Tag Archives: Financial Planning

The Case for International Stocks

4/2023

By Don Keeney, CFA, CFP®

Many of us have heard statistics1 claiming:

  • Domestic stocks have outperformed international stocks eight out of the last ten years.
  • Domestic stocks have outperformed international stocks by a cumulative 20 percentage points over the last three years.
  • Domestic stocks have outperformed international stocks by a cumulative 50 percentage points over the last five years.

These truths make it seem as though investing in international stocks is a complete waste of time. To help explain why that’s not the case, let’s take a look at some additional data.

Figure 1

The above chart containing data from 1973 to 2022 outlines the following:

  • Over the last 50 years, domestic stocks have outperformed international stocks only 59% of those years.
  • International stocks have outperformed domestic stocks 100% of the time when domestic stocks had returns of less than 4% for the year.
  • International stocks have outperformed domestic stocks 96% of the time when domestic stocks had returns of less than 6% for the year.

Some of what we hear is rooted in Recency Bias. Recency bias is a behavioral pattern in which people incorrectly believe recent events will soon either occur again or persist indefinitely. This bias inhibits an individual’s ability to objectively gauge probabilities, which can lead to poor decisions. While domestic stocks have outperformed international stocks more recently, this has not consistently been the historical norm – nor can we say it will be the case in all future years. We have to separate recent market occurrences from future anticipated market movements.

There is solid evidence that shows the outperformance of one stock market over the other occurs in long cycles (see figure 2). The current cycle is now over 12 years long (including 2023 year-to-date). However, immediately before the current cycle started, international stocks outperformed domestic stocks for roughly eight consecutive years. While the below graphic consists of 5-year rolling returns and not stand-alone calendar years, the perspective remains meaningful. The current cycle is not going to last forever. Investors should acknowledge recency bias and expect the market to NOT stay that way.

Figure 2

When is the next cycle going to start? Who knows! Was international’s outperformance in 2022 the start of a new, long-term outperformance cycle? Who knows! Only one thing remains certain: at some point, the current performance cycle will flip, and international stocks will outperform domestic stocks (at least until the next cycle begins).

With this in mind, Cahaba Wealth Management appropriately constructs your investment portfolio to maximize the potential return for an appropriate amount of risk over the long term. The conversation above about which asset class is going to outperform another asset class actually misses the bigger, more important idea at play: diversification. Diversification is the process of spreading your investments around to multiple different asset classes so that your exposure to any one type is limited. As we tell our clients, diversification is the only “free lunch” in investing!

In other words, an investor can purchase two (or more) risky assets and simultaneously (1) improve the expected rate of return for the combined portfolio AND (2) reduce the portfolio’s overall expected risk. Diversification is a true “two-for-one special”! The only caveat is that the assets cannot act exactly like each other – meaning the assets should not have the same performance and volatility patterns. The more dissimilar the returns are, the larger the “free lunch”.

The takeaway is not to ask if international stocks will ever outperform domestic stocks again (or vice-versa); instead, it is to capitalize on the value of diversification and the resulting higher expected returns, with lower volatility, over your long term investing horizon. The inclusion of temporarily underperforming asset classes will always remain a positive contributor to your portfolio, given the power of diversification!

Don Keeney, CFA, CFP® is a financial advisor in the Nashville 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.

1Source: ycharts.com

A Silver Lining Within Today’s Interest Rate Environment

A Comparison Between Cash Management Products

3/2023

By Robert Eifert, CFP®

In light of recent events such as the Silicon Valley Bank collapse, many individuals have questions about cash management strategies. As the Federal Reserve has been on a campaign to raise interest rates to combat inflation, the cost to borrow has increased significantly, and the broader markets are exhibiting volatility while investors attempt to interpret what’s next for the economy. On the other side of the coin, rates in short-term cash-like instruments have begun to rise to reflect the current rate environment.

