News & Views

Model Portfolios Finish 2021 Strongly for Solyco Wealth

The four model portfolios managed by Solyco Wealth maintained their benchmark-beating performance to conclude 2021. Spanning risk tolerances from Conservative to Moderate through Moderately Aggressive and Aggressive, each of the four portfolios exceeded its respective benchmark’s performance since their 9/8/21 inception date after assessing an annualized 1.0% management fee, as shown in the following table.

Solyco Wealth Returns and Benchmark Comparisons by Strategy, Since Inception (9/8/21)

Strategy Return, Net of Fee Return, Prior of Fee
Since Inception Benchmark Strategy +/- Benchmark Since Inception Benchmark Strategy +/- Benchmark
Conservative 1.49% -0.13% 1.61% 1.74% -0.13% 1.86%
Moderate 3.18% 0.28% 2.90% 3.43% 0.28% 3.15%
Moderately Aggressive 4.68% 0.63% 4.05% 4.93% 0.63% 4.30%
Aggressive 3.49% 1.04% 2.45% 3.74% 1.04% 2.70%
Russell 3000 Index 4.35%  
S&P 500 5.90%
MSCI World ex-US Index -1.99%
Bloomberg US Agg Bond Index -0.56%

Past Performance Is Not Indicative of Future Results

Solyco Wealth used Morningstar Direct to calculate the above returns for the 4Q21 and since inception periods from September 8, 2021, through December 31, 2021.
Fees assumed in above calculations amount to 0.083% per month, or 1/12 of annual 1% management fee.
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.

Each of Solyco’s Model Portfolios includes fixed income and cash allocations, ranging from a cumulative 10% for the Aggressive portfolio to a cumulative 80% for the Conservative portfolio. Equity, fixed income, and international allocations for the three more risk-averse portfolios all outperformed since-inception returns for their respective benchmarks – Russell 3000, MSCI All-World ex-US, and Bloomberg US Aggregate Bond Index – as well as their equity component exceeding same-period S&P 500 returns. The post-Thanksgiving downdraft negatively impacting domestic riskier assets, however, resulted in the domestic equity and fixed income allocations within the Aggressive Model Portfolio modestly underperforming their respective benchmarks; returns to the Portfolio’s international equities, though, outpaced those of the MSCI All-World ex-US benchmark.

Why Tech Stocks Could Stumble Amidst Rising Rates

Prospects for higher interest rates sooner rather than later really appear to be disproportionately whacking Tech stocks. Given that many of these companies retain substantial sums of cash net of debt on their balance sheets, this trading behavior may be confusing to many investors. Institutional investors’ concerns likely focus on the discounted value of Tech companies’ future cash flows rather than on its prospective balance sheet condition.

Theoretically, for a company generating $1 billion in free cash flow with a 7% average cost of capital – its discount rate – incurring a two-percent increase in that discount rate, while relatively benign optically, translates to an estimated reduction in value of $17M+ in a year. If our company has 100M shares outstanding and trades at 20x free cash flow, that $17M drop in value results in a share price decline of only $3.43, or about 1.7%. That price change falls well within the range of typical market gyrations and probably, never garners another thought.

However, that theoretical increase in the company’s discount rate also likely results in a down-tick in the cash flow multiple that investors will pay for shares of the company, say from 20x to 18x. Now, that $17M decline in value amounts to a $23.09, or 11.5%, downward revision in value. Even for the most resilient, longest-term investor an 11.5% price drop likely results in at least a raised eyebrow.

Of course investors may argue that rising rates impact companies across sectors and question why Tech trades differently. Two factors, in our view, serve to explain Tech’s potentially increased sensitivity to rates vis-à-vis companies in other sectors: 1) significantly higher expected future free cash flows and 2) elevated trading multiples for those expected future free cash flows.

If you want to chat about any of this, we’re here to help: (713) 444-3560 or ctrimble@solycowealth.com.

Volatility, Cash and Options

No sooner than I put the Thanksgiving leftovers in the fridge than COVID rear its ugly, spiked head again and blew up Black Friday. Bah humbug, indeed. From an investor’s perspective, though, the timing, magnitude, and driver of last Friday’s volatility spike offer valuable lessons. Chief among these lessons are the benefits of:

  • Maintaining a solid, actionable investment plan commensurate with your risk tolerance,
  • Allocating a portion of your assets to cash, and
  • Utilizing options to mitigate a portion of this volatility.

An investment plan should be crafted to your risk tolerance with appropriate allocations to fixed income, equities, and cash, and with well-researched equity, ETF, or mutual fund weightings across economic sectors. If a few percentage points of volatility in the equity markets one way or the other rattles confidence in your plan, chances are it and your risk tolerance are misaligned.

