October 24, 2022
The Future is Bright “The tide of human suffering grows ever greater. This is especially so of those who are refugees. Theirs is a special kind of suffering. Not only are they forced to suffer famine, persecution, war, and natural disaster, but also the horrific plight of being forced to keep on the move. They have nowhere which they can call home and often no one is prepared to listen to their cry for help.” -Mother Teresa
Mother Teresa passed away 25 years ago this past September 5. Her observation above could easily describe the world today. Let’s face it; these issues are unlikely to ever be “solved.” However, does that mean we should ignore the issue? Does that mean we should use it as a political football to gain power by blaming Democrats or Republicans? Or does it mean we should (somehow) do our part to ease the suffering of people looking to make a better life for themselves or their family’s? I am not here to judge anyone, but I will suggest that people come to the United States for good reason. Many come to escape desperate situations because they have no path to a peaceful and prosperous existence in their own country.
I think it’s worth making a couple of suggestions:
Don’t blame immigrants for coming to the United States; they are not the problem.
Work together to find solutions to ease the suffering of these human beings.
Push politicians of both parties to find a viable solution to process and integrate immigrants into the United States legally and safely. Encouraging people to come without proper policy is not helpful, nor is allowing people to come without ensuring they assimilate into society.
Recognize our good fortune in the liberties, wealth, and opportunities we enjoy and the human responsibility to help others less fortunate.
I will be the first to admit:
I do not know much about solving this issue.
I do not do enough to ease this suffering.
I want to constructively be part of the solution.
A special thanks to CIRI (Connecticut Institute for Refugees and Immigrants) for the good work you are doing, and a special thanks to F.R. for allowing August Wealth to help in a small way.
Why am I talking about immigration to the USA? Of course, I have a hard time watching this suffering and this fighting. But there is more:
It’s worth pointing out that people are coming to the USA because we have a legal system that does its best (not perfect) to protect individual liberty. We protect the right to criticize, we protect the right to change direction when people feel disenfranchised. Democracy is a chaotic process, and despite having to stomach so much negativity in the New York Times (part of my job) every day, it’s alive and well in my opinion. The country is better off than ever! The country is also more powerful internationally than ever (like it or not). The US (rightly or wrongly) is throwing its weight around (I suspect) because it believes strongly in protecting democracy, promoting democracy, and because it has the power to throw its weight around (sometimes abusively and callously unfortunately). Powerful systems in all forms become corrupt; it’s a question of degree. Being able to be kept in check is a good thing, but I suspect most other nation’s ability to keep the USA in check is waning at present. I do not see a strong challenger. I may be wrong about this, but I see Russia and China in decline, and I see Europe more dependent on the USA.
People come to the USA because they want a peaceful and prosperous life for themselves and their families. They don’t care much about politics! There just isn’t as much opportunity in many other countries around the world. We have an uncanny ability to evolve. Some systems of government are in place to protect certain power structures and people at the expense of the population. You don’t have to take my word for this if you disagree, but people are coming to the USA, and they are leaving other places (or wanting to do so if only they could).
I am willing to bet on democracy and capitalism around the world becoming more powerful in the next decade, and I am also willing to bet that those countries that seek to control, stifle free thinking, and direct “innovation” at the state level will decline.
I am willing to bet that there will be innovative new technologies that will change life dramatically in the next 10 years, and I want to be invested in those countries and companies that can participate in the innovations of this changing world. Countries that promote the ability to change and that legally protect the entrepreneurial ideas will likely benefit.
As always, I will not try to pick winners, but I will bet in a diversified way across various asset classes that stand to benefit from human progress in those countries that allow it to take place!
There will always be challenges and there will always be suffering; you may think what difference can I make? My advice, take action anyway. As Matt Damon says: “Fortune favors the brave.” I don’t mean invest in crypto though. I mean invest for the long term and bet on a bright future even when your mood is bleak.
I also mean, ease the suffering of one person. That person might change the future.
The future is bright from where I sit!
Managing your portfolio and managing the conversations
I thought perhaps it would be helpful for you to hear some of the questions and discussions we have been having with some clients this month in particular:
How are we positioned?