In the midst of a tortuous market cycle, the ears of many investors and financial professionals tend to perk up when they hear there are ways to earn a 3%-5%1 return while taking on very little (or, in some cases, zero) risk.

While the exact path and duration of the Fed’s current monetary policy may be uncertain, we at Cahaba Wealth avoid altering our strategy based on short term predictions or pontifications. We choose to focus on the opportunity to take advantage of these high yielding and highly liquid products when it makes sense for clients.

Every decision we make for client portfolios is based on a comprehensive financial plan and the 3 pillars of investment management:

  • Risk tolerance
  • Time horizon
  • Cash flow needs

Below, we will compare and contrast a few methods of managing cash for clients who have excess savings. An important distinction to make is that the savings vehicles we are comparing here are only one small component of a well-diversified portfolio that is aligned with goals and risk tolerance. Depending on your unique situation, the following vehicles could be preferable to traditional checking accounts that are currently paying little to no interest 1.

High Yield Savings Accounts:

These are traditional deposit accounts at various banking institutions that compete for the highest rate and most account flexibility. There may be limitations on the amount of transfers in or out of these account in any given month, but this still affords very quick access to a linked checking account for any expenditures. As these accounts are offered by banking institutions, depositors receive full FDIC insurance (up to the limit of $250k per account holder). Because of the safety and flexibility of these accounts, rates are generally lower than other products available.

Certificate of Deposit (Brokered):

A CD is a banking product that offers a fixed rate of interest in exchange for holding a deposit with that bank for a pre-determined time period. For our purposes, we will focus on the higher yielding “brokered” CDs that banks offer to depositors through larger brokerage houses like Fidelity, Schwab, Vanguard, etc. These are still bank products and are insured up to the FDIC limit.

The rate on a brokered CD is generally higher than a savings account because purchasers are agreeing to leave their deposits with the bank for anywhere from a few months to a number of years. This can be beneficial because the rate is locked up for that period, despite any interest rate fluctuations.

A brokered CD actually has a secondary trading market where one can sell before the end of the term if funds are needed (CDs obtained directly from a bank lack this feature and charge penalties to do so). The price of these CDs is highly dependent on prevailing interest rates and a number of other factors, so there is still a risk that the purchaser could receive less than the actual value that would be achieved if held to maturity.

Treasury Bills:

A T-Bill is U.S. Government debt that matures in a period of one year or less. These securities are typically sold at a “discount to par value”. This essentially means that the purchase price is less than the stated “par value”, and upon maturity the purchaser is paid that par value. The difference between purchase price and par value represents interest earned (in order to compare with other interest-bearing instruments).

T-Bills are regarded as one of the safest assets in existence, as they are backed by the unlimited taxing authority and borrowing power of the U.S. Government.

As of late, T-bills and Brokered CDs of similar maturities have been trading rank for the highest interest rate1. However, T-bills have the advantage when it comes to liquidity. The secondary market for treasury instruments is very robust which means that they are very easy to liquidate before maturity, should the need arise.

An additional benefit of Treasury instruments is that they are generally exempt from state and local income tax. This can result in significant savings depending on one’s tax situation and the amount invested. 

Money Market Mutual Funds:

These Mutual Funds consist of a mix of very safe, short term assets from the U.S. Government, banks, and high quality corporate issuers. There is a wide offering of Money Market Funds that allow investors to tailor their exposure to various instruments based on desired yield, risk and tax treatment. The rates earned with these funds are variable, but we’ve found that they can be competitive with the other instruments listed even after the fund management fees are considered.

A distinct benefit of a money market fund is the ability to liquidate all or a portion of the investment at the $1.00 “per share” value that the funds maintain. This allows investors to earn and re-invest the interest, all while preserving the ability to utilize the cash in short order.

These products each have different use cases, and are no substitute for a diversified portfolio that is aligned with investment objectives. The financial planning process is a critical piece needed in order to effectively manage a liquidity portfolio. Armed with the knowledge of our clients’ short and intermediate term liquidity needs, we can align our clients’ hard earned savings in the appropriate vehicles. If you have questions regarding your specific situation, please do not hesitate to reach out.

