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Should You Go Aggressive or Conservative With Your Wealth Plan?

25/8/2024

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Should You Go Aggressive or Conservative with Your Wealth Plan?
Is the right answer to do both in an age-appropriate way? You may have asked for one or the other, but how do you know if you’ve really received what you’ve asked for? Is it possible that an aggressive plan is missing out on hot industries, such as artificial intelligence? Is it likely that your “conservative” plan, which is supposed to protect your principal, has lost money?

Watch my videoconference, or listen to my podcast on this topic. (Click on the blue-highlighted words to access on YouTube.com/NataliePace and NataliePace.Substack.com.)

Below are the topics we’ll tackle in this blog.

Is your conservative plan safe, or is it losing money?

The aggressive investor: do you let emotions get the better of you?

What is an age-appropriate plan?

Can you have performance and protection?

How do you know if your current plan is age-appropriate and properly diversified?

Some valuable assets that you might not be thinking of.

Family money that is making landlords rich.

Have a 100-year vision, like rich people do.

Overweighting 20% safe in our sample pie charts.

Free web apps

And here is more information on each topic.

Is your conservative plan safe, or is it losing money?
An all-bond portfolio isn’t as safe as you might think. Neither are money market funds. Why? There is still heightened credit and duration risk in the bond market. In a normal world, interest rate cuts, which are expected to start in September, could bring most of the paper losses back to normal. However, we’re not in a normal world. We’re in a slow growth, overleveraged, Debt World.

If you are a fixed-income lover, it’s time to understand how to protect principal, while earning yield. We spend one full day on this topic at our Financial Freedom Retreats. We’ll host a Bond & What’s Safe Master Class, the Saturday after our Oct. 18-20, 2024 Financial Freedom Retreat. Learn more in my blog, “5% Return Without Those Pesky Paper Losses.”

$106 billion moved into money market funds in August (as of the 24th), according to Bloomberg. With the expectation of an interest rate cut, investors wanted to “lock in” the higher rate. However, money market funds move with the market. You don’t lock in anything with them. Additionally, money market funds are not FDIC-insured and can go down in value. These funds had to be rescued in the Great Recession and the pandemic. They are not as safe as investors might believe.

Given the afore-mentioned credit and duration risk, it’s a good idea to keep the terms short (under 5 years) and the creditworthiness high. Staggered maturity dates that allow us ongoing access to our money can be helpful as well. There may be opportunities in the next five years to take advantage of. Paper losses, long maturity dates and illiquidity will prevent us from being able to take advantage of them. It’s important to read the fine print of any investment, especially if we’re expecting it to protect our wealth. Join us at the retreat & master class to learn more.

The aggressive investor: do you let emotions get the better of you?
When stocks are high and we’ve made a lot of money it’s easy to want to be aggressive and keep the party going. However, we’ve been in the longest secular bull market in history. Never confuse a bull market with a time-proven plan. Recessions are a normal part of the business cycle. The recessions in the 21st century drop far, fast. Between February 19 and March 23, 2020 stocks plunged 38% in the S&P 500. (We don’t normally print up over $4 trillion to avert a recession.) The best performers in 2023 (the Magnificent 7) were some of the worst in 2022.

So, an important question for “aggressive” investors to ask themselves is, “Am I willing to lose half of my wealth?” (Most Main Street investors lost almost 40% before we even knew we were in a global pandemic in 2020.) As we get closer to retirement, we can’t afford to ride the Wall Street rollercoaster. We don’t have the time horizon to make it up. And it could put us in a perilous position with regard to our home and our ability to pay our bills. A better strategy is always going to be to have an age-appropriate, diversified plan that is rebalanced regularly (capturing gains high).

What is an age-appropriate plan?
It’s important to always keep a percentage equal to our age safe. Safe means that it is invested in fixed income assets that preserve our principal while providing us with a steady yield. (This is tricky, but doable, once we know how to avoid credit, duration and opportunity risk.) When we are younger, we have time to make up any volatility in stocks. However, as we get older, it’s very important for us to keep our wealth intact and not be subject to the wild fluctuations in price that are characteristic of 21st Century stocks.

