The S&P 500® Index (S&P) is up 16% YTD after posting back-to-back 8% quarterly returns. In the face of a deteriorating economic backdrop and expectations for even higher interest rates, this exceeded even the most optimistic expectations.However, not all is rosy with this advance. 75% of the gain was due to only 7 mega-cap stocks, and 95% due to the largest 30 companies as the hype around Artificial Intelligence sparked near mania for anything related to the technology. The rest of the market advanced less than 1% – not the healthy advance of a broad rally. To signal a healthier investment environment, there must be broader participation across sectors and market caps. (For the record, as of this writing we are pleased to be beginning to see just that).
While surprising gains are welcome, they point to potential repercussions for the rest of the year. The S&P is now expensive, trading at a 20x price-to-earnings ratio (P/E). It seems rather optimistic that earnings can grow quickly enough to sustain these prices, in the context of a Fed predicting two more rate hikes this year, multiple signs of a weakening economy (outside of housing and employment), and the previous rate hikes having yet to fully impact the broader economy. Despite many signals to the contrary, markets appear to have ruled out not only recession, but slower earnings in a weakening economy.
Economic growth remains but is slowing. Spending in the travel, dining and other service sectors remains strong, but cash accumulations and consumer confidence are waning. The manufacturing economy is weakening as spending on goods is slowing. Credit card and auto loan delinquencies are rising while banks tighten lending to only the most credit worthy. As the summer travel season tapers off, we expect households to reassess spending and consumer demand to slow this Fall.
While much of the economy is contracting, some parts continue to grow (technology, travel-related industries, construction, etc.). The housing market remains strong due to a severe supply imbalance and continuing job growth. Assuming no widespread credit defaults, banking crises or liquidity issues, we may very well escape true recession and end up calling this period a rolling recession, where economic sectors phase through recessionary cycles at different times. This is what the market is currently signaling it believes is happening.
We are near the end of the Fed tightening cycle. Consensus views are for two more rate hikes of 0.25%. The drivers for these additional hikes are continued inflation in housing and services. Then, we will see how much demand destruction, credit constriction and confidence erosion has occurred and whether the economy can continue growth in the face of a 5.5% Fed funds rate. The narrative will be a slow moving and ever-changing picture.
Continue reading to hear how Integras Partners is navigating the current market.
There is a flawed assumption that 4% portfolio distributions are sustainable throughout retirement. Unfortunately, this has proven to be unreliable for too many retirees. The problem doesn’t lie in the math of a withdrawal rate but with the structure of the portfolio.
Retirement portfolios are often assigned a 60/40 allocation (60% stocks with 40% bonds and cash) with monthly distributions drawn proportionately across all assets, regardless of market direction.
In down markets, this strategy forces the sale of more shares to generate cash. The worrisome decision now facing the retiree is whether to increase the pressure on the portfolio by taking the same distributions or to decrease income. Neither is desirable.
Integras Partners takes a healthier approach to retirement income planning.
We layer our clients’ portfolios with designed strategies matching the timeframes of withdrawals.
By isolating more stable assets for short-term spending, we insulate early distributions from random market performance. Assets we don’t need until later have appropriate time to capture growth.
Our clients comfortably spend during market declines without being forced to choose between taking less income or the fear of possibly running out of money.
Several years ago, a client couple referred their neighbors. Let’s call them Jim and Kate. They had been married almost 20 years and had established careers and two younger children. After recently purchasing their dream home, they came to us to help consolidate multiple investments and build a financial plan for their retirement. We started by solidifying their college savings, reviewed existing life policies, and started managing their accumulated retirement accounts.
Jim was an early employee of his firm and was working with leadership to design his exit strategy. He wanted to spend more time with family, and was starting his own business. A few years later Jim got sick, and we sat with them at the attorney’s office to draft wills and healthcare directives. Fortunately, his life insurance was already in place, as insurance companies won’t issue a policy once a serious healthcare issue arises.
Jim recently lost his battle with a debilitating illness. Through the waves of emotions that followed, we were able to provide Kate with peace of mind around her financial future, so that she could focus on her family and their grieving. When she was ready, we helped her reregister accounts, file insurance claims, update her will, and refine college planning. Thankfully, the life insurance benefits more than covered expenses while she took a leave of absence from work and prepared their oldest child for college.
