News & Insights

Since the Pandemic, the Federal Reserve reminds me of a gymnast that utterly failed his Floor exercise but is trying desperately to stick the landing on the Uneven Bars. 

Hindsight is always 20-20, but as inflation was getting going in 2021 the Fed was far too slow to adjust its policy stance. Believing that increasing prices were primarily a function of broken supply chains, the Fed maintained its zero-interest rate policy and aggressive purchases of government and mortgage-backed bonds into early 2022, well after the economy began experiencing mid-to-upper single digit inflation starting in April 2021. While it is understandable why the Fed placed much of the blame on supply chains, a failure to appreciate the impact of the $5.2 trillion in fiscal stimulus related to the Pandemic, equivalent to about 25% of GDP, on the prices of scarce goods and services is confounding. The Fed blew the Floor exercise. 

It never dawned on me how uniquely American my job is until I came to the United Kingdom. I am working remotely from the middle of England for most of 2024. My wife Elizabeth is English. We want our kids to better understand this half of their heritage. We will come back to the US in August for the start of the new school year. Liz was granted leave from her job in Ann Arbor for about eight months. I’m writing this from the guest room, now the home office, of my in-laws’ rental property in the small town of Rothwell, Northamptonshire, keeping some late hours due to the time difference. 

Traveling reveals lots of interesting details about other cultures. This immersive, extended stay is teaching me some subtleties of English life I hadn’t observed during shorter visits in the past. You’re probably aware of our different definitions of “football”. In the US we drive on the right. In the UK it is optional. Beyond the big, obvious differences, I’ve found the schools here are generally a little stricter. Farms are smaller, which greatly affects the landscape. People socialize in pubs differently. 

According to the National Philanthropic Trust, the first donor-advised funds (DAFs) were created in the 1930s, though only recognized formally in the tax code in the Pension Protection Act of 2006. In 2022, DAF owners contributed over $85 billion in assets and granted over $52 billion to non-profit organizations using nearly 2 million DAF accounts. Prominent investment companies such as Schwab, Fidelity, and Vanguard sponsor their own DAFs, helping drive adoption. You can learn more at https://www.schwabcharitable.org. 

The tax code allows every individual to deduct nearly $15,000 and every married couple to deduct nearly $30,000 from their income before taxes start to apply, the “standard deduction.” Charita­ble contribu­tions are considered deductible but only earn any practical value to the extent that they help drive a taxpayer’s total deductions over and above the standard deduction threshold. This incentivizes taxpayers to lump multiple years’ worth of charitable giving into a single tax year. Most years the taxpayers receive the standard deduction, but occasionally get a larger benefit during a higher giving year. 

“When I was 17 I went to get a Limp Bizkit tattoo and when they wouldn’t let me because I didn’t have a guardian’s approval, I cried and punched a lamp post. 3 months later I was allowed to take on $119,000 in loans to go to art school.”

@BillDixonish

A recent study estimates that the average listed cost, including tuition and living expenses, for private universities at $54,840 per year.[1] Facing numbers so huge, it absolutely falls on applicants and their parents to become educated consumers. Beware, because colleges love money, the stakes are high, and the rules of the game are just as peculiar and special as the college experience itself. 

I like this time of year. While I’m not a fan of the start of winter in Michigan, I do enjoy celebrating Thanksgiving and Christmas. Plus, it gives me some time to reflect on the year that was and think about ways I can make 2024 better.

 The past three years have been unique, to say the least. 2023 felt much better as the COVID pandemic turned into an endemic, the phase where we learn to live with this virus and resume normal living. I’m hopeful that 2024 will continue to put COVID in the rear-view mirror.

Like most years, I make my New Year’s resolutions during December, jotting down thoughts as I go through the holidays with the idea that I’ll pick two or three to work on, the more realistic the better. Here are some ideas from my checklist that you might put on yours as you think about your New Year’s resolutions, both in your life and of the financial variety.