What are we thinking?
Should we be reducing equity risk and holding more cash?
Are there other products or strategies that we should be considering?
Does my family have too much market risk?
Does tax harvesting mean we are reducing equity risk? Answer, NO; it just reduces current or future capital gains tax obligations.
Given my role, I fully comprehend that I must absorb the entire negative news cycle, adjust portfolios based on probabilistic changes in the economy and market, and deal with the negative emotion of short-term declines in our portfolios. It is of paramount importance to ensure focus on:
Understanding your financial situation; risk, goals, tolerance.
Accepting the current economic and market circumstances and opportunity.
Adjusting course decisively when circumstances and probability change.
Having the wisdom to rise above the noise (know the difference between what needs to be accepted and what should be changed).
In answering the above questions to clients, it occurred to me that perhaps I could be communicating more effectively. I realize my writing is not always orthodox for this industry. If you feel we can improve, please reach out to the team to let us know. I try to communicate our process, our beliefs, and our adjustments in thinking in our monthly letters. However, the team is also here to speak with you one on one.
Consistency of Process
Our process remains consistent. Of course, in hindsight there are portfolio adjustments to reduce risk that I wish we made more quickly and aggressively in 2022. However, our process and our approach has not changed because we believe it to be sound.
My hope is that you are partners of August Wealth because of our process. It is essential you have faith in our approach, and your long-term plan, to work effectively together. Hopefully, we keep you balanced through the cycle.
I think we provided a voice of reason during times of excessive greed in the recent past. A little over a year ago, the examples of questions I received were vastly different than the ones we receive today:
Should we be buying crypto? (No comment, Matt Damon said it all)
Should we be investing in venture capital? (My opinion is well stated; it will be interesting to see how big these losses are, once these funds are marked to market).
Should we be in more innovative technology companies? (As previously stated, it is very hard to pick winners. I will leave that to Cathie Wood and ARKK, but we are focused on companies that can fund themselves throughout the cycle).
Should I be buying municipal debt for tax free income? (As previously stated, yields were not offering sufficient reward for your risk 18 months ago).
What has changed? Sure, the environment has changed, because the Fed has been hiking interest rates so aggressively. However, I suspect it has more to do with the fact that emotion is running high because portfolios have declined in value in 2022. Emotion is an important barometer in our process: it may mean the environment will get worse, but it can also mean it’s about to get better.
I am not suggesting we are better at investing than anyone else, nor am I suggesting we cannot improve the process. However, I feel strongly that we ask the right questions, we keep a healthy balance through the economic cycle, and we approach the markets with rationality and simplicity. We hope to protect you from FOMO (fear of missing out), excessive greed, and excessive fear.
However, as you know, we cannot assure outcomes, particularly in the short term. When investing over long-time frames, it is essential to tolerate and consider (in advance) short term portfolio fluctuations. As I have illustrated before in a simple hypothetical example: An investor with $1m over a 10-year time frame, to overcome the emotion that arises with volatility, could approach investing in the following way:
Assume in any given year the portfolio of $1m can rise or fall by 20%, then your actual investment at the end of year one is between $800,000 and $1,200,000. If that portfolio grows by a straight-line average of 7% per year for the next 10 years, your expected portfolio value in 10 years will be a range between $1,600,000 and $2,400,000.
Approaching the current market
There is no doubt that this market has a high degree of uncertainty. Because of that uncertainty, we became defensive at the beginning of January 2022 (increasing cash and short duration fixed income), and we continued to get more defensive throughout the year. However, a large part of what we do is to invest for you over the long term. This is not always easy; I will illustrate why below.
“I find that alcohol, taken in sufficient quantities, may produce all the effects of drunkenness.”
-Oscar Wilde
How much investment risk to take?
Someone mentioned to me recently (only half in jest) that they have lost half of their senior in high school’s college tuition in the market. Let’s be honest, if you are investing in growth for 10+ years with money earmarked for expenses in the next 24 months, that isn’t a sound strategy! However, if you have your expenses covered with income for the next few years, and you have excess savings on top of that, you should certainly be investing for growth over 10+ years.