How can you have performance and protection?
When we keep a percentage equal to our age safe, in assets that provide 4-5% yield while protecting our principal, that is a good defensive plan. Before the Dot Com and the Great Recessions, because assets were very expensive and growth was expected to be anemic, we were overweighting safe in our sample pie charts. Today we are again overweighting 20% additional safe. What that does is really protect us from a recession, should it occur. With 20% overweighted safe, a 50-year-old would only have 30% at risk of losses.

It is important to remember that economists are terrible at predicting recessions. As you can see in the charts below, by the time the headline screams that we are in a recession, investors have already lost 35% or more of their wealth.

Many people who were using our pie chart samples as their guide in the Great Recession earned gains instead of losing more than half of their wealth.

With regard to performance, most people have a boatload of large cap growth or value. Those are portfolio stabilizers. However, if we want to increase our performance, it’s important to add in hot industries and small caps. Small caps typically outperform large caps. If we wanted additional exposure to the Fantastic 5, we could do a hot slice of breakthrough technology. Other industries we might consider today would be cybersecurity, artificial intelligence, gold, silver, crypto, copper, or any other industry that you really believe is going to outperform.

If we’ve asked for a conservative plan, we might not have any exposure to growth stocks and the fantastic gains of 2023 and 2024. Without the Magnificent 7, the S&P 500 earned just 9.9% gains in 2023.

How do you know if your current plan is age-appropriate and properly diversified?
In my private coaching practice, many people will come to me with a plan that has 18-pages of holdings and say, “Look! I’m diversified.” When I put each of the holdings into a category based on size and style, what we see is that they have a boatload of large caps. Most plans don’t have enough safe (even if they are “conservative”) and are missing the diversification of small, mids and hot, and oftentimes, even growth.

If you ask your broker-salesman whether or not you’re safe and diversified, you might be assured that you are and that all of this is done in accordance with Modern Portfolio Theory. However, what is printed on your brokerage statements is what counts, and that might reveal a different story. Yes, it does require us understanding how to read those. However, that’s easier than you might realize. Our pie chart system makes it easy as a pie chart.

If you have never learned the life math that we all should’ve received in high school and college, this will be a game-changer for you in life. You can read about it and my bestselling books, learn and implement it at our online financial freedom retreats, or get an unbiased 2nd opinion and a new wealth blueprint from me personally in my private coaching. Email [email protected] or call 310-430-2397 to learn more now.

Some valuable assets that you might not be thinking of.
That 2 to 4% mortgage loan. That home you own free and clear.
For most of us, it’s a great idea to pay off our home before we retire. However, if we live in a big home that is larger than we need in retirement, and particularly if we have an equity-rich property with a mortgage rate that is under 4%, those are valuable family assets. In today’s world, it really pays to consider at least three generations of the family, and have a wealth plan that works for the grandparents, parents and kids. I discuss this in the 6th edition of The ABCs of Money, which will be published in just a few days. We also talk about this in our Financial Freedom Retreat and Bond Master Class.

Family money that is making landlords rich.
When each family member is living in a small apartment, particularly with today’s very expensive shelter inflation, we’re making landlords rich. This can be an opportunity for everyone to benefit if we start looking at wealth as that 3-generation plan. The family that comes together to reduce housing costs empowers individuals to invest in a much brighter tomorrow, whether it be by having a better career that will serve them for their entire lives, saving up for a down payment on their own home, contributing to their retirement accounts, getting an advanced degree, or some other wealth building strategy.

Have a 100-year vision, like rich people do.
When I meet with families who have kept wealth over centuries, one theme is prevalent: their wealth plan covers 100 years. When I’m asking us to think about our parents and our kids and have a plan that works across three generations, it’s simply modeled off what very wealthy people do.

Overweighting 20% safe in our sample pie charts
As I mentioned above, we are overweighting 20% additional safe in our sample pie charts. If you look at the chart below, you can see that equity prices are higher today than they were in the Great Depression. The only time that prices were higher was in the Dot Com Recession.

In the Dot Com Recession, the NASDAQ Composite Index plunged 78% from the highs of March 2000 to the low of October 2002. It took 15 years to recover.

There are some years where protecting our wealth is the most important thing we can do. At minimum, now would be the time to know exactly what we own and why, to be sure that we are age-appropriate and diversified.

