News & Insights

Once upon a time, IRA distributions were relatively straightforward. Retirees would take distributions based on their life expectancy and that of their primary beneficiary. Distributions would have to begin no later than age 70-1/2, a number etched into our brains. Surviving spouses of deceased IRA owners could roll the IRA into their own. Non-spouse beneficiaries had the option to take distributions over their own life expectancies (so-called “stretch IRAs”). The only noticeable change to distribution rules occurred in 2006 when Congress began allowing charitable contributions directly from IRAs. With that one exception, IRA rules changed very little for decades, until recently.

Beginning in 2020, the SECURE Act introduced a number of changes. The most noticeable change was that the government now incorporated longer life expectancies into IRA distribution schedules, allowing RMDs to begin the year the IRA owner turns 72. Other favorable changes ushered in by this law included allowing employees age 70-1/2 and older to contribute to IRAs, and making part-time employees eligible to participate in 401k plans if they work at least 500 hours for three straight years (versus 1,000 previously).

Two years ago I wrote a Viewpoint entitled A Bad Idea Bubble in which I warned that prices for speculative stocks were coming unglued from reality. I named three specific examples of marginal businesses whose stock prices were being bid up to spectacular heights in a raucous market. In retrospect, I was awfully early in my warning, too early to be useful, like a tornado siren going off days or weeks before the actual twister. After a brief Covid-induced lull in early 2020, the bubble continued to expand.

In early 2021 I checked back in on those three companies in a follow-up Viewpoint called Bubble Fatigue. All three had continued to rise. The party just raged on and on. My theme in Bubble Fatigue was the emotional exhaustion of watching people hypnotized by greed and fantasy throw more and more money after whatever dumb themes happened to be working and, in the process, screw up the game for the rest of us. There is a saying, “price is truth,” which emphasizes that successful investing is buying assets that go up, not having elegant, rational arguments why the assets you own deserve to go up. In a crazy market, insisting that price is truth becomes like gaslighting—a form of psychological abuse in which the abuser stubbornly denies fundamental truth and eventually causes the victim to doubt their own sanity.

Many of us have seen some variation of the following advertisement for an online brokerage: A well-dressed businessperson stands on a busy metropolitan street corner mid-day, carefully surveying the scene. This person, acutely aware of their surroundings, notices what others presumably do not… that an abnormal percentage of people are wearing the same brand of shoes, a brand that is a new entrant to the market! With a slight smile on their face, this very-observant individual logs on to their trading account via their smartphone and buys shares of Company X, the maker of the hot new style of footwear. The ad cuts off there, but we are left to imagine the rich rewards undoubtedly awaiting Mr./Ms. Observant.

Or perhaps you have seen the recent advertisement featuring actor Matt Damon encouraging people to invest in cryptocurrencies. He walks past multiple images in the ad, including a climber summiting Mount Everest and the Wright Brothers, before stopping next to a picture of Mars. He then encourages investment in crypto by saying, “Fortune favors the brave.” The message is clearly, take a chance by being an early adopter and ultimately become a hero!

I make my New Year’s resolutions during December. When I was younger, I’d keep a note pad on my desk so I could jot down candidates, but now I use my smartphone as it’s always available wherever I am. My younger self would take this list and try to work it aggressively from January 1st, inevitably forgetting about it by February/March when the usual, more immediate life challenges derailed my best intentions. As I’ve gotten older, I take these long lists and pick just two or three to work on, usually finding enough time and focus to (mostly) accomplish them.

I bet a lot of you who make New Year’s resolutions had yours derailed in 2020 by the pandemic. My three in 2020 certainly were: take a family vacation abroad (I’ve always wanted to see Australia), remodel an outdated bathroom, and reconnect with a church we had left a few years back. I had done a little work on these three but when Covid entered our vocabulary it was obvious by April that I wasn’t going to accomplish these resolutions. Instead, I got to learn about remote work, social distancing, constant hand sanitizing, and masks. At least I got those down!

Historically, financial professionals have used the analogy of a person sitting on a 3-legged stool to give their client a visual aid for retirement planning. The three legs of the stool represented the three sources of income in retirement: Social Security, pensions, and personal savings. In order to illustrate and stress the importance of having diverse sources of income during retirement, the professional would ask, “What would happen if that stool was missing a leg?” Unfortunately, employer-sponsored pension plans have become virtually non-existent over the past several decades, so most people will be missing this leg of the stool. Also, individuals have little control over growing their Social Security benefits, which will typically replace around 40% of pre-retirement income. This adds more pressure on people to grow their personal savings in order to have a strong financial foundation and enjoy the golden years of retirement stress free.