Here's why:
Everyone knows that if you had $1M in excess (money not being used for expenses) cash in 2000, and you stuffed it under your mattress, you lost a whole lot of purchasing power. In fact, according to the Bureau of Labor Statistics, you would today need $1.7M in cash to buy the same basket of goods and services. In my best Boston accent, I would say: “you lost big time kid!” It’s like David Coppah-field came along and made almost half of your dollahs disappear.
However, if you put your extra $1M into a diversified set of investments: stocks, real estate, precious metals, etc., not only do you have the $1.7M, but you also likely have a whole lot extra.
And I am willing to bet that my $1.7M today is not going to buy me as many Oystahs in Glahstah (oysters in Gloucester, MA) in 2035 (at retirement) as it does today.
So, even though I may feel good with my money undah the mattress instead of with all the Suckas gamblin’ in the mahket, I bettah figah out where and when I want to be fully invested again!
Pushed off balance
When you are pushed off balance in life or while skiing, it’s never going to feel good. It can sometimes end tragically. The same is true in portfolio management. Once you are off balance, getting back into a rhythm can be tricky.
I have no idea where the equity market will bottom, but the following example might illustrate how disaster strikes many investors and traders:
The goal: Protect long-term purchasing power.
The challenge: The market went down 20% and I feel awful.
The question: Do I sell because I believe the market will go down another 20% before bottoming?
Action: I decide to sell and move to cash, the market does indeed go down another 10%, and I feel much better. Phew. Dodged that bullet. News is worse, it’s probably going to get a whole lot worse.
The hypothetical future: Instead of dropping another 10%, the market moves up by 20%. I decide to re- enter the market. Then, the market drops by 20%, oh no. I decide to sell out again. But this turns out to be the bottom. The market never gets back to this point again, and you never get back in. You have been pushed off balance.
I have seen this happen many times across many different trading markets (I have done it personally) in my career. The inexperienced trader that lacks discipline learns hard lessons this way. Many people stay poor and have to work much later in life because of the lack of discipline.
That is why many investors perform so poorly over time. They react to emotion and what they think they know. They lack a disciplined long-term plan.
I give people like my brother-in-law a lot of credit. He knows nothing about the market; he admits it. He invests over the long term with a disciplined plan. He understands the formula for building wealth:
Do what you are good at and have someone pay you money for it.
Save an excess over what you are spending (live within your means).
Invest that excess in a diversified set of investments.
Allow time to work for you and compound those returns over 40 years.
My brother-in-law is 60 years old this month, and although he may have earned a far lower salary compared to many on Wall Street, he will be retiring with more wealth than many of those highly paid folks because of his methodical and humble approach. Well done K.F.
It’s not blind optimism
Can the news and markets get worse in the short term? Of course. It is hard to have an edge right now, and that is why we maintain a somewhat flexible, defensive position. However, we admit that we do not know how markets will adjust; therefore, we must remain largely invested. We do not want to be pushed off balance. We want to ensure your purchasing power and your wealth is protected over time.
Additionally, despite the uncertainty and risk reduction at the moment, the opportunities of tomorrow are presenting themselves today. When the near-term outlook becomes more clear, we are positioned to capitalize on those opportunities.
We believe over the next 10 years:
Inflation will continue to be positive.
US Dollars ultimately will be worth less in real terms (despite Fed rate hikes).
The United States and other democracies will experience innovation and growth.
Owning a diversified portfolio of assets over the long term will achieve your goals.
I am also willing to bet that the USA will have solved its immigration issues, millions will come to this country seeking and succeeding in pursuing a better life for themselves and their families. Democracy and capitalism will remain alive and well, and at least the ideals that the USA represents will be a beacon for the rest of the world.
Joe Cardello
Joseph Cardello, Principal August Wealth Advisors, LLC 51 Riverside Avenue, First Floor Westport, CT 06880 Direct (916) 461-9451 toll free (800) 985-9477
jcardello@augustwealthadvisors.com
www.augustwealthadvisors.com
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