneer Natural and Lockheed Martin more than made up for. Unfortunately, the 20% overall allocation to equities in the Conservative model proved insufficient to offset the fixed income headwinds presented from its longer duration and international debt allocations despite outsized upside benefits from Lockheed Martin, Schlumberger, and TotalEnergy.

Volatility probably will remain elevated as compared to 4Q21 until the Ukraine-Russia situation concludes. No guesses as to when that happens, however… Barring a significant escalation of the conflict, we anticipate asset market volatility not approaching the levels experienced in late February and early March, though. The fact that the Fed commenced their cycle of interest rate increases and that the rate of increase of consumer expenditures appeared to slow, if only modestly, late in 1Q22, lend some confidence to this expectation for reduced volatility.

For the time being remaining overweight Energy and Health Care equities appears to be a good idea. Potentially adding to Industrials stocks if inflation actually slows, supply chains loosen up, and infrastructure spending rotates up the Federal agenda presents a possibility for additional capital deployment heading into Summer 2022 as well. Increased fixed income and cash holdings appear to only be solid investing ideas if the Ukraine situation re-escalates or another crisis arises, which we decidedly hope is not the case.

As always, please give us a call if you’d like some help defining and meeting your financial and investing goals:  (713) 444-3560.

Allocating to International Markets Nowadays

Investing best practices continue to advocate for diversifying US markets exposures with allocations to international markets. With similar headwinds negatively impacting international markets to the same, or in many instances worse, degree as the domestic asset markets, many investors likely question the near- to medium-term value of this diversification. Doubling down on this investor skepticism for international investing: the fact that foreign markets, in general, only offered diversification by lagging US asset markets over much of the past 10 years (chart below).

Since its early-September 2021 inception, Solyco Wealth underweighted international exposures for both its equities and fixed income allocations across its four model portfolios. Certainly numerous specific situations and equities across non-US markets offered abundant opportunities to reap significantly positive returns uncorrelated with domestic investments: MercadoLibre (MELI) in 2020, PetroBras (PBR) 2006 to mid-2008, AliBaba (BABA) 2017 to 3Q21, and many more. However, the relentless encroachment of domestically listed, US companies on international markets in the age of globalization also must figure into investors’ analysis as well, in our opinion.

If a US-listed company, with readily available financial data, corporate presentations, and management commentaries – not to mention shares that trade on a widely recognized exchange during domestic working hours – offers similar end market exposure to a foreign-listed equity, the value of diversification, in our view, should be heavily scrutinized. We remain cognizant of the familiarity, or “home,” bias that this view reflects. Similarly, we posit that firms and individuals solely focused on international investing remain susceptible to a propensity to “talk their book,” exhibiting similar behavioral biases. To combat these behavioral hurdles, Solyco Wealth executes a 180-degree lookback as part of its evaluation process of domestic and international equities. This process enabled us to discover and add to our model portfolios what we evaluate to be outstanding international operators like Sociedad de Quimica y Minera out of Chile, Taiwan Semiconductor, France’s TotalEnergies, and the Swiss engineering and industrial concern ABB, among others.

While we have yet to “pull the trigger” with respect to adding China-specific exposure to our portfolios due to government policies and resulting increased regulatory scrutiny, we continue to closely monitor select Chinese equities. The downdraft in equities prices in China resulted in a very attractive valuation proposition, as shown in the chart to the right. However, we have yet to gain sufficient comfort to deploy capital.

Similarly, with several countries’ central banks ahead of the Fed in raising interest rates, we continue to watch emerging market debt, both in local currency and in US dollar terms. Without a resolution on the Russia-Ukraine situation, however, we remain loath to accept these assets risk-reward ratios.

Looking forward a host of factors probably alter the international investing landscape: demographics, trade restrictions, geopolitical strife and wars, tax policies, etc. Just as with our current approach, however, we recommend that investors adopt: 1) a standard approach to generate investment options across a wide variety of markets, 2) a set framework with which to evaluate and rank these options, and 3) a policy for periodically evaluating these choices in the context of current market conditions, investing goals, and investment alternatives.