Kate has told us many times how grateful she is to be able to lean on us. A year after losing her husband, we helped her dismantle her inherited business and work through the pros and cons of strategies to help restart her life, including selling their family home and securing financial freedom.
Partnering with a trusted Financial Advisor now could be one of the most important moves you make. Life is unpredictable. When you find yourself faced with stressful life changes, having built strong advisor relationship will prove to be invaluable.
Article 5 of 5: Real Estate As An Investment Option
This is the final installment in a series of five blogs on how Owning Real Estate Complements Stock Risks. The series addresses the attributes and differentiating factors of real estate that pair nicely with traded stocks. The third & fourth segments review public real estate securities and the advantages of private real estate offerings.
Our previous blog in this series outlined the Advantages of Owning Private Real Estate. In summary, investors in private offerings will likely capture higher yields, realize less volatility, and have greater diversification benefits than public securities.
Private real estate can be accessed through a variety of investment vehicles. Below we discuss four categories.
Interval Funds are structured to trade like mutual funds but with limited liquidity. They are typically a “fund-of-funds”, meaning they invest in other real estate funds – large institutional funds that an individual investor would otherwise be unable to access. Interval funds keep some public stock and debt in their portfolio for liquidity. Since the underlying institutional funds have limited liquidity, interval funds also impose redemption limits. Typically, investors can only redeem 5% of the fund’s value per quarter. The interval fund may also have a one-year hold required to avoid a short-term redemption fee.
NAV REITS are perpetual-life REITs that directly own properties. NAV stands for net asset value, which is the value of the REIT’s assets minus its liabilities. These REITs are named for the way that their shares are priced, at their NAV per share rather than a price determined by trading forces. They are generally diversified portfolios focused on core property sectors. Liquidity limitations are similar to interval funds, but NAV REITs have more discretion than interval funds and can shut down redemptions during periods of portfolio stress. Federally, investors are required to meet moderate income and/or asset thresholds to invest in NAV REITs. Many states have additional requirements or limitations.
Private Placements are relatively small, narrowly focused, and riskier investments. They may be for new development, renovation projects or even rehabilitating distressed properties. Utmost care must be taken to evaluate the managers, strategy and track records. There are no liquidity windows and in some cases no income distributions. They bring the higher Accredited Investor standard, which is for millionaires or exceptionally high earners.
Delaware Statutory Trusts (or DSTs) are designed to accept 1031 Tax-free Property Exchange proceeds. Current tax law allows real estate sellers to defer capital gains by reinvesting all proceeds into a replacement property, or DST that owns replacement properties. DSTs may be illiquid for 10 years or more. They are also only available to Accredited Investors.
1 Registered Representatives that work through Broker/Dealers are entitled to charge these commissions, which are usually in the 6% – 7% range. Investment Advisors, who are held to a Fiduciary Standard, do not charge commissions for investments.
Article 4 of 5: Real Estate As An Investment Option
This is the fourth in a series of five pieces to help investors understand the benefits of owning commercial real estate, then differentiate the dynamics and variety of ownership channels.
Our first blog in this series explains how commercial real estate investments enhance traditional stock and bond portfolios.
Briefly, real estate generates most of its returns from rental income, can diversify a traditional stock and bond portfolio, and typically holds value during inflationary periods.
Indirectly holding real estate through stocks and mutual funds often dilutes these benefits, as they are subject to market volatility. Real estate stocks offer attractive dividends, but as demand raises the stock price, their yield goes down. Real estate funds can reflect a broad (indexed) composite of the market, but this washes out the opportunities of manager selection.
Owning private commercial real estate means investing through a pooled investment vehicle that is not listed on a stock exchange. Non-traded real estate portfolios often pay higher yields and better retain value.
Since private real estate is not publicly traded, it is not subject to the market volatility responsible for much of the fluctuations of traded REIT or mutual fund prices. Non-traded funds typically are priced at their Net Asset Value (the value of their assets minus liabilities).
Mutual fund managers must sell their holdings at lower prices during periods of high redemptions. Non-traded funds avoid these pitfalls by limiting redemptions, so they are not appropriate for short-term investors.