Having a cash component in your asset allocation plan offers a buffer with which to get your plan aligned with your risk profile – if it’s not already. Also, cash provides dry powder with which to add to disproportionately beaten down positions if you deem them worthy of additional investment – an active
rebalancing effort, if you will.

Finally, providing that you possess a solid understanding of how options function, covered calls and cash-secured puts present the potential to mitigate the possible impacts of short periods of volatility. Income generation represents another prospective benefit of complementing your core investment plan with an options strategy.

If you want to chat about any of this, we’re here to help: (713) 444-3560 or ctrimble@solycowealth.com.

Model Portfolios Turn in Solid 2nd Month

Each of Solyco Wealth’s four model investment portfolios outperformed its benchmark, net of fees, over the two-month period ending 11/8/21. As shown in the following table both the Aggressive and Moderately Aggressive portfolios, which hold heavier weightings to equities, also their first two months in existence exceeded returns for both the S&P 500 and the Russell 3000 after fees. Past performances are not indicative of future results, however.

Solyco Wealth Returns and Benchmark Comparisons by Strategy, 9/8/21 – 11/8/21

Strategy Return, Net of Fee Return, Prior of Fee
2-Month and Since Inception Benchmark Strategy +/- Benchmark 2-Month and Since Inception Benchmark Strategy +/- Benchmark
Aggressive 5.30% 1.94% +3.35% 5.47% 1.94% +3.52%
Moderately Aggresive 5.43% 1.37% +4.05% 5.59% 1.37% +4.22%
Moderate 2.82% 0.91% +1.91% 2.98% 0.91% +2.08%
Conservative 1.41% 0.34% +1.07% 1.57% 0.34% +1.24%
Russell 3000 Index 4.37%  
S&P 500 4.22%
MSCI World ex-US Index -0.03%
Bloomberg US Agg Bond Index -0.15%

Past performance should not be construed as illustrative of potential future performance.

Solyco Wealth used Morningstar Direct to calculate the above returns for the 1-month and since inception periods from September 8, 2021, through November 8, 2021.
Fees assumed in above calculations amount to 0.083% per month, or 1/12 of annual 1% management fee.
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.

Significant upside moves from Earthstone (ESTE; +48.7%), Advanced Micro Devices (AMD; +37.6%), and Sociedad Quimica y Minera (SQM; +25.6%), generally aided performance while Zendesk (ZEN; -18.4%), Universal Health (UHS; -16.9%), and ViacomCBS’s (VIAC; -13.4%) hampered performance. Holdings in private debt capital providers Ares Capital (ARCC; +6.9%) and Hercules Capital (HTGC; +7.1%) paced fixed income-linked holdings over the past two months. Notably, not all of the portfolios held all of these positions.

Solyco Wealth utilizes its model portfolios as baselines for creating investment programs customized to its clients’ individual investing goals and risk tolerances. For more information call (713) 444-3460.

Looking to 2022: End of Year Checklist

As the 2021 holiday season quickly advances on us, now offers a sensible time to execute a quick run-through of a financial planning checklist. Just like with holiday shopping – which we also recommend you commence soon as supply chain issues likely will present challenges even greater than unraveling changes to the 2022 tax code – starting early probably leads to better outcomes. Here are a few quick pointers to get the ball rolling:

  • Review and update beneficiary designations for brokerage and other accounts
  • Complete charitable giving plans
  • Evaluate insurance coverage: home, auto, life, other
  • Spend balances in flexible spending accounts
  • Analyze investment portfolios to rebalance asset allocations
  • Identify any tax-loss harvesting possibilities
  • Assess potential tax liabilities: stock/asset sales, income withholding, child tax credit paybacks
  • Check emergency savings account balance
  • Complete – for retirees – any required minimum distributions
  • Give some thought to possible life changes arising in 2022: job, home, car, surgery…
  • Read over financial and/or estate plan with those possible 2022 changes in mind

If you want to chat about any of this, we’re here to help: 713-444-3560 or ctrimble@solycowealth.com.

Inflation: Risks and Opportunities

Inflation’s having a moment. Not since the hideous late-70s and early-80s has this economic phenomenon grabbed so many headlines. Many may not now be bothered by inflation like they weren’t by ‘70s fashion, but that seemingly little bend to the far right of the graph below likely represents $100s of dollars to even the stingiest households in higher costs for everything from Clorox bleach to Nikes to gasoline.