Last-Minute Tips for 2021 Taxes

The The Monday, April 18, 2022, deadline to file personal income taxes for 2021 quickly approaches. Below, I outline a few handy tips and checks that might aid in efficiently filing returns and, more importantly, expeditiously receiving refunds.

Before I get to rocking and rolling, inputting data and such, I always like to review my W-2s, account statements, donation receipts, and such. Paramount to doing this is having my paperwork organized and in one place. Executing this first step guards against my tax-prep software kicking me out due to inactivity, which frustrates me and leads to me making errors, while I search for a missing receipt or account statement. I also make sure I have my online account information – numbers, usernames, and passwords – handy prior to commencing preparation of my returns. The same process applies if someone else does your taxes, too.

If you have children and received a portion of your Child Tax Credit over the course of 2021, make sure you know the correct amounts received. You likely received one-half of $3,600 per child five and younger($1,800) and $3,000 for kiddos between six and 17 ($1,500). While the government forwarded all parents and guardians a letter stating the amounts they received, it’s always a good idea to verify these amounts. The IRS informed folks early this year that they anticipated errors regarding claims for the 2021 Child Tax Credit likely would define the primary culprit for delayed processing and, thus, postponed refunds this year.

Work-from-home and the investments it required for many taxpayers could result in increased 2021 deductions. Investigating the possibility that the sum of your deductions exceeds the Standard Deduction ($18,800 for single filers or $25,100 for joint filers) may involve a little more investment of time, but it could add up to substantial savings on your tax bill. If you engaged in a side-business that required travel or personal investment, these figures easily could exceed the Standard Deduction when combined with mortgage interest, property taxes, and other deductions.  By the same token, double-check your income from any side jobs as well. Failure to report the income while claiming a deduction creates a red flag for the IRS.

Cryptocurrency gains need to be reported just as gains from stock, bond, mutual fund, or other investment sales need to be reported. I’ve seen estimates that as many as 40 million people in the U.S. traded or participated in cryptocurrency exchanges in 2021. If this figure holds true, the IRS may scrutinize crypto-derived gains at a level similar to that of home office deductions and Child Tax Credit claims.

Think about making an Individual Retirement Account (IRA) investment. If your employer doesn’t offer a 401(k) or other retirement plan or you made less than $78,000 ($129,000 for couples), you can make a $6,000 IRA contribution ($7,000 if you’re 50 and over) before 4/18/22 and claim it on your 2021 tax return. While growing your retirement savings balance, this contribution also reduces your 2021 taxable income. If you choose to make an after-tax, Roth IRA contribution the income limits scale up to $144,000 for individuals and $214,000 for couples.

Finally, double-check your return, especially for the routing and account numbers for the Direct Deposit of your refund. After taking all the time to prepare your returns (or paying someone else to do so), an extra few minutes to make sure everything adds up and that nothing’s missing always counts as time well spent.

Model Portfolios Outperform S&P 500 by as Much as 6.99%

Over their first six months in existence Solyco Wealth’s four model portfolios outperformed the S&P 500 by between 349 basis points and 699 basis points, after fees, as shown in the following table. Solyco Wealth’s four model portfolios accommodate investing comfort levels ranging from Conservative through Aggressive. Each portfolio holds 33 to 35 well-research positions diversified across individual equities and fixed income-focused exchange traded funds (ETFs).