Robert Eifert, CFP®, is an associate advisor in the Birmingham office of Cahaba Wealth Management, www.cahabawealth.com.

1 Based on interest rate environment as of March, 2023.

Source: “Fidelity Money Market Funds.” Money Market Funds | Fidelity Institutional, Fidelity Institutional Asset Management®, 19 July 2022, https://institutional.fidelity.com

Source: Kozlowski, Julian, and Samuel Jordan-Wood. “Where Do You Keep Your Liquid Wealth-Bank Deposits or T-Bills?” Economic Research – Federal Reserve Bank of St. Louis, 16 Dec. 2022, https://research.stlouisfed.org

Source: Leondis, Alexis. “CDS versus T-Bills: For High-Yield Savings, Go with Treasuries.” Bloomberg.com, Bloomberg, https://www.bloomberg.com

Source: “Maintaining the Stable Net Asset Value Feature of Money Market Funds.” GFOA.org, Government Finance Officers Association, https://www.gfoa.org

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.

Getting Ready for the New Year

12/2022

As we begin wrapping up the 2022 tax year and planning for 2023, we wanted to make note of the announcements the IRS recently made for the 2023 tax year. In a year that was highlighted by soaring inflation putting pressure on taxpayers and their families, the IRS made unprecedented changes to the retirement plan limits and raised the income thresholds for each tax bracket. The government hopes to stimulate economic activity by allowing Americans to keep more of their earnings and increase their retirement contributions. Here are the important changes to know going in to the New Year:

Retirement Plan Limits

2023 Limits2022 Limits
401(k)/403(b)/457(b) Elective Deferrals$22,500$20,500
Traditional and Roth IRA$6,500$6,000
Catch-Up Contribution (plans other than SIMPLE plans)$7,500$6,500
SIMPLE Plan Employee Deferrals$15,500$14,000
SIMPLE Plan Catch-Up Contributions$3,500$3,000
Plan Maximum Annual Contribution – Defined Contribution Plans$66,000$61,000
Maximum Annual Benefit – Defined Benefit Plans$265,000$245,000
Compensation Limit under Section 401(a)(17)$330,000$305,000
(Source: www.irs.gov)

Health Savings and Health Flexible Spending Accounts

2023 Limits2022 Limits
 HSA – Annual Contribution Limits
   Self-Only Coverage$3,850$3,650
   Family Coverage$7,750$7,300
   Catch-up Contributions (age 55 or older)$1,000$1,000
FSA – Annual Contribution Limits
   Self-Only Coverage$3,850$3,650
   Family Coverage$7,750$7,300
(Source: www.irs.gov)

Standard Deductions

2023 Limits2022 Limits
Single$13,850$12,950
Married Filing Jointly$27,700$25,900
Head of Household$20,800$19,400
(Source: www.irs.gov

Other Changes for 2023

  • In addition the changes mentioned above, 2023 will bring revisions to the tax brackets, exemptions and credits, and limitations. 1
  • The Alternative Minimum Tax (AMT) exemption will increase to $81,300. AMT is in place to ensure higher income earners pay at least a minimum amount of tax. 1
  • Also in 2023, the Social Security Administration announced an 8.7% cost-of-living adjustment (COLA) Social Security retirement and disability beneficiaries. 2
  • The first $17,000 of gifts to any person are excluded from tax, up from $16,000. The exclusion is increased to $175,000 from $164,000 for gifts to spouses who are not citizens of the United States. 1
  • The Earned Income Tax Credit (EITC) increased the maximum credit amount to $7,430. This is a refundable tax credit for low and moderate-income workers. 1

If you’re curious how the new changes will affect your bottom line, we are here to talk about your plan. As always, we appreciate the opportunity to be of service.

We wish you a joyful and fulfilling New Year!

1 Source: www.irs.gov

2 Source: https://www.ssa.gov/cola/

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.