Buyer beware!  Annuity salespeople are out in droves. They are conscious that volatility in the stock market over the last couple of years has made some investors approaching retirement reluctant to stomach the ups and downs of their investment portfolios. The allure of a lifetime stream of income to combat investment uncertainties is very tempting, but it comes at a steep price.

As some wise person once said, “Annuities are sold, not bought.” The insurance salesperson or financial advisor will earn a lucrative commission for selling you this product. If you get past the salesperson’s self-interest before buying an annuity, you first need to realize what it is. An annuity is a complicated insurance product. Therefore, the buyer must be familiar with the contract to avoid any potentially unpleasant future surprises.

We have a great team here at Provident, and I’m proud of the work each of them does. Our clients see the trades we make in their portfolios, and they read Investment Comments, Viewpoint, and quarterly letters authored by our portfolio managers. But there is a broader team behind the scenes. I’d like to share a bit about each of them so clients can see how our company functions.

I recall a television advertisement years ago featuring legendary investor Peter Lynch. Lynch helped popularize the “growth at a reasonable price” (GARP) strategy that Provident largely follows today, registering a sterling track record as the manager of the Magellan Fund at Fidelity between 1977-1990. This advertisement probably aired toward the end of his tenure with the Magellan Fund. In it he emphasized the link between earnings growth and market performance, saying something along the lines of “earnings drive the market.” As an impressionable youth with an interest in the investment business, this message stuck with me. It is something I think most investors generally understand, but the breakdown in short-term correlation between earnings growth and market performance sometimes obscures the tie between the two.

For example, look at what has happened in markets over the past year and a half. In 2022, earnings for the S&P 500 grew 5%, while the market fell 18%. The story in 2023 has been just the opposite, as earnings for the S&P 500 through the second quarter were down while the market advanced nearly 16%. This is not how celebrated market wizard Peter Lynch told us things work! I’m being facetious because what Lynch implied in the advertisement was that while the link between earnings and the market can be tenuous over any shorter period, it generally holds over the longer-term.

Artificial Intelligence has burst on the scene in 2023, paced by OpenAI, L.P.’s release of ChatGPT (Chat Generative Pre-trained Transformer) last November and Microsoft’s further $10 billion investment in OpenAI that will support incorporating Artificial Intelligence (AI) into current and future products. Investor enthusiasm has been somewhat bubble-like as companies viewed to be on the cutting edge of AI have been rewarded with rich valuations that will only be justified if AI produces profits. It seems that every company has jumped on the AI bandwagon. I can hardly get through the first few minutes of company quarterly earnings or conference presentations without hearing about how they use AI or plan to do so in the future.

For non-investors, I’ve seen and read several articles and blogs speculating that ChatGPT and its further development will eventually lead to Skynet, the fictional conscious-mind AI from the Terminator movies that launched a global nuclear holocaust to destroy its enemy, humanity.

Clients often ask whether Provident can manage the assets in their 401(k) or 403(b) employer-sponsored retirement plans. Until recently, our answer was “no” because we could not trade client accounts custodied outside of Schwab. Assets left behind in a previous employer’s plan could potentially be rolled over into an IRA at Schwab which we could manage. However, with respect to assets in the current employer’s plan the best we could do was to evaluate options and offer a complimentary recommendation for the client to consider. Whether the client acted on those recommendations or revisited the problem in the future as life circumstances changed was beyond our control.

A new technology provider, Pontera, now allows us to trade accounts in employer plans, turning that “no” into a “yes”. Pontera integrates with our reporting system, Tamarac, and allows us to show you a combined portfolio report, including current holdings and historical performance for assets custodied at Schwab alongside those in your employer plan.

Most of you do not know me, but I have been behind the scenes at Provident for almost 25 years. Scott Horsburgh asked me to share my observations with clients following my retirement on June 30th.