Free web apps
We have some free web apps that can help you to personalize your own sample pie chart. Once you know what an age appropriate, diversified and personalized plan looks like, then it will help you see how close or far you are from that goal in your wealth plan. Email [email protected] with Free Web App Links in the subject line. You can also access them on the homepage at https://www.nataliepace.com/#/ with the Free Web Apps badge.

Bottom Line
Should you be aggressive or conservative right now? Why not both? Most of us think we’re one or the other, when we might not be. Wisdom and time-proven systems are the cure. Whether you get this information from reading about it in my bestselling book The ABCs of Money (get the 6th edition in a few days), or learn and implement it at the October 18-20, 2024 Financial Freedom Retreat, or receive an unbiased 2nd opinion from me privately in my coaching program, now is the time to fix the roof, while the sun is still shining. It’s human nature to wait until things get broken to fix them. However, securing our financial house before the economic storms arrive mean that we are in the best position to weather those very storms. Email [email protected] or call 310-430-2397 to learn more and register now.

Join us for our Online Oct. 18-20, 2024 Financial Freedom Retreat. Email [email protected] or call 310-430-2397 to learn more. Register with friends and family to receive the best price. Click for testimonials, pricing, hours & details. \

Join us for our Restormel Royal Immersive Adventure Retreat. March 7-14, 2025. Email [email protected] to learn more. Click for testimonials, pricing, hours & details. There is very limited availability. Register by August 15, 2024 to ensure that you get the exact room you want. (There may not be an opportunity to register after August 15, 2024.) This retreat includes an all-access pass to all of our online training for a full year for two, and three 50-minute private, prosperity coaching sessions. Much more affordable than you might think. Email [email protected] to learn more.

Natalie Wynne Pace is an Advocate for Sustainability, Financial Literacy & Women's Empowerment. Natalie is the bestselling author of The Power of 8 Billion: It's Up to Us and is the co-creator of the Earth Gratitude Project. She has been ranked as a No. 1 stock picker, above over 835 A-list pundits, by an independent tracking agency (TipsTraders). Her book The ABCs of Money remained at or near the #1 Investing Basics e-book on Amazon for over 3 years (in its vertical), with over 120,000 downloads and a mean 5-star ranking. The 5th edition of The ABCs of Money and the 2nd edition of Put Your Money Where Your Heart Is are the most recent releases of these books. Follow her on Instagram.

Natalie Pace's easy as a pie chart nest egg strategies earned gains in the last two recessions and have outperformed the bull markets in between. That is why her Investor Educational Retreats, books and private coaching are enthusiastically recommended by Nobel Prize winning economist Gary S. Becker, TD AMERITRADE chairman Joe Moglia, Kay Koplovitz and many Main Street investors who have transformed their lives using her Thrive Budget and investing strategies. Click to view a video testimonial from Nilo Bolden.

Check out Natalie Pace's Substack podcast on Apple and Spotify.
Watch videoconferences and webinars on Youtube.

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Important Disclaimers
Please note: Natalie Pace does not act or operate like a broker. She reports on financial news, and is one of the most trusted sources of financial literacy, education and forensic analysis in the world. Natalie Pace educates and informs individual investors to give investors a competitive edge in their personal decision-making. Any publicly traded companies or funds mentioned by Natalie Pace are not intended to be buy or sell recommendations.

ALWAYS do your research and consult an experienced, reputable financial professional before buying or selling any security, and consider your long-term goals and strategies. Investors should NOT be all in on any asset class or individual stocks. Your retirement plan should reflect a diversified strategy, which has been designed with the assistance of a financial professional who is familiar with your goals, risk tolerance, tax needs and more. The "trading" portion of your portfolio should be a very small part of your investment strategy, and the amount of money you invest into individual companies should never be greater than your experience, wisdom, knowledge and patience.

Information has been obtained from sources believed to be reliable. However, NataliePace.com does not warrant its completeness or accuracy. Opinions constitute our judgment as of the date of this publication and are subject to change without notice. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. Securities, financial instruments or strategies mentioned herein may not be suitable for all investors.

1 Comment

Earning 5% Interest Without Those Pesky “Paper” Losses.

9/8/2024

Natalie Pace in Powerscourt, Ireland. Photo by: Marie Commiskey.

