Tag Archives: Wealth Management

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

Cahaba Welcomes Michelle Collier

Michelle Collier
Executive Assistant

Cahaba Wealth Management is delighted to announce that Michelle Collier has joined our team as an Executive Assistant in the Birmingham office!

Michelle began her career at Cahaba Wealth Management in January 2023 after being part of the accounting team at a multi-family real estate developer in Birmingham. Michelle strives to provide excellent administrative support to the advisors, to serve to the day-to-day needs of clients, and to assist daily operations within the company.

Michelle is originally from Auburn, Alabama, and graduated from the Auburn University with a B.A. in Mass Communication. She currently lives in Birmingham with her daughters Reese and Wynn. When not at work, Michelle enjoys her daughters’ sporting events and spending time with family, watching Auburn athletics, trying new restaurants and shopping.

Secure Act 2.0

3/2023

By Louis Williams, CPA, CFP®

Secure Act 2.0 has become a hot topic of discussion in recent months, as this piece of legislation includes several law changes that have the potential to impact our clients’ financial circumstances and opportunities. After spending some time reviewing the subject matter of Secure Act 2.0, we wanted to highlight some of the changes that we feel are most relevant.1

Delay of Required Minimum Distributions from Retirement Accounts

Congress passed a law in 2022 that pushed back the age for required minimum distributions (RMDs) from 70.5 to 72 as long as you turned 70.5 after January 1st, 2020. Secure Act 2.0 has delayed RMDs even further for those born in 1951 and later. Depending on one’s date of birth, the age at which RMDs are mandatory could be anywhere from 70.5 to 75. In an effort to simplify this topic, we have included a summary table below.

Date of Birth RMD Age
Before July 1st, 194970.5
July 1st,1949-December 31st, 195072
1951-195973
1960 or later75

Changes to the Catch-Up Contribution

The ‘catch-up’ contribution within employer 401(k) retirement plans refers to a contribution that is allowed for individuals nearing retirement, and it is allowed in addition to normal retirement plan contribution limits. For 2023, the catch-up contribution limit is $7,500 and applies to those who are at least 50 years of age at the end of calendar year. Beginning in 2025, individuals who are ages 60-63 at the end of the calendar year will have the option to contribute $10,000 (or 150% of the standard catch-up, whichever is greater) in an expanded catch-up contribution.2

An additional change to the catch-up contribution will only apply to those whose annual income exceeds $145,000. Currently, most employer plans offer the capacity to make catch-up contributions on either a pre-tax or Roth basis. Beginning in 2024, however, those who exceed $145,000 in annual income will only have the Roth option.2 Roth contributions are made on an after-tax basis, and thus this move will increase current tax revenues from a government perspective.

Other Retirement Plan Roth Opportunities

As the Roth tax designation continues to become more prevalent, Secure Act 2.0 provides additional Roth opportunities relating to retirement accounts.

Among these opportunities is the option to make Roth contributions within Simple IRAs and SEP IRAs, which are retirement plans that are generally reserved for small employers and self-employed persons, respectively. Historically, contributions made to plans of this nature have only been treated as pre-tax.

Employer contributions within 401(k) plans have also historically been treated as pre-tax and therefore are not immediately taxable to the participant. Secure Act 2.0 allows for employer plans to offer the option for employer contributions to be treated as Roth. This would trigger the taxability to the participant in the year the contribution is made. The benefit of Roth contributions of any kind is to promote tax-free growth rather than tax-deferred, and this option would need to be carefully considered within the context of an individual’s financial plan.

529 to Roth Conversions

529 education accounts have long been considered to be the most tax-efficient savings vehicle for future education costs. One of the drawbacks of 529 accounts is that there is generally a penalty applied to earnings withdrawn from an account when funds are not used for qualified education expenses. As a result, most are careful not to ‘overfund’ these accounts out of fear of being subjected to this penalty. Beginning in 2024, Secure Act 2.0 provides a potential solution to this risk.2 529 account holders who meet a specific set of requirements will have the opportunity to transfer 529 funds directly to a Roth IRA. Eligibility for this type of transfer will need to be carefully determined, but it is certainly an option that should be considered for those with 529 assets that exceed education needs.

This summary is in no way meant to be a comprehensive analysis of the entirety of Secure Act 2.0, but we hope that the detail in this article can identify areas by which one’s financial plan can be enhanced. As with any law changes, it will be important to consult a financial professional before implementing any changes in response to this legislation.

Louis Williams, CPA, CFP® is a financial advisor in the Birmingham office of Cahaba Wealth Management, www.cahabawealth.com.

1For a complete Section by Section Summary of Secure Act 2.0, please visit https://www.finance.senate.gov/

2Secure Act 2.0 contains a number of important provisions that become effective in future years. We will continue to monitor these provisions for any new or clarifying legislation. The information in this article is as of March, 2023.

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.