Solyco Wealth 6-Month/Since Inception Returns and Comparisons by Strategy, (9/8/21 Inception to 3/8/22)

Strategy Return, Net of Fee Return, Prior of Fee
Inception to 3/8/22 Benchmark Strategy +/- Benchmark Inception to 3/8/22 Benchmark Strategy +/- Benchmark
Conservative -2.70% -5.46% 2.76% -2.20% -5.46% 3.26%
Moderate -1.55% -7.60% 6.06% -1.04% -7.60% 6.56%
Moderately Aggressive -0.10% -9.14% 9.04% 0.41% -9.14% 9.54%
Aggressive -3.60% -11.28% 7.68% -3.10% -11.28% 8.18%
Russell 3000 Index -8.99%  
S&P 500 -7.09%
MSCI World ex-US Index -15.57%
Bloomberg US Agg Bond Index -4.62%

Past Performance Is Not Indicative of Future Results

Solyco Wealth used Morningstar Direct to calculate the above returns for since inception and 6-mpnth period from September 8, 2021, through March 8, 2022.
The above table reflects a 1% management fee, or 0.083% per month, equal to 0.50% for the since inception/6-month period.
Actual client investment performance likely will differ from respective model portfolio performance due to several factors including: 1) Timing of securities purchases and sales, 2) Dividend reinvestment choices, 3) Securities held outside the model portfolio, 4) Weighting differentials for certain securities relating to whole versus partial share accounting, 5) Timing and pricing of rebalancing actions, and other minor factors.
Conservative benchmark = total returns for 10.0% Russell 3000 Index, 65.0% Bloomberg US Aggregate Bond Index, and 10.0% MSCI World ex-US Index and 15.0% cash allocations.
Moderate benchmark = total returns for 22.5% Russell 3000 Index, 45.0% Bloomberg US Aggregate Bond Index, and 22.5% MSCI World ex-US Index, and 10.0% cash allocations.
Moderately Aggressive benchmark = total returns for 32.5% Russell 3000 Index, 25.0% Bloomberg US Aggregate Bond Index, and 32.5% MSCI World ex-US Index, and 10.0% cash allocations.
Aggregate benchmark = total returns for 45% Russell 3000 Index, 5.0% Bloomberg US Aggregate Bond Index, 45% MSCI World ex-US Index, and 5.0% cash allocations.

Earthstone Energy (+72.3%), Pioneer Natural Resources (+67.3%), and Schlumberger (+63.2%), from the Energy sector, paced portfolios’ performances, as they have since inception. While Total Energy (+15.3%), a Paris-based international oil & gas producer, outperformed for the first five months of the portfolios’ existences, its Russian exposure resulted in the depletion of much of its pre-February performance. An ancillary energy play with significant complementary agricultural minerals production, Sociedad Quimica y Minera de Chile (+40.7%), which ranks among the largest lithium producers in the world, also supported upside performance. Solyco Wealth maintains its Energy overweight, which it established upon inception.

Health Care marks the other overweight sector for Solyco Wealth’s portfolios. Upside holdings in this sector, AbbVie (+38.4%), Vertex Pharmaceuticals (+24.2%), CVS (+19.5%), Cigna (+6.9%), NuVasive (+7.7%), Humana (+3.0%), and Johnson & Johnson (-0.8%), each outperformed the S&P 500. The only underperforming Health Care stock in any of the portfolios, Abbott Laboratories (-8.9%) just missed the S&P 500’s -7.1% total return for the past six months.

Lockheed Martin (+30.5%), Chubb (+9.7%), Travelers (+8.0%), and Citizens Financial Group (+8.0%), round out upside performers from Solyco Wealth’s equity selections. A difficult past six months for the fixed income universe amidst inflation and the prospect of rising interest rates, upside from this asset class was more difficult to come by than in the Energy and Health Care sectors. Nonetheless, Solyco Wealth holdings Ares Capital (+6.2%) and Hercules Capital (+7.2%), which trade as equities but provide private credit services to small- and mid-cap companies aided performance for the three model portfolios that hold them.

Major detractors for Aggressive portfolio performance include Shopify (-62.2%), YETI (-39.5%), and Viatris (-31.0%). Across the portfolios, American Tower (-23.1%), Comcast (-22.8%), ServiceNow (-21.6%), and Amazon (-22.5%), presented stiff headwinds as well. Out of the fixed income universe the Vanguard Emerging Markets Government Bond ETF (-13.3%) and the iShares iBoxx $ Investment Grade Corporate Bond ETF (-8.4%) more than offset the aforementioned positive contributions from the Ares and Hercules holdings.

