Insights

Commentary, insights and analysis from Cahaba Wealth Management

Russia Invasion of Ukraine, Stock Market Correction and Loss Aversion

2/2022

By Brian O’Neill, CFP®

Today was not a great day to turn on the news. Stocks (as measured by the S&P 500 from the all time high price reached in early January) have officially entered correction territory, in no small part due to the Russian invasion of Ukraine we all saw unfold this morning.

Chart 1 — Price Movement of the S&P 500 over the past year

The chart above reflects the price movement of the S&P 500 over the past year, and you can see the damage that has occurred since the start of 2022. We certainly do not want to discount the fear and emotions that come with geopolitical instability and market turmoil. We do, however, believe that in these times it is worth exploring how we make decisions.

If you look at the chart above, the recent drawdown is apparent. What is less apparent is that while we are in a correction today from all-time highs, we are at the same price level on the S&P 500 we were in June 2021 – barely 8 months ago. Think back to what you were doing in June 2021, and I would strongly suggest worrying about the markets was not on your to do list. The human brain has been trained over thousands of years to deal with problems and conflict, and we are constantly constructing narratives to help us wade through these challenges. Investing is no different.

One of the most important concepts to wrestle with as an investor is Loss Aversion – this is the tendency of investors to be so fearful of losses, that they focus on that more than making gains. Let’s not forget that stocks have historically gone up three out of every four years in general. The knee jerk reaction to recent events may be to “go to cash” or to “wait this out on the sidelines,” but history tells us the markets are way smarter than any individual. By the time we realize this bout of volatility is over, it may be too late to jump back in.

The chart above is the S&P 500 price level since 1950. While you can certainly see the various drops (specifically the 01–02 dot com bubble bust and the 08-09 financial crisis), the long-term returns are significant for those who can wait that out. Our portfolios are designed with flexibility, and when married with our understanding of each client’s unique time horizon and need from assets, we can avoid selling during these periods of negativity.

We send this primarily as an acknowledgement that these last few weeks have not been pleasant for investors. We are thankful for the opportunity to serve you as a client and look forward to continuing to be a resource for you and your family. Please let us know if you have questions or would like to discuss in greater detail.

Brian O’Neill, CFP®, is president and a financial advisor in the Atlanta office of Cahaba Wealth Management, www.cahabawealth.com.

Cahaba Wealth Management is registered as an investment adviser with the SEC and only transacts business in states where it is properly registered, or is excluded or exempted from registration requirements. Registration as an investment adviser does not constitute an endorsement of the firm by the SEC nor does it indicate that the adviser has attained a particular level of skill or ability. Cahaba Wealth Management is not engaged in the practice of law or accounting. Always consult an attorney or tax professional regarding your specific legal or tax situation. Content should not be construed as personalized investment advice. The opinions in this materials are for general information, and not intended to provide specific investment advice or recommendations for an individual. Content should not be regarded as a complete analysis of the subjects discussed. To determine which investment(s) may be appropriate for you, consult your financial advisor.

Bull or Bear: Does it matter?

By Henry Wideman, CFP®

Long term investors invest in the market initially based on the indisputable fact that it has increased over time. Historically, while we know that the stock market gives us the best opportunity to outpace inflation, stocks do not increase in a linear fashion. The market will periodically give back due to recessions, valuations and unforeseen shocks.

Bull or Bear: What is Your Financial Advisors Role?

Our role as advisors is to minimize panic during periods of downturn, turning to our cash flow analysis to remind clients why they can hold on. It is not that investors forget that short term economic and market cycles occur, but humans do tend to forget how we felt when the last one began.

It is human nature to eliminate short term pain from our memory banks.

Even the most placid investor can make emotional decisions during market volatility produced by the ebbs and flows of the market cycles. A contributing factor to the investor panic is what seems to be an hourly “breaking news” story. News typically does not sell unless it is negative fear mongering. This is reaching a fever pitch given the information age in which we currently find ourselves. Even with periods of decline and bad news, long term returns remain positive.

What Does Market Volatility Mean to You?

Our most important job as financial advisors is to put our clients in the best position possible to not outlive their assets. We never want our clients to fear living beyond their means. Our team has navigated clients through three major economic recessions and market downturns in our history.