When I joined Provident Investment Man­agement in October of 1998, the company was Seger-Elvekrog, named after its founders. I interviewed with Ralph Seger, Maury Elvekrog, and Scott. Ralph was pleasant with his wonderful reassuring smile, and it was apparent his mission was to share his gift of successful investing. Maury was eloquent, easy to talk to, and then presented me with a psychological multiple-choice test with his charming smile.

I recently became an uncle. Meeting my nephew was a great experience. After I held the little guy for as long as he would let me, his parents put him to bed and we talked about newborn things – how he was eating and sleeping, where daycare costs and college savings fit in the budget, etc. I asked my brother if he had increased his life insurance coverage with the new dependent. I was happy to hear that yes, he took care of this a while ago and hadn’t thought much about it since. That’s how it should go. The sooner you set it and forget it, the lower the cost to you. But it’s important to periodically review your life insurance policy as your life progresses.

Life insurance is not the kind of thing we think about every day. There are no news programs dedicated to daily moves in policy rates or conversion options. For most people, life insurance serves to replace income when one passes away. The risk of losing your life in any particular year is low, but the financial severity of the loss is high, larger than the accidental loss of your home or automobile. For risks with those characteristics it’s smart to transfer the risk to a third party. Customers pay the life insurance company a premium to assume that risk.

A new chapter in the history of American bank regulation began the night of Wednesday, March 8. That’s when Silicon Valley Bank revealed that the need to raise cash to meet customer withdrawals forced it to book $2 billion in losses on the sale of securities, leading it to look for more capital. Less than 48 hours later, regulators shut down the bank as it lacked sufficient liquidity to satisfy withdrawal demands. An incredible 96% of its deposits exceeded the FDIC insurance limit of $250,000 per depositor. Shockwaves rippled through the bank system. Clients asked us whether their banks were safe, even behemoth Chase.

Over the past 40 years, we’ve had the “Latin American debt crisis” in the mid-1980s, the “savings and loan crisis” in the late 1980s-early 1990s, the Global Financial Crisis in 2008-2009, and now this mini-crisis. Regulatory changes are made after each one, but we always end up back in the soup!  Many blame this crisis on changes to bank regulations in 2019, but in fact there is plenty of blame to go around.

The original “Setting Every Community Up for Retirement Enhancement Act” (SECURE Act) was signed into law on December 20, 2019. A new bill dubbed Secure Act 2.0, was introduced in November of 2022 and signed into law on December 29, 2022. The intention of the law is to build upon the existing Secure ACT by improving retirement savings opportunities. The recently adopted provisions offer new benefits to employers and employees in order to generate greater participation in retirement plans. Secure Act 2.0 will be a rolling process, where enhanced features will be implemented over the course of several years. There are 90 provisions in the updated Act; we will cover some of the key retirement provisions that have the broadest impact.

Changes to Required Minimum Distributions

The Original Secure Act raised the age for required minimum distributions (RMDs) from Traditional IRA accounts and workplace retirement plans to 72 from 70 ½. Effective January 1, 2023, the age for RMDs has been further increased to 73 and on January 1, 2033, the threshold age for RMDs will be increased to 75. In addition, the penalty for failing to take an RMD decreased to 25% from 50% of the undistributed amount. The penalty is further reduced to 10% if the undistributed portion of the RMD is subsequently taken in a timely manner. As for RMDs from inherited IRAs, these were eliminated with the original Secure Act, the only requirement was that an IRA had to be liquidated by individual beneficiaries within 10 years of the date of the original owner’s death. Secure Act 2.0 lacks clarity whether annual RMDs will be reintroduced alongside the 10 year liquidation requirement. Finally, starting in 2024, Roth accounts in workplace retirement plans will not be subject to RMDs.

We are approaching the ten-year anniver­sary of Detroit’s 2013 bankruptcy filing. In light of 2022’s market downswing, as well as recent high inflation, this could be a useful time to brush up on the history of Detroit’s bankruptcy, as other distressed municipali­ties could find themselves in jeopardy in the future.