Personal savings refers to any assets that an individual has saved for retirement. This could range from a money market account at their local bank to a retirement account offered by their employer. Keep in mind that the type of account used for retirement savings could be just as important as what the savings are invested in.

First of all, I would like to welcome James Skubik as a shareholder in Provident. James came to Provident almost five years ago after many years of experience in the investment management industry and before that in investment banking. James earned his undergraduate degree from the University of Michigan and an MBA from Case Western Reserve University. He is a CFA Charterholder as are Dan Boyle, Miles Putnam, and I, so it is fitting he joins the three of us as a shareholder in the business. Don’t read anything into this change beyond rewarding a valued member of our investment team because it is good for the business and for our clients.

We’re now several months past our transition to Schwab and I wanted to provide an update to our clients. Virtually all our clients made the journey with us, and we have considered our effort complete since August.

Wall Street’s machinery has been calibrated to encourage activity from investors, often to their detriment. To prod action, there are Wall Street analysts recommending “buys” and “sells” on individual companies along with a parade of market strategists who appear in the media to suggest the right strategy for the moment. As one example, Barron’s recently ran its Fall Market Outlook, which helpfully included a “shopping list for fall,” highlighting sectors strategists recommend overweighting and underweighting. Though many of these strategists are thoughtful and smart, and I often find value in understanding their rationale, I wonder who acts on these recommendations. I envision someone reminiscent of the woman from the Interactive Brokers’ commercial a few years ago who had to excuse herself while at dinner with a companion in order to make some “hedging trades” on her phone in response to some breaking news.

I try not to be an investment snob, turning up my nose at those who choose to pursue a different path than we do at Provident. We have time-tested reasons for our process, and ultimately believe our strategy positions clients well for achieving their desired long-term outcomes. That doesn’t mean it is the only way or that you can’t find success YOLO-ing options on meme stocks such as GameStop or by investing in your favored cryptocurrency. I would argue those paths make achieving long-term financial goals significantly less likely, but as the recent environment has shown, under the right circumstances one can find tremendous success. We view investing as a serious business, yet that doesn’t prevent us from finding humor when someone makes a life-altering sum of money thanks to a cryptocurrency based on a dog that initially was intended purely as a joke.

I got together with a few other neighborhood dads recently to play a board game called Q.E. The name is short for “Quantitative Easing,” a term that entered the public conscious when Ben Bernanke’s Federal Reserve started buying investment securities to improve banks’ balance sheets during the financial crisis of 2008-09. The game was published in 2019, and while its theme harkens back to 2008-09, it also accidentally anticipated the Covid-19 pandemic.

Players assume the roles of central bankers around the world competing to bail out too-big-to-fail national industries, printing huge amounts of money in the process. One of the game’s rules is that the player who prints the most money destroys his or her national currency and automatically loses the game. The strategy is to abuse your national currency as much as possible without totally destroying it. It is funny how this game mechanic seems to agree with the incentives that drive real-world governments and central banks. Its designers must know a thing or two about political economy. Throughout history, governments have almost universally favored higher inflation while trying to avoid the disruptive and humiliating consequences of straying too far into hyperinflation.

As Miles discussed in this month’s Investment Comments, inflation has reared its ugly head for the first time in many years. For those of us that remember the 1970s “stagflation,” a combination of persistently high inflation paired with slow economic growth, just the word “inflation” brings to mind poor stock returns. Let’s delve a bit deeper into the damage inflation causes, why it has spiked, the prospects for the spike to continue, and our thoughts on what you should do with your portfolio, particularly your stock allocation.

Why is Inflation a Problem?

Rising inflation causes problems for everyone. For consumers, the ability to purchase goods and services is reduced as the currency they hold is no longer worth what it was in the past. Businesses endure two negatives: revenue can be suppressed as consumers can’t buy as much as they could before, and input costs are now higher, hurting profits. The overall economy slows until everyone has adjusted to the new price levels. If inflation is persistent these impacts are reinforced as workers demand higher wages to offset the reduction in purchasing power and business profits take a further hit from the higher wage cost. In the 1970s persistent inflation, exacerbated by higher energy input costs from two oil shocks, created stagflation as the economy never got a chance to fully adjust.