There were similarities across each of these dark periods of market volatility. First, the root cause of each crisis was distinctly different: the technology/internet bubble that burst in the early 2000s, the real estate crash and gridlock of our financial systems in 2008/2009, and the 2020 COVID-19 economic shutdown was the first pandemic since the 1917 Spanish Flu. Second, although the respective catalysts of these periods were unique, the results were basically the same. The stock market and the economy declined substantially, but eventually rebounded.

The final, and most important similarity is that the only investors who truly lost during these periods were those who panicked and sold.

Stock Market Crash of 2008 — Source: thebalance.com

The Counterintuitive Nature of Successful Investing

In order to benefit from investing in the market over time, it is vital to believe that stocks will increase, even though they will also suffer periods of volatility and decline. Investors must be in the market on its best days, as opposed to trying to miss its worst days.

Since we do not know when the best days of the market will occur, we have to unfortunately remain invested on its worst days, and use the volatility to rebalance. Evaluating your true time horizon through constant revisions to long term cash flow models will dramatically increase the odds of never having to sell temporarily depleted portfolio assets for a need. Having an advisor that keeps emotions in check during the dark days is equally important.

Navigating Inevitable Market Cycles

Yes, the current bull market will end at some point. However, through proper planning and a belief that the market will continue to provide long term returns, it simply does not matter.

There is a better way to navigate through inevitable market cycles. If you would like to learn more, contact Cahaba Wealth Management.

Henry Wideman, CFP®, is a partner and financial advisor in the Birmingham office of Cahaba Wealth Management, www.cahabawealth.com.

Charitable Giving: Ways to Give

By Will Jackson, CFP®

We frequently receive questions about charitable giving, most related to giving from a retirement account, Qualified Charitable Donations (QCDs). Did you know that there is another attractive option?

Charitable giving is an important aspect of many clients’ annual planning. Other than cash gifts, there are two primary ways we guide clients in making strategic charitable gifts.

If retired and eligible, we recommend making Qualified Charitable Donations (QCDs) from a retirement account. If that is not an option at this time, we recommend a Donor Advised Fund (DAF) as a great way to fund your future charitable giving while receiving an attractive tax benefit.

If you have QCD questions, please let us know. For this column, we will focus on the Donor Advised Fund, and four questions we frequently receive regarding DAFs.

What is a Donor Advised Fund?

A DAF is like an investment account for the purpose of supporting charitable organizations you care about. When you contribute cash, securities or other assets to a DAF, you are generally eligible to take an immediate tax deduction. Those funds can then be invested for tax-free growth, and you can recommend grants to virtually any IRS-qualified public charity at any point in the future.

When you give, you want your charitable donations to be as effective as possible. DAFs are the fastest-growing charitable giving vehicle in the United States because they are one of the easiest and most tax-advantageous ways to give to charity.

How do you contribute to a DAF?

You can donate cash, stocks or non-publicly traded assets such as private business interests, cryptocurrency and private company stock to be eligible for an immediate tax deduction all while funding your future charitable giving. The one point to always remember is that a contribution to a donor-advised fund is an irrevocable commitment to charity; the funds cannot be returned to the donor or any other individual or used for any purpose other than grant making to charities. It is important to only select assets that you feel are appropriate.

What happens to DAF assets while deciding what charity to support?

While you’re deciding which charities to support, your DAF can potentially grow, making available even more money for charities. Most sponsoring organizations have a variety of investment options from which you can recommend an investment strategy for your charitable dollars. For larger donations, there is the option to have your advisor manage the asset allocation of your DAF.

How long do you have to donate DAF assets?

The IRS does not have specific rules for when funds in a DAF must be used, but most DAF providers will require the account to be used at least once every two years.

You can support virtually any IRS-qualified public charity with grant recommendations from the DAF — from your local homeless shelter to your alma mater or religious institution. The public charity sponsoring your account will conduct due diligence to ensure the funds granted go to an IRS-qualified public charity and will be used for charitable purposes.

You can incorporate your DAF into estate planning by making a bequest in your will to the DAF sponsor, or by making the sponsor a beneficiary of a retirement plan, life insurance policy or charitable trust.

If you are interested in learning more about a QCD or DAF, please don’t hesitate to let us know. We are big believers in giving back to our communities, and are enthusiastic about helping our clients do the same.

Will Jackson, CFP®, is a partner and financial advisor in the Nashville office of Cahaba Wealth Management, www.cahabawealth.com.