As with most volatile things, especially those of an economic nature, inflation presents risks and opportunities. The primary risk revolves around the prospects of economic beings – people, companies, governments – earning at the same rate in the future but paying more for things. In economic parlance wages, earnings, and tax receipts stagnate while prices increase for the goods and services that families, companies, and municipalities buy. Of course, this risk never occurs for every actor in the economy at the same time and to the same degree. These disconnects present opportunities for those economic participants to benefit from the sorry souls forced to pay more for stuff in 2021 (and highly likely in 2022, 2023, 2024…) while, for whatever reason, they still earn the same paycheck they did in 2011:  YUCK!

This may seem all high-level and meaningless to many but avoiding the just some of the risks and taking advantage of only a few of the opportunities environments like the current one offer could make a monumental difference in future quality of life. For instance, if a family chose not to re-finance their mortgage over the past few years, they probably are in jeopardy of missing the opportunity to more than offset the higher costs of the gasoline required to get the folks back to the office, the kiddos to swim practice, and everyone to Nana and PopPop’s for Thanksgiving. Similarly, if the owner of your favorite burger joint or steakhouse freaked out and decided last week to buy forward all of his beef for the coming year because they think prices will escalate forever, get ready to either pay more for that burger or to find a new favorite restaurant with cheaper prices (if the cost of beef drops).

Investing in inflationary environments may prove even trickier. Too many bonds, the wrong equities, or none of one or the either asset classes, could set the earnings of a savings or retirement plan back a few years. Give Solyco Wealth a call, I think we can help:  (713) 444-3560.

Bitcoin “Strategy”

Earlier today the first bitcoin-linked exchange traded fund (ETF), ProShares Bitcoin Strategy (BITO), commenced trading on the New York Stock Exchange. I say “linked” as BITO doesn’t actually hold bitcoins. Rather, ProShares structured BITO as an investment vehicle in bitcoin futures, or contracts traded on the regulated Chicago Mercantile Exchange (CME) that track the future prices of bitcoins. I have no idea what ProShares’ “strategy” might be with respect to trading bitcoin futures other than simply being the first ETF to do so. While the first-mover advantage frequently represents a fine strategy, we’ll withhold judgment on this one for a while.

Investing in futures contracts likely represents one of the few ways that the Securities and Exchange Commission allows an ETF to offer exposure to bitcoin. Notably, the SEC chose not to disapprove or approve BITO. Rather, they simply chose not to act on ProShares’ offering of BITO. The SEC had a 75-day period over which they could comment on BITO, which expired yesterday (10/18/21). The fact that BITO invests in futures traded on a regulated exchange, much like similar ETFs tied to crude oil, gold, or other commodities, likely paved the way for inaction from the SEC. More futures-based cryptocurrency ETFs likely soon will follow BITO.

Before investors jump into BITO or their likely soon-to-be-launched look-alike ETFs, I recommend taking a moment to digest the differences between owning futures and owning the underlying assets. Most prominently, price relationships between futures and bitcoins infrequently will reflect 1:1 proportionality. In fact, based on the anticipated popularity of BITO CME’s bitcoin futures contracts recently reflects a 15% premium to the actual spot price of their underlying bitcoin. Second, this “contango” relationship, which describes the condition under which the prices for the underlying in the future trade higher than the current spot price, creates “roll risk.” As funds like BITO periodically must reinvest in new futures contracts to replace expiring contracts, the potential exists for these ETFs to buy high and selling low if bitcoin spot price dynamics change substantially between buy and sell dates. Additionally, BITO cannot participate in the spot market for bitcoins, which removes a key function many large futures traders employ to limit the potential negative impact of roll risk. While the bitcoin futures and spot markets appear large and liquid the potential for manipulation persists. Trading bitcoin futures is not a cost-less exercise either.

All of these potential risks, however, probably pale in comparison to the substantial risk of price volatility posed to bitcoin investors. Without the linkages to material uses offered by the more typical assets on which futures markets base values – currencies, lumber, interest rates and such – bitcoin prices reflect consumers’ views as a store of value. As such bitcoin price behavior likely will correlate better with art and collectibles than it does even with gold, the other historically popular store of value. All of this is not to say that investors owning bitcoin or other cryptocurrencies is necessarily bad or good, just that it likely will be quite different than their experiences owning other assets.

Solid First Month For Solyco Wealth

The first month for Solyco Wealth’s Model Portfolios, which provide a risk tolerance-based framework for discussing client goals and investments, proved to be an eventful one. Characterized by ongoing debates concerning Fed policy, COVID impacts on labor supply, and the resulting impacts on domestic and international economies, the investing landscape offered plenty of challenges. All told, Solyco Wealth, which populates its model portfolios primarily with individual equities and fixed income exchange traded funds (ETFs), turned in a solid first month, as shown in the following table.