Earning 5% Interest Without Those Pesky “Paper” Losses.
Are you earning nothing in your savings or checking account? Did you realize you could earn $40,000-$50,000 pretty safely on $1 million each year, or $10,000-$12,500 on $250,000? These steady gains can make the difference in our budget, and can contribute to a better FICO score and tomorrow.

It’s tricky, but doable. Why is it tricky? If we don’t know what the risks are, including:

·      “Paper” losses on bonds,
·      Liquidity fees in money market funds,
·      Surrender and hidden fees in annuities (that are not FDIC-insured),
·      Early withdrawal penalties on Certificates of Deposit,
·      Gap downs and emergency dividend cuts, and,
·      FDIC loopholes on brokerage accounts,

we could end up losing money. Since the “safe” side of our wealth plan is supposed to protect our principal, reaching for yield in a tricky landscape can be perilous to our fiscal health. So, what is a good plan?

Here are the things will cover in this blog.

Why Would Anyone Purchase a Long-Term Bond?
Bond Funds
Mortgage-Backed Securities
Junk Bonds
Managed Plans
Duration Risk
Liquidity risk
Credit Risk
Paper Losses

More information on each point is listed below. You can also get vital details in my:

·      Free videoconference on YouTube.com/NataliePace or podcast on NataliePace.Substack.com.
·      Bonds & What’s Safe Master Class on Oct. 26, 2024. (Prerequisite: Financial Freedom Retreat.)
·      If you’d like an unbiased 2nd opinion on your current wealth plan, email [email protected] for pricing and information.

Why Would Anyone Purchase a Long-Term Bond?
Asked someone who had long-term bonds in her managed plan (and didn’t realize it).

After seeing the negative yield curve, where long-term bonds are paying a lower interest rate than short-term, one of my coaching clients asked why anyone would ever buy a 30- or 40-year bond, when they are getting paid more for a 1-year bond. Why take on the risk that you don’t get your money back for almost half of our entire lives?

U.S. Treasury par yield rates. Source: Treasury.gov.

That same client held long-term bonds in her own managed plan – mostly in the bond funds that she owned (almost all of which had lost value). Yes, we are the people who buy those long-term bonds, and sometimes even junk bonds, often without realizing it. Whether it is in our managed portfolio, our retirement plan, or in our bond funds, most of us are exposed to duration, liquidity, and credit risk, and paper losses, while also getting a lower yield than the shorter term (and safer) bonds.

The first rule of safe investing in a Debt World is to know what we own. We also want to keep the terms short and the credit worthiness high. Holding a bond to term to make up losses doesn’t always make sense, particularly if the term is decades away. (Avoiding those losses in the first place with proper due diligence, instead of blind faith that someone else is doing this for us, is an important determent strategy.) With $35 trillion in public debt and over $99 trillion in total debt and loans in the U.S., it would be smart to adhere to Will Rogers adage: “I’m more concerned with the return of my money than the return on my money.

Bond Funds
Many bond funds hold mortgage-backed securities, junk bonds and long-term bonds, even those that claim to be “investment grade.” This helps to explain why so many bond funds have lost value over the past few years. You might be told that these are “unrealized” or “paper” losses. However, as you can see in the charts below, long-term government bonds lost 26% in 2022 and only clawed back about 3% in 2023. Even though interest rates are a tailwind for the bond market, credit, duration and liquidity risks remain elevated.

Mortgage-Backed Securities
Some mortgage-backed securities are collateralized by office properties – yes, those half empty office buildings that we know have been a problem for community banks, like New York State Bank and the failed Silicon Valley, Signature and First Republic Banks. Many investment grade bond funds have mortgage-backed securities in them. Oftentimes we’re getting paid 4% or less for taking on the risk of losing some principal.