It is estimated that over the next two decades, Baby Boomers will pass down a whopping $68 trillion worth of assets to younger generations. Receiving an inheritance should be considered a blessing, but if not handled correctly it can quickly become a curse. If you’re not careful, you run the risk of losing your money just as quickly as you receive it. According to a study conducted by the Bureau of Labor Statistics, one-third of people who receive an inheritance spend all of it in the first two years. With some sensible planning and foresight, you can make sure that your inheritance takes care of you and your family long after you receive it.

Here are some ideas to help set you on the right course with your newfound wealth.

First, take time to grieve and don’t make decisions right away. When you lose a loved one, you’re not thinking clearly enough to make sound financial decisions. Deciding what to do with an inheritance during this period can be overwhelming, upsetting, and cause confusion. There is nothing wrong with letting your inheritance sit for a while until you are ready to focus and develop a plan.

Work continues in earnest on the transition to Schwab. There is a lot of preparation that goes into changing custodians. This is often referred to as “repapering” in the industry, as every account requires new paperwork. There is the logistical challenge of gathering information for each client and each account in a practical format. There is the professional challenge of interacting with a new customer service team and a new software interface. Most importantly, there is the challenge of providing consistent service to clients and making the process as seamless as possible.

I will not rehash our explanations for making the transition, but I will give you an update on where it stands and why we have been asking you to confirm personal details that may seem trivial or unrelated to investment strategy. Our goal remains to complete the process mostly digitally. Our clients have been willing and helpful participants to that end. We plan to continue utilizing digital forms and signatures in our normal course of business, when possible. Reducing analog paperwork between you and your custodian should improve speed and efficiency.

It is said that 70%-90% of new businesses fail within a decade. Imagine our pride that the little investment business founded by Ralph Seger and Maury Elvekrog on July 29, 1981 will soon celebrate its 40th anniversary!

Allow me to share a trip down memory lane, 40 years of history in a 10-minute read. After successful careers as a chemical engineer and industrial psychologist, respectively, Ralph Seger and Maury Elvekrog took their hobby of stock investing to the next level. Both began working for a local investment firm and quickly realized their investment philosophy and client focus were more aligned with each other than with their employer. Seger-Elvekrog Inc. soon followed.

Imagine the boldness to start a new investment business in 1981 in the midst of back-to-back recessions and bear markets! In retrospect, it was a wonderful time, as the United States was on the cusp of a long bull market lasting almost two decades with only brief interruptions.

“People say that life is short, but it isn’t short. It’s very long.”

-Frank Abagnale

The battle cry of the modern speculator is “YOLO” meaning You Only Live Once. It is a kind of greedy twist on the “Carpe Diem” motto that Robin Williams invoked to motivate lackadaisical adolescent boys in Dead Poets Society. YOLO is obsessed with money—grab it all now before you die. People don’t yell “YOLO” when they give money to a charity or finish a challenging book. They could, but they don’t. They yell YOLO when they sink their annual bonus into cryptocurrency, or maybe when their broker approves a margin loan application. This greed is combined with a sort of nihilism—who cares if things don’t turn out how you’re hoping? In their view, living is doing outrageous things for a slim chance at a miraculous payday. I wonder what everybody will be yelling when it stops working?

2020 was a very strange year for markets. Over the past year we likely set a record for the use of the word “unprecedented” on earnings calls. I suppose a pandemic combined with meaningful amounts of global monetary and fiscal support will do that. Going into 2020 analysts expected 5% revenue growth and 9% EPS growth, leading to an approximate 5% increase in the S&P 500. This was not particularly noteworthy, as the default estimate for growth in the S&P every year is a mid- to high-single-digit percentage gain. Though the final numbers for 2020 have yet to be counted, expectations are for a 1% revenue decline accompanied by a 13% drop in EPS, well below initial expectations. Meanwhile, the S&P 500 advanced by a better-than-expected mid-teens percentage. This goes to show the extreme difficulty in making forecasts, yet Wall Street continues to try.

Happy New Year! If you are like me, I bet you are glad to wave the year 2020 goodbye as it has been one of the saddest and strangest of times for our country. If you have lost a loved one or friend to COVID-19, please accept my condolences. Let us all wish for a speedy rollout of vaccines that bring this pandemic to a swift close.