Solyco Wealth Returns and Benchmark Comparisons by Strategy, 9/8/21 – 10/8/21

Strategy Return, Net of Fee Return, Prior of Fee
1-Month and Since Inception Benchmark Strategy +/- Benchmark 1-Month and Since Inception Benchmark Strategy +/- Benchmark
Conservative -0.87% -1.44% 0.57% -0.79% -1.44% 0.65%
Moderate -1.07% -2.15% 1.09% -0.98% -2.15% 1.17%
Moderately Aggresive -0.73% -2.69% 1.96% -0.65% -2.69% 2.04%
Aggressive -2.48% -3.40% 0.92% -2.40% -3.40% 1.00%
Russell 3000 Index -2.70%  
Bloomberg US Agg Bond Index -1.07%
MSCI World ex-US Index -4.74%

Past performance should not be construed as illustrative of potential future performance.

Solyco Wealth used Morningstar Direct to calculate the above returns for the 1-month and since inception periods from September 8, 2021, through October 8, 2021.
Fee assumed in above calculations amounts to 0.083%, or 1/12 of annual 1% management fee. 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.

More information on Solyco Wealth’s Model Portfolio’s available upon request:
ctrimble@solycowealth.com
– 713-444-3560.

Great Advice Depends On Great Questions

Asking great questions ranks as a superpower in my view. Doing so can elevate normal, everyday folks to exalted status. From “Can I help you with that box?” to “How’s your mother today?” to “Would you like fries with that?”, just having another human being display a modicum of concern frequently places a little more pep in a step or turns a frown upside down.

Great questioning defines great financial advice as well. Irrespective of whether the situation involves an advisor endeavoring to aid a recent widow in making sense of her financial situation or a banker seeking to offer the most useful advice possible to a CEO and his strategic initiatives team, effective engagement centers on asking about the right things in the correct way.

With respect to conversations revolving around money, many frequently lose sight of what I view of the most important question: “What do you want to do with your money?” Many, many more people, of course, may argue that “How do I get more money?” may be a more important question. I beg to differ as the “what” conveys a goal while the “how” – at best – might offer a pathway toward achieving that goal. In my experience figuring our the “what” yields significant insights into the anxieties, challenges, hurdles, and, in the end, the opportunities, to aid in determining the best “how”.

Little of this great questioning matters though if I fail to listen to the answers. A one-sided conversation, which my daughter in high school would sneeringly term a “lecture,” does little more than convey facts or opinions or viewpoints from one person. As an advisor I’m seriously disinterested in spouting facts and views on stocks, interest rates, or tax regulations. Rather, I’d prefer to ask clients to describe their financial goals and what they see as the opportunities and challenges impacting the achievement of these goals. Maybe then I can put those views on stocks, rates, and regulations into action to motivate them closer to those goals.

Planning Sucks, But It’s Worth It

I get it: planning sucks. It’s like someone else always telling you what to do. Much of it involves trying to allocate insufficient resources to satisfy excess demand for those resources. Financial planning can be even worse: it involves money, which never seems to be oversupplied (unless you’re Elizabeth Warren bad-mouthing poor Jerome Powell). Undesirable terms like budget, taxes, required, beneficiary, and, yep, death, get thrown around ad nauseum (I threw Latin in there just to drive the discomfort point right where it needs to be).

Here’s the kicker on planning, though: rarely, if ever, does one incur a negative outcome from it. Sure, executing the plan frequently proves to be rife with pitfalls. Conditions change. Unintended consequences arise from choices made (or avoided). Your in-laws move in for an indeterminate period of time because their basement flooded. The process of planning is like free self-education.

The upsides of financial planning can be multitude. One might discover upside earnings potential due to an over-allocation to cash or “low-risk” fixed income. Or, a couple could learn that their counterpart is far more risk averse than they initially thought, stressing their union with lost sleep and unneeded anxiety. Reviewing financial assets in their entirety with a professional could unearth misallocations versus a risk profile that explain past periods of under- (or over-) performance amid periods of market turbulence or calm. To borrow from Forbes: with all thy getting, get understanding.

Recent conversations with a prospective client discovered that across the half-dozen accounts they held at four different firms they sat on $250,000 of cash in excess of their desired cushion. At a moderate level of risk tolerance (45% in the Bloomberg Agg Treasury Bond Index and 22.5% in each of the Russell 3000 and MSCI World ex-US) over the past year this misallocation amounted to an opportunity cost in excess of $33,000, or the sum of lease payments over the next three years on the new pickup the client wanted to purchase. Another client complained of a prior advisor perpetually allocating their capital too conservatively when, in effect, the advisor achieved an appropriate risk profile but did so by significantly over-allocating to relatively underperforming international equities. Without an effective planning process, however, no one grasped the roots of the issues. Anecdotal evidence, to be sure, but personal examples frequently provide the best impetus for action.