According to the April 2024 Financial Stability Report, the market for commercial mortgage-backed securities (CMBS) collateralized by office properties tightened in term of financing terms and weakened in liquidity, as “collateral quality has weakened and demand for funding has increased.” Many companies are downsizing their office footprint, as a hybrid work week and work-from-home remain popular with the labor force. The CRE industry is one of the areas of greatest concern for Wall Street, banks, brokerages, insurance companies, pension providers and any other entity that loans long-term.

https://www.federalreserve.gov/publications/April-2024-financial-stability-report-leverage-in-the-financial-sector.htm

Junk Bonds
Even investment grade bond funds can have up to 20% of bonds that are below investment grade in them. Since over half of the S&P500 is at or near speculative status, junk bonds are a rampant problem. When a company is downgraded from investment grade to speculative (junk), the value of the existing bonds sinks and liquidity tightens (we’ll have to take a haircut on price to sell the bond). So, the trick is to avoid heavily indebted, slow growth companies and governments. Sadly, in 2024, that included knowing the credit rating of a lot of banks, insurance companies, brokerages, fund companies, fintechs, and other companies that are entrusted with our financial future.

Managed Plans
Managed plans are highly likely to have long-term bonds in them, even if we’ve asked for a conservative portfolio. Since bonds are thought of as the “safe” side, we might end up with a lot of bonds that lost even more than stocks did in 2022.

We have to know how to read our brokerage statements, rather than just rely upon the assurances of our broker-salesman. I’ve seen a lot of people who were told that they are earning 5-7% yields on their bonds, without being advised that many of our holdings have lost 10 to 20% in principal, taking the overall earnings down to 2% or less, and sometimes even negative. The truth is printed on the brokerage statements. So we must read them, and understand what the information is revealing about our true return (or loss) on investment.

Duration Risk
Broker-salesman will try to minimize our concerns about duration risk by telling us that we get our money back. However, the longer the period of time that a company or government has to pay us back, the more risk we’re taking on, especially if there is a lot of debt, combined with slow revenue growth and a decline in profitability.

I’ve already mentioned that over half of the S&P500 is at or near junk bond status. I reviewed a conservative portfolio for a client who had a junk bond rated BB (speculative) with a duration of 40 years. This particular client will not be alive in 40 years. The company had almost declared bankruptcy in 2022. Revenue was down -35% year over year. The bond was showing paper losses and unloading it to someone else could mean discounting the asset even further. It’s important to avoid this scenario. However, if we find ourselves immersed in it, then it’s equally important to develop an exit strategy and a game plan that doesn’t put us in harm’s way again!

Liquidity risk
I’m going to stay with the example above because when we own a 40-year junk bond in a company that is on the ropes, who is going to want to buy it from us? When we own a bond that nobody wants to buy off of us, the only way we get rid of it is by putting it up for sale and taking a loss on it. Not a paper loss. A real one. There are all kinds of reasons why we might want access to our own money over a 40-year period, from a better investment opportunity to a dire need to pay certain bills.

What is the risk that the company will declare bankruptcy in the not-so-distant future before our term ends? What are the odds that we’ll get paid back less than what we invested? It’s better to ask these questions and receive sober answers before we own the bond.

A few years ago, Warren Buffett said that bonds should come with warning labels. In the wake of the Great Recession, MF Global placed a big bet on Greek bonds that they believed would be bailed out by the European Union. The country was bailed out, but the package included forcing existing bondholders to take a huge haircut on their investment. That was one of the reasons why a company with over $42 billion in assets, run by a former Goldman Sachs CEO and Governor of New Jersey, declared bankruptcy in 2011.

Credit Risk
It’s been a year since Fitch downgraded the USA from AAA to AA+ (on August 1, 2023). S&P Global did it on August 5, 2011. Below are the countries that still have a AAA rating.

Credit risk is a real concern in our Debt World. We all have to be mindful of the fine print, understand the credit ratings, limit the credit, duration and the liquidity risk, and never reach for yield. Some banks do automatic rollovers from a decent yielding CD into one that yields almost nothing. So, things are very tricky today.

Paper Losses
Paper losses can create a lot of harm to our wealth plan in the near and mid-term, even if we do get the money back eventually (which is not guaranteed). There is a concern that we will have to wait decades to get our money back, while enduring a stressful, challenging interim period. Paper losses reduce our FICO score, limit our access to our own money, and can have other meaningful, significant, and negative impacts.

The bank failures of 2023 had a lot to do with paper losses on bond portfolios, which then spread into a contagion of a run on the bank. The Federal Reserve created a Bank Term Funding Program to basically make it so that banks did not have to declare their paper losses. That program no longer makes loans as of March 11, 2024. The terms were for one year so it looks like we may not see or feel the full ramification from the wind down of this program until March 2025 – just a few months after the U.S. will encounter another Debt Ceiling debacle in Congress.