Private real estate investment managers look to increase profits by focusing on opportunities.
When you buy stock in a traded REIT, you’re buying it from someone who wants to sell their shares, but the real estate portfolio itself isn’t changing. Investors in private offerings are adding new money to a portfolio, allowing managers to be strategic in putting that money to work, looking at real estate dynamics for today’s opportunities. To see how Integras Partners incorporates real estate and other “Real Assets” click below.
Article 3 of 5: Real Estate As An Investment Option
This is the third in a series of five pieces to help investors understand the benefits of owning commercial real estate, then differentiate the dynamics and variety of ownership channels.
Many investors get started in real estate by owning one or more individual properties.
They may elect to rent a former home, acquire a property that already has a tenant, or inherit a property that they decide to rent. In this case, the owner must choose to engage a property manager or become the landlord. In addition to dealing with tenants, repairs, and maintenance, there are periodic costs for roofs, painting and prepping between tenants.
Rather than become a landlord, an investor may choose to get exposure through real estate securities, in the form of mutual funds, exchange-traded index funds or a host of public REIT stocks. These allow investors to own a slice of a professionally managed real estate portfolio, made up of hundreds or thousands of properties.
Public real estate securities trade on major stock exchanges, so they can be easily bought and sold.
Because they are publicly traded, they are priced based on market supply and demand, and are more correlated to corporate stock than private, or non-traded, real estate investments.
Non-traded REITs give investors the advantage of owning private real estate while avoiding the fluctuations of public markets. Click below to learn more about private real estate investments.
Article 2 of 5: Real Estate As An Investment Option
This is the second in a series of five pieces to help investors understand the benefits of owning commercial real estate, then differentiate the dynamics and variety of ownership channels.
Two investors that each own Amazon stock own the same investment; however, two investors that each own warehouses leased to Amazon do not. All commercial real estate (CRE) is different and can be categorized and analyzed in many different ways.
CRE Sectors
The heart of every major city is the Central Business District, which is home to the “core” sectors of Office, Industrial, Multi-Family, and Retail which make up the bulk of CRE, and are typically the most expensive buildings. They are often owned by large institutions i.e., insurance companies or pension funds as portfolio diversifiers. Satellite sectors include hotels, regional malls, self-storage, data centers & even cell towers. Each sector has unique demand drivers and sensitivity to economic factors. Many investors diversify their real estate holdings across multiple sectors.
Geography and Demographics
The most valuable domestic markets are the “Gateway Cities” of Boston, New York, Miami, Seattle, San Francisco & Los Angeles. Industrial warehouses are more valuable closer to the ports of Houston, Savannah, and Long Beach, CA because of their import traffic. CRE gets more affordable in smaller markets. Every geographic center can then divided by “sub-markets”, which might be identified by average household income or education level, proximity to transportation, or other magnets like schools and shopping. The size and characteristics of a market’s population have a major influence on real estate. Demand for apartments, for example, is higher near universities, military bases, hospitals, or other major employers.
There is an expression that All Real Estate is Local, which speaks to the need for knowledgeable community members when evaluating the merits of owning a particular property.
Risk / Return Characteristics
Real estate investments can also be categorized by their risk/return characteristics. The spectrum can be categorized as Core, Core Plus, Value-Add, and Distressed. Core properties generally have high occupancy and stable tenants. The steady income stream and predictable cash flows put core properties on the more conservative end of the real estate spectrum.
As you move down the spectrum from core-plus to distressed, properties have greater cash flow uncertainty and capital improvement needs. Investors may choose properties with greater risk for the possibility of greater capital appreciation.
Additional metrics in determining a building’s category can include age, design characteristics, and remaining lease terms.
As you learn more, it becomes readily apparent that investors need to rely on experts to determine the best buildings for any portfolio.
Article 1 of 5: Real Estate As An Investment Option
This is the first in a series of five pieces to help investors understand the benefits of owning commercial real estate, then differentiate the dynamics and variety of ownership channels.
For centuries, the two asset classes creating the most wealth have been stocks and real estate. Today, most people’s first investments are in stocks or stock funds. Established investors should consider adding real estate investments to enhance their portfolio.