As for the economy and investing, COVID-19 caused both predictable and surprising impacts. On the predictable side entire sectors of our economy, particularly hospitality and travel, fell into deep recession and will likely not reach 2019’s level of activity for years. Social distanc­ing accelerated trends that were already in evidence such as buying online, remote work, and entertainment on demand via streaming. Shutting down the economy to fight the virus led to recession and a bear-market drop that registered more than 40%, ending the longest bull-market in history at eleven years.

2020 will be remembered as a year like no other. A year that started out with a global pandemic and ended with a presidential election. A year that saw the stock market contract to bear market levels from record highs, only to rebound and set new record highs. However, with all the unexpected changes around us, one important task remains constant, year-end financial planning. As always this will help you better organize your financial health and start off the New Year on the right foot. Here are some key topics to consider addressing.

Gifting strategies

Whether you give to a loved one or to a charitable organization that is close to your heart, ‘tis the season of giving gifts. If you choose to give a gift to an individual, keep in mind that gifts up to $15,000 per person are allowed under the annual gift tax exclusion. Consider gifting assets that have the greatest potential for appreciation in order to optimize the tax savings.

From time to time, I like to update clients as to what is happening behind the scenes here at Provident. We’ve made a number of technology changes over the past year or so, and you might find it interesting to learn how things gradually evolve here. We are not “early adopters” of technology. We tend to wait a bit and let others work out the kinks on brand new offerings.

The impetus for this piece is an important change to our client accounting system. After almost 22 years with PortfolioCenter, we are switching to Tamarac Reporting. Portfolio­Center was a reliable software package, but began to show its age in recent years as owner Charles Schwab Corp. seemed to stop investing in it.

About two years ago, Schwab sold the Port­folioCenter business to Envest­net/Tamarac, a publicly-traded software company focused on the investment industry. The buyer had been using PortfolioCenter as the backbone of its own online portfolio accounting soft­ware, and was the logical buyer when Schwab wanted to exit that business.

To say this has been an interesting year for the market would be an understatement. After the swoon in March due to the pandemic, we recovered the entirety of the downturn and then some. There have been only a few market declines of similar magnitude over such a short timeframe, and the abruptness of the snapback has surprised many, especially given what are likely to be longer-lasting effects on the economy from COVID-19. To be certain, fiscal and monetary stimulus have played a significant role in supporting the economy and aiding the market’s recovery. Interest rates have declined, helping make the case for higher P/E multiples. Lower interest rates reduce the rate at which future cash flows are discounted, raising asset prices in general. However, while a portion of the recent rebound in stock prices looks to be justified, it has been accompanied by some harder-to-explain moves in certain individual stocks, and for that matter certain other assets.

Though more traditionally discussed in relation to bonds, the concept of “duration” similarly applies to stocks. Duration is a measure of the weighted average of when investors receive their cash flows. Though the risk profiles generally differ, stocks and bonds are fundamentally similar. Each produces a stream of cash flows; however, unlike bonds, which have contracted payments over preset intervals, the “payment” on stocks is less certain. Assets that are longer duration are more sensitive to movements in interest rates, deriving greater benefit from lower rates and alternatively selling off more when rates rise. Stocks generally have a longer duration than bonds, and among stocks durations will differ as a result of the anticipated cash flows.

As an investment advisor I worry about inflation a lot. Besides political revolution, no other force turns rich people into poor people as quickly and as surely as inflation. If your income is fixed by a pension or annuity formula which doesn’t escalate along with the cost of living, or if most of your money is tied up in long-term bonds with low yields, then your means will shrink at the pace of inflation. A few consecutive years of double-digit inflation can turn a comfortable retirement into a marginal one if your portfolio does not own enough real assets to defend against it.

Happily, inflation has been predictable and tame for almost 40 years. Consumer Price Index (CPI) inflation has not advanced at a double-digit annual pace since 1981. It has not even been as high as 5% since 1990. Many analysts believe that the CPI’s methodology understates the “true” rate at which prices rise. I agree, but the magnitude of the understatement is probably no more than 1% per year. Buttering another 1% onto the price level annually certainly adds up over time, but it does not change the fact that we have recently enjoyed an era of extraordinarily stable fiat money.

In these unprecedented times, nearly 40 million Americans have lost their jobs in a span of eight weeks. That is more job losses than the last recession saw over two years.

The loss of a job can be a nerve-racking experience, leaving a person with feelings of sadness, anger, and depression. Mourning a job loss is normal; for many it means the loss of their identity and lifestyle. Many professionals feel that other than the death of a close family member or going through a divorce, the loss of a job is probably the single most traumatic event of a lifetime.