Bottom Line
We can earn almost 5% on the safe side, but it is tricky. It’s a good idea to keep the terms short, and the credit worthiness high of our fixed income holdings. We need to read the fine print and understand the hidden fees, loopholes, risk, and federal insurance levels. It’s a good idea to have rolling maturity dates, which will give us ongoing access to our money. It’s important to not just have blind faith that our wealth is protected, even if we’ve asked for a conservative portfolio. We must be the boss of our money.

Join us at our online Oct. 18-20, 2024 Financial Freedom Retreat and our Bond/What's Safe Master Class Oct. 26, 2024. Learn how to:

* Invest in hot industries, such as Nvidia and artificial intelligence,
* Hedge against a weaker dollar,
* Invest and compound your gains,
* Green your retirement plan,
* Easy and efficacious nest egg strategies,
* Get hot and diversified (including in artificial intelligence and EVs),
* Evaluate stocks,
* Keep an age-appropriate amount safe, and,
* Know what's safe in a Debt World.

You'll even discover how to save thousands annually with smarter big-ticket choices. Yes, it's a complete money makeover.

Email [email protected] to register. Learn the 15+ things you'll master and read testimonials in the flyer on the home page at NataliePace.com. Register with friends and family to receive the best price.

"Ten minutes into the first day I was already much smarter about investing than I ever thought I would be in my life and I knew I was in exactly the right place at this retreat. I am amazed at how EASY and FUN it is to make my money work for me and those I love. I think this kind of information should be compulsory in schools. I wish I'd learned this sooner." CM

If you’d like an unbiased 2nd opinion on your current wealth plan, email [email protected] for pricing and information.

Check out Natalie Pace's Substack podcast on Apple and Spotify.
Watch videoconferences and webinars on Youtube.

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Important Disclaimers
Please note: Natalie Pace does not act or operate like a broker. She reports on financial news, and is one of the most trusted sources of financial literacy, education and forensic analysis in the world. Natalie Pace educates and informs individual investors to give investors a competitive edge in their personal decision-making. Any publicly traded companies or funds mentioned by Natalie Pace are not intended to be buy or sell recommendations.

ALWAYS do your research and consult an experienced, reputable financial professional before buying or selling any security, and consider your long-term goals and strategies. Investors should NOT be all in on any asset class or individual stocks. Your retirement plan should reflect a diversified strategy, which has been designed with the assistance of a financial professional who is familiar with your goals, risk tolerance, tax needs and more. The "trading" portion of your portfolio should be a very small part of your investment strategy, and the amount of money you invest into individual companies should never be greater than your experience, wisdom, knowledge and patience.

Information has been obtained from sources believed to be reliable. However, NataliePace.com does not warrant its completeness or accuracy. Opinions constitute our judgment as of the date of this publication and are subject to change without notice. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. Securities, financial instruments or strategies mentioned herein may not be suitable for all investors.

The Dow Drops 1400 Points.

2/8/2024

The Dow Drops 1400 Points.

After the Feds Signal a September Rate Cut and Unemployment Rises.
Watch my free videoconference at YouTube.com/NataliePace. or listen to my podcast at NataliePace.Substack.com.

On July 31, 2024, the Dow Jones Industrial Average started out strong, rising 384 points from the open until 2:45 pm ET. However, as the news spread (during the Jerome Powell press conference) that a September interest rate cut was on the table, the sellers dominated the rest of the day, trimming the gains back to 106. On August 1, 2024, stocks retreated further with the DJIA dropping almost 500 points. Today, after a job report showed unemployment had ticked up to 4.3%, stocks dropped further – showing a decline of another 907 points in the DJIA in the first two hours of trading on August 2, 2024.

Isn’t a rate cut what everyone has been waiting for? Why the sell-off? What does this mean for investors for the rest of 2024, and what is our best move for both stocks and bonds as we enter a cycle of potential rate cuts?

Below are the points we’ll discuss in this blog.

