talk of recession amid A rough start to 2022
Global supply shocks and higher interest rates and inflation hobbled global markets during the first quarter of 2022. Those same forces have prompted economists to raise the probability of a recession in the next twelve months for both the U.S. and overseas. Your BFA investment committee is not concerned, however. First, while economists at JP Morgan and those surveyed by the Wall Street Journal, for example, have increased their probabilities of a U.S. recession in the next twelve months, the figures are still relatively low (from 20% at the beginning of 2022 to 30% now). Keep in mind that in an average year, there is a 15% chance of a recession in the U.S. Second, there is growing evidence that supply shortages are easing, which should help satisfy the demand of global consumers, especially in the U.S., who have ample cash reserves and a desire to spend. Third, it is difficult to paint the global economy with broad strokes. While Europe has a higher chance of a recession due to its dependence on Russian energy supplies, the U.S. is not as vulnerable as Europe. Also, Latin American markets tend to be more commodity-based and are enjoying an economic rebound due to increased energy and raw material prices. However, further price spikes in oil or an escalation of the war in Ukraine are wildcards that we will monitor.
HOW SHOULD WE FEEL ABOUT BONDS?
Given the volatility and steep drops in equity and fixed income markets so far this year, some investors are in unfamiliar territory and may be unsure how to feel about their bond holdings, particularly those who have only been in the markets for the past 10-15 years. There is no sugar-coating that bond prices have been hit hard with a double whammy of the highest inflation in 41 years and rising interest rates. However, we also believe in the power of compounding and understand that price return is just one component of total bond return. As interest rates go up, bond coupons are reinvested at those higher rates, which means income makes up even more of the total return of bonds over the medium to long term. Your BFA investment committee wants to reassure you that we feel we are positioned correctly in our fixed income portfolio. Our fixed income managers think that we are now past the inflection point and that the “medicine” we are taking will result in healthier fixed income markets and better returns in the future. So, here is the takeaway: Bonds are down year-to-date. BUT, we have already 1) captured higher than average returns during the falling rate environment of a couple of years ago; 2) diversified to bonds that should generate higher yields through floating-rate bonds and provide corporate bond outperformance; 3) diversified the bond portfolio further with short-term high-yield and international bonds that are not as interest-rate sensitive as core bonds and provide higher yields to maturity; 4) chosen managers who can accumulate stabilizing cash if the bond market continues to be uncooperative; and most importantly 5) significantly outperformed core fixed-income last year and are positioned this year to do the same.
Financial Planning Concepts
A simple new process ensures planning success for everyone
In his most recent book, The Psychology of Money, Morgan Housel makes a powerful observation critical for all of us. He says, “Planning is important, but the most important part of every plan is to plan on the plan not going according to plan.” What does he mean? There are two parts to the statement that should ring true for you: First, there is the assumption that there IS a plan. A plan to purchase a home, educate your children, protect your family, retire, reduce taxes, grow your wealth, leave a legacy, etc., etc. Truly, for those without a plan, the end result is a guess at best and a guaranteed failure at worst. We should all have a Plan.
However, the second part is that constant change necessitates revisions to our Plan to ensure its success. Housel goes on to say, “A plan is only useful if it can survive reality. And a future filled with unknowns is everyone’s reality.” Like the sand on the shoreline at the beach, as the wind and waves pass over, the picture changes. Sometimes the changes are dramatic and sometimes they are subtle but they are always changing. Your finances are the same.
To help you maintain peace of mind and a successful Plan in the face of constantly “shifting sands”, we are excited to introduce the Brown Financial True Planning Cycle (TPC), a systematic process to partner with each of you to help you achieve all of your goals in the face of risk, uncertainty and constant change.
the true planning process
The TPC is Simply Effective. The hardest part of financial planning is gathering data to complete the plan. To help overcome this annoying hurdle, the TPC breaks the Plan into manageable component parts for analysis over a continuous, two-year cycle. Retirement, Insurance, Investment, Tax and Estate planning all occur in a repeating cycle to ensure impactful focus on each area. As the Plan encounters shifting scenarios, it is regularly updated and adapts. Even when things are not going “according to plan”, the Plan navigates to compensate. Without a doubt, this process is the most powerful tool that you can have to ensure you achieve your goals. It is also unique in our industry. Many firms claim to provide financial planning but few have a systematic process to ensure your Plan is always on track. We are delighted to have the opportunity to present it to you and will discuss it more in your upcoming reviews. Because the TPC is so amazing at producing the results we all desire, financial security and peace of mind, it is now the foundation of what we offer to all of our clients. So, as we tell our friends who are new to the process, “Come and see what you’ve been missing!”