Given the volatility with which 2022 commenced, we thought it useful to include model portfolio performance statistics for the year to date. While outperformance versus benchmark for the four portfolios ranged from 113 basis points for the Conservative portfolios to 517 basis points for the Aggressive portfolio, the range out upside versus the S&P 500 accelerated for the year-to-date period to between 525 basis points and 814 basis points. Largely, the same stocks and sectors drove upside for the YTD period as for the since-inception period with the major impeders of performance remaining consistent across time periods as well. Winners kept winning while losers continued to lose.

Solyco Wealth Year-to-Date Returns and Comparisons by Strategy, (1/1/22 Inception to 3/8/22)

Strategy Return, Net of Fee Return, Prior of Fee
1/1/22 to 3/8/22 Benchmark Strategy +/- Benchmark 1/1/22 to 3/8/22 Benchmark Strategy +/- Benchmark
Conservative -4.12% -5.25% 1.13% -3.94% -5.25% 1.31%
Moderate -4.97% -7.79% 2.82% -4.79% -7.79% 3.00%
Moderately Aggressive -4.90% -9.66% 4.76% -4.71% -9.66% 4.95%
Aggressive -7.02% -12.19% 5.17% -6.83% -12.19% 5.36%
Russell 3000 Index -12.79%  
S&P 500 -12.26%
MSCI World ex-US Index -13.86%
Bloomberg US Agg Bond Index -3.98%

Past Performance Is Not Indicative of Future Results

Solyco Wealth used Morningstar Direct to calculate the above returns for the year-to-date (1/1/2022 to 3/8/2022) returns presented above.
Fees assumed in above table reflect 1% annual management fee over 66 days (18 % of a year), or 0.18%..
Actual client investment performance likely will differ from respective model portfolio performance due to several factors including: 1) Timing of securities purchases and sales, 2) Dividend reinvestment choices, 3) Securities held outside the model portfolio, 4) Weighting differentials for certain securities relating to whole versus partial share accounting, 5) Timing and pricing of rebalancing actions, and other minor factors.
Conservative benchmark = total returns for 10.0% Russell 3000 Index, 65.0% Bloomberg US Aggregate Bond Index, and 10.0% MSCI World ex-US Index and 15.0% cash allocations.
Moderate benchmark = total returns for 22.5% Russell 3000 Index, 45.0% Bloomberg US Aggregate Bond Index, and 22.5% MSCI World ex-US Index, and 10.0% cash allocations.
Moderately Aggressive benchmark = total returns for 32.5% Russell 3000 Index, 25.0% Bloomberg US Aggregate Bond Index, and 32.5% MSCI World ex-US Index, and 10.0% cash allocations.
Aggregate benchmark = total returns for 45% Russell 3000 Index, 5.0% Bloomberg US Aggregate Bond Index, 45% MSCI World ex-US Index, and 5.0% cash allocations.

Stay the Course and Stick with the Plan

Volatility like that experienced in equity markets yesterday unnerves us, to say the least. An almost 120-point swing (2.9%) in the S&P 500 occurred over the course of the morning and very early afternoon. If that wasn’t enough, that price action nearly completely reversed itself by the end of trading (see chart below). One minute, just after one o’clock in the afternoon New York-time, it looked like they “fixed it.” By the time the markets closed for trading, less than three hours later, it appeared that they “broke it” again. I’d like to characterize these market movements as unusual, but over the past two months they’ve been anything but out of the ordinary.

Such gyrations in account values require a heightened sense of discipline and a refined plan of action that, all too frequently, demands inaction despite the overwhelming urge to sell, sell, sell. An overarching concept – know what you own and why you own it – may allow you to retain your portfolio’s most attractive holdings while also offering objective reasons for selling non longer desirable positions out of your portfolio. Below are a few questions that might prove useful in stress-testing your portfolio:

  • Do your most volatile positions still offer the requisite potential reward to warrant their volatility?
  • Is your level of diversification (stock-bond-alternative-cash, sectors within your stock allocation, duration within your bond allocation, and domestic-international) still appropriate?
  • For your overweight sectors or themes, do current conditions still support the overweight?
  • If a holding significantly appreciated – say maybe an energy holding in the recent environment – does it still possess valuation support or are you simply riding the momentum wave?
  • Bigger picture one here: do your investments still correlate with your comfort level with being invested and with your long-term investing goals?

