Market Commentary Q3 2021

Fall’s bumpy ride and China in the news

Since the bottom of the COVID-induced market downturn in Spring 2020, it seems like the equity markets have only been going one way: up. However, analysts and investors are keenly aware that, on average, September is the worst month for the S&P 500 (U.S. large-cap stocks), and September 2021 was no exception. The S&P 500 fell 4.8% in September, its largest monthly drop since March 2020. However, the index still finished the third quarter up slightly by 0.6%, its sixth consecutive quarter of gains. Volatility re-entered the bond and equity markets during the third quarter, as well, driven by talk of higher inflation, U.S. Federal Reserve tightening, uncertainty surrounding the Democratic infrastructure and spending bills, possible higher taxes, and a potential U.S. government shutdown. As a result, investors began to sell Treasury bonds in earnest. U.S. core bonds ended the quarter down almost 2% year-to-date on a total return basis. The resulting climb in bond yields has become a headwind for U.S. mega-cap technology stocks, as well, whose long-term earnings become less valuable as yields go up. China’s overheated property market also caused ripples with news of a possible default by real estate developer China Evergrande on its debt. A potential collapse of Evergrande along with ongoing concerns in China of slowing economic growth, a government crackdown on large technology companies, and continued government interference in the equity markets sector led to negative returns in the third quarter for emerging market stocks. Your BFA Investment Committee reminds you of four things, however:

  1. As Scott McLeod’s recent webinar explained, volatility is normal and should be expected as we are overdue for some this year.
  2. Our fixed income portfolio goes beyond U.S. core bonds and uses managers with flexible mandates to take advantage of higher yields (non-investment grade corporate bonds), geography (international bonds), and to shelter taxable income when practical (municipal bonds).
  3. Equities including real estate investment trusts (REITs) have shown over time to be an effective inflation hedge.
  4. Our fund selection in the emerging market allocation has outperformed the index due to its focus on smaller and more value-oriented companies.

tax planning in the fourth quarter for client portfolios.

Mutual funds are required to distribute their realized capital gains by year-end, with most of those distributions occurring in December. We will analyze our client holdings for material distributions (i.e., 5% or more of net asset value) and may take action to avoid those distributions. We will also look for opportunities to harvest further capital losses in client portfolios. Given the specter of higher capital gain taxes, loss carryforwards have become even more valuable. These actions could save on taxes for you.

Financial Planning Concepts

4 tips to living the retirement of your dreams

Running out of money during retirement is a fear that nearly everyone faces at one time or another. Rest assured, your friends across the dinner table or on the golf course are just as concerned as you are (at least, at times) about not having enough. Even those you might consider “wealthy” have similar concerns. Nevertheless, there are specific strategies that successful retirees employ to protect and grow their retirement assets, live fulfilled, and have peace of mind. Here are four proven steps for a successful Retirement Plan:

  1. Make sure you always have an up-to-date Retirement Plan. Whether you are still working, saving, and preparing for retirement or living the retirement dream now, you should have a realistic Retirement Plan. By projecting your cash flows and considering portfolio growth and taxes, the best Retirement Plan does two things: First, it ensures that you can meet your expectations and have an action plan to do it. Second, it provides peace of mind by showing the long-term implications of your current actions. When you face your fears head-on, you find peace in knowing that you control your destiny. Your Retirement Plan is the only way to accomplish this goal.
  2. Manage your spending around your goal. If you are still working, your Retirement Plan defines what savings will be required to meet your standard of living during retirement. “Pay yourself first” by investing what your Plan requires before you start spending. If you are in retirement, use your Retirement Plan to help you develop a spending strategy. Unfortunately, bond yields and stock returns may be lower in the next few years. Knowing what you can spend by having a cash-flow-based plan is critical. The Plan will account for irregular expenses (car purchases, a home remodel, etc.) and help you control your spending to meet your long-term retirement goals.
  3. Manage your distributions during retirement. One of the easiest ways to maximize your retirement spending is by avoiding distributions during market declines. After a fall, allow your portfolio to recover before making your next withdrawal. Waiting will help ensure that you are always “selling high,” a key to a successful retirement strategy. Maintain an emergency fund or use a Home Equity Line of Credit as a spending cushion during market volatility.
  4. Protect your savings with insurance. There are many risks to your Retirement Plan, but you can protect yourself with insurance. Use “longevity insurance” to protect your income, long-term care insurance to cover unexpected medical expenses or life insurance to replace your spouse’s income. There are many new tools available to help you mitigate these risks.

Brown Financial Advisory is committed to helping you achieve your long-term goals by updating your Retirement Plan regularly and guiding you through the strategies you need to live the retirement of your dreams. Above all, we want you to have the peace of mind you deserve and are happy to help you get there.