Real estate has a different return composition.
Over the long term, U.S. stocks (i.e., the S&P 500 Index) have averaged annual returns in the 11% range. This comes mostly from appreciation and a modest (around 2%) dividend. Established real estate investments have comparable total returns, but a different return composition, with about 70% of the return coming from income. There are also tax advantages that can improve after-tax return. Both stocks and real estate investments can benefit from long-term capital gain tax rates, but real estate can offer additional tax benefits from pass-through depreciation.
Real estate has a lower risk profile than stocks.
Stock prices can fluctuate dramatically with quarterly earnings surprises, broad stock market gyrations and investor emotions. Real estate prices are driven by demand, net operating income (NOI), and interest rates, which all move more slowly. Demand can be driven by sector (apartments or warehouses, e.g.) or by the growth or decline of a specific market. Rising borrowing costs can restrict net income, however this is often offset by price appreciation in an inflationary environment.
Real estate behaves differently than stocks during economic cycles.
Stock prices are driven by earnings expectations and rise or fall in anticipation of changes in corporate earnings and broader economic forces. Building values tend to be much more stable through cycles, as values are determined by consistent rental income rather than less predictable corporate profit expectations.
Geography and sector diversity are important considerations.
The types of buildings you invest in and their location are important. Population shifts, regional economies, state-specific tax and business climates all impact real estate.
To learn more about how real estate can be classified by sector, location, and risk/return characteristics, read the next blog in our real estate series, “All Real Estate Investments are Different”.
As machines become more intelligent, their role as “Robo-Advisors” is destined to become more widespread. It’s popular for being a cheaper way for big firms to invest your money, but it is based on only a limited set of facts, like your age, financial stability, and your appetite for risk. Sadly, no matter how good it may seem, computers will only follow instructions.
Your financial planning should be more personal and nimble than a computer program. Automatically rebalancing a portfolio is fine, but you deserve professional expertise, compassion, and human judgment to make decisions for your money.
Financial planners may cost a little more upfront but building a relationship and getting holistic advice that considers your circumstances could be invaluable.
We build real relationships with clients. We partner with you to determine when you’ll need money. We take low risk with the money you need soon, allowing the opportunity to capture greater returns with money invested for later.
We do this by segmenting your portfolio into timeframes, from next year all the way to 15+ years. Each segment employs one of our 5 strategies, which keeps risk (and emotions) aligned to your needs and goals.
Many people have unanswered questions about setting themselves up for a successful retirement. Below are the primary risks to consider and some general ideas for overcoming them. We help our clients with these strategies, which starts with identifying the amounts needed to fund goals. This conversation is different for everyone, so we invite you to connect.
Underfunding:
Try to maximize your employer’s retirement plan. Many Americans contribute only the amount that triggers an employer match, failing to adequately fund this primary channel for retirement savings. Since salary-deferral contributions are not taxed, the reduction to your take-home pay is less than any contribution increase.
Overspending:
You want to stay retired, so be modest in projecting the growth of your investments during retirement. If you overspend early in retirement, you put too much pressure on your portfolio to sustain lifetime income.
Longevity:
With increasing life expectancies, retirees should plan to spend 35 years in retirement. Life expectancies are a mid-point, not an end-point. What you don’t want to do is plan to live to age 88 and turn 87 without enough money for the next 15 years.
Investments too Conservative:
The refrain of maintaining your principal and living off the earnings is not a good strategy. Inflation compounds every year, so retirees need growth investments to maintain their lifestyle. Every retiree needs some growth investments, which do better over long periods and can offset the challenges of increased longevity and rising costs.
Inflation and Medical Costs:
Inflation occasionally spikes (like after COVID), but even a 4% rate doubles expenses in 18 years. It’s estimated that 80% of your lifetime medical expenses are in your last five years, and the medical cost inflation rate averages 8%. Be sure to factor rising healthcare and living costs into your retirement planning.
It is widely recommended that you work with a financial advisor. We employ cash flow analysis and forecasting to model spending and investment strategies. The “4% Rule” is outdated and can compromise a peaceful retirement if markets decline early in your retirement. We created time-layers strategies to grow investments with appropriate risk throughout your retirement.