As we’ve written and noted in several postings before, among the worst mistakes investors make involves selling at or near the bottom only to remain too scared to re-invest through a recovery. Staying invested through downturns, however, doesn’t mean remaining fully invested in the same holdings or at the same position sizes through thick and thin. Interest rates, operating environments, earnings and cash flows, and expectations for those earnings and cash flows, all change and, sometimes, our investments need to change in response. Many times, however, these changes prove to be relatively miniscule and, as a result, don’t warrant changes in our investments or plans.

Notes on Morgan Housel’s The Psychology of Money

After reading a number of endorsements and receiving numerous recommendations to read Morgan Housel’s The Psychology of Money, I finally got around to checking it out. I found several concepts in the book important enough that I decided to take the time to write them down and share them.

Three big messages materialized, in my view:

  1. Investing success frequently requires more time than many investors expect.
  2. Many investors triumph despite being uncomfortable.
  3. Practicing humility, checking your ego, and forgiving yourself tend to lead to better investment outcomes over the long term.

Drilling deeper on point #1: without sufficient time the wonders of compounding returns lack the duration necessary to overcome the inevitable interim periods of negative returns. To drive this point home Housel noted that of Warren Buffett’s $84.5 billion in wealth, $81.5 billion came after Buffett’s 65th birthday! Of course achieving $3.0 billion of wealth in the first 65 years is nothing to scoff at, but seeing it multiplied over 28x in the next 25 years truly astounds.

Housel contends that success with money comes at a cost. Treating uncertainty, doubt and regret as fees to be paid rather than fines to be avoided represent to investors the costs of admission to success. Similarly, risk should be embraced as enduring it pays off over time. A key corollary of embracing risk, however: avoid ruinous risk as it prevents investors from being able to incur future risks that likely will pay off with time.

Humility, kindness, and compassion likely will garner investors the respect and admiration they seek much faster and more completely than will allowing ego to dictate investing decisions in search of newer and flashier material possessions. Housel defines savings as the difference between an investor’s ego and their wealth. Likely, investors will sleep better at night practicing self-forgiveness for their investing mistakes and avoiding the extremes of financial decisions that typically plague those looking for more stuff. Managing to avoid the excessive risks that frequently characterize ego-driven investing also likely better equips investors to avoid succumbing to the overly pessimistic storylines that force long-term investors out of winning positions.

While Housel employs the following example closer to the beginning of his book than to the end, it distills the importance of time, humility, and embracing risk. The families of Sue, Jim, and Tom invest $1 per month from 1900 to 2019. Sue’s family invests through thick and thin, feast and famine, dutifully plowing $1 per month into the U.S. stock market while staying fully invested regardless of the prevailing economic condition. Tom’s family is more milquetoast than Sue’s family, though, and only invests $1 per month when there’s no recession, sells six months after a recession sets in, and fails to re-invest and restart their $1 per month investing until six months after a recession ends. Meanwhile, Jim’s family is just flat-out risk averse and only invests $1 per month when times are good, sells everything and keeps their $1 per month in their pocket during recessions, and only goes all-in again and recommences their $1 per month investments once the economy moves beyond recession. While Sue’s family may test its intestinal fortitude remaining invested and continuing to save come hell or high-water, they end up with $435,551 by 2020 while Jim’s family had $257,386 and Tom’s family $234,476. Notably, all three families ended up relatively large winners as only 1,438 months exist between 1900 and 2019, but Sue outperforms Jim by 77.8% and Tom by 95.1%. All too much like the PTA raffle, investors pretty much must be present to win.