With over $15 billion in obligations at the time of filing, Detroit became the biggest municipality in U.S. history to file for Chapter 9 reorganization. Technically, that record still stands today, although in 2016 Puerto Rico began a process resembling bankruptcy, governed by a special act of Congress abbreviated PROMESA. States and territo­ries do not currently have an avenue for bankruptcy, but the path for cities is well established under Chapter 9.

In a reversal of a long, consistent trend, we just experienced a year where “value” stocks outperformed “growth.”  In 2022 the Russell 1000 Pure Value index lost 8% while the Russell 1000 Pure Growth Index fell 38%.

Though they are widely used, I’ve never been fully comfortable with these classifications.  To be fair, the labels serve a purpose, as people generally understand what they mean.  “Value” typically implies something along the lines of a company with a low price-to-earnings ratio or a low price-to-book value.  Growth, I think, is self-explanatory.  While conceding these can be useful labels, they ignore important nuance and can be misleading.

I don’t know about you, but I’d like to put 2022 firmly in the rear-view mirror. The war in Ukraine, inflation, the Federal Reserve’s interest rate increases, bear markets in both stocks and bonds, and the meltdown in the cryptocurrency markets have made 2022 a miserable year for investors.

However, this doesn’t mean we haven’t been working to make Provident a better firm to serve your needs, especially now that interest rates have risen above zero. In the investment community there has been an acronym, “TINA”, to describe the low interest rate environment over last decade – “There Is No Alternative” to stocks.

2022 is shaping up to be tough for investors. However, as the year draws to a close, focusing on short term market performance is not productive. Now is the perfect time to focus on your financial goals and re-evaluate your progress. It is important to take proper steps before year end in order to best position yourself for achieving your goals.

Required Minimum Distributions

If you are 72 or older and have a Traditional IRA or an employer-sponsored retirement plan such as a 401(k) or 403(b) and are retired, you must take a required minimum distribution (RMD) by December 31st each year. The IRS penalty for failing to do so is 50% of the required amount not withdrawn. In addition, an owner of an Inherited IRA that was inherited prior to 2021 is required to take a minimum distribution. The same December 31 deadline and 50% penalty apply to an Inherited IRA. Keep in mind that most custodians do not send out notices about the Inherited IRA RMD; it’s up to the owner in most cases to stay involved with calculating the RMD amount and making sure it is distributed. There is no need to wait until December to take the distribution and risk missing the deadline. The distribution amount is calculated by dividing the prior year-end balance of the account by an IRS estimate of your life expectancy. We calculate the RMD amount you need for your accounts with Provident.

Every couple of years we provide clients with an update on cybersecurity and overall data security. This update comes with two goals: to inform clients on our progress on these fronts and to share with you what we’re seeing in this ongoing battle.

Provident is in the early stages of a cybersecurity consultation with Charles Schwab and our IT partner, N2M Technolo­gies. This project isn’t undertaken as a result of any known problems; rather, it is a proactive effort to identify areas needing improvement. The bad guys keep getting better at hijacking data, so we need to keep improving as well.

I recently presented at the 70th BetterInvesting National Convention (BINC) held in Dallas from June 23rd to 26th. Provident has been a long-time supporter of BetterInvesting (www.betterinvesting.org) and owes its existence to co-founder Ralph Seger, a tireless volunteer and board member who thought BetterInvesting principles could be applied to managing investment portfolios.

I was a member of an investment club in the 1990’s but didn’t know much about the organization behind it that, at the time, was called the National Association of Investors Corporation (NAIC), later renamed BetterInvesting. At BINC each of the more than 300 attendees received a book written by former Detroit Free Press newspaper columnist Mike Wendland. The 2001 book, From little acorns grow: MAIN STREET MILLIONAIRES, was a quick read and a fascinating historical account of NAIC/BetterInvesting.