25 or 50 Basis Points?
Data Dependent
Apple & Amazon Earnings
Why are the Feds Considering a Cut & What Does it Mean for Stocks & Bonds?
Best Strategy for Stocks
Best Strategy for Bonds

And here is more color on each point.

25 or 50 Basis Points?
Jerome Powell usually sticks pretty close to his talking points and script. However, he was a little bit lively, for him, at the most recent press conference. Powell was fairly emphatic that it would be a 25 basis point cut, if a rate cut takes place, which he repeatedly noted wasn’t a guarantee. He said that there weren’t any discussions of 50 basis points at this juncture. Despite that assertion, 80% of the futures pointed to a 50 basis point cut on August 2, 2024 (source: CME FedWatch).

Data Dependent
Last year, we had had several months of data showing that inflation was coming down to the 2% target range. And then in the first quarter of 2024, inflation ticked up again, and was once more of concern. In the second quarter of 2024, inflation looked like it was moving down again, from a peak of 7% to 2.5% (source: Federal Reserve). If inflation looks to be stabilizing closer to the target rate of 2%, then the Feds will have greater “confidence” (a key word) that a rate cut won’t raise the specter of inflation again.

One of the reasons that a rate cut could be on the table is to make sure that the employment situation continues to normalize, rather than have a troublesome jump in unemployment. Maximum employment is the 2nd leg of the Federal Reserve Board’s dual mandate.

Rate cuts are needed to make sure that unemployment doesn’t get too high and a recession doesn’t become too problematic. A tight monetary policy is needed to make sure that prices remain stable. So it is a very delicate dance to get the formula right. These facts were stressed repeatedly by Jerome Powell. As Powell admitted in the July 31, 2024 press conference, “certainty” isn’t a word that is used in economics.

Apple & Amazon Earnings
Apple and Amazon earnings were announced today, August 1, 2024, after the market closed.
In the June 2024 quarter, Apple’s revenue was up 5% year over year, while net income improved by almost 8%. The new AI smart phone may be partially responsible, as is customer loyalty and satisfaction (per CFO Luca Maestri). All geographic regions had increased sales, with the exception of Greater China, which fell by -6.5%. (I explained why China Apple sales are expected to drop in January of this year, in my “Is Huawei the Apple of China’s Eye?” blog.) Asia Pacific had the strongest revenue growth at 13.5%. The Mac, iPad and Services segments were strongest, with revenue growth of 2.5%, 23.7% and 13.7%, respectively.

Amazon’s revenue was up 10%, and net income doubled, from $6.7 billion last year to $13.5 billion in the 2nd quarter of 2024.

Labor market conditions wax and wane on business conditions. So, when Apple and Amazon show continued strength, the Feds will take note. The increased revenue and net income in these two trillion dollar+ companies would argue against a rate cut. However, they are not the only companies in the S&P500, and even given the welcome news in these earnings reports, both companies were down in afterhours trading.

Why are the Feds Considering a Cut & What Does it Mean for Stocks & Bonds?
The Feds are considering a rate cut because, according to Jerome Powell at the July 31, 2024 press conference, “The broad sense of the committee is that the economy is moving closer to the point at which it will be appropriate to reduce our policy rate, but we’re not quite at that point yet.”

Rate cuts occur when policymakers are trying to stoke growth and limit the detrimental impact of a recession. During 21st Century recessions, there have been dramatic (terrible) declines in stock prices. Sophisticated investors know this. The mood among Wall Street whales in July was one of profit-taking and reallocating out of large caps and into small caps, which rose 10.71% in the month (source: S&P Dow Jones Indices).

Rate cuts are perceived as good for the bond market because lowering interest rates should, in theory, increase the value of existing bonds and make it easier for companies to borrow money more affordably. However, the policy interest rate is only part of a more complicated story. There is still elevated credit and duration risk. Additionally, long-term bonds lost more than stocks did in 2022, and did not make up those losses in 2023.

Bonds earned gains in the Dot Com and Great Recessions, providing safety from the sizeable losses of stocks (-78% in the NASDAQ Composite Index in the Dot Com Recession, and -55% in the Dow Jones Industrial Average in the Great Recession). However, even if there is a slight increase in bond value after a few interest rate cuts, it’s unlikely that bond gains are going to erase the sizable paper losses of 2022. Interest rates are not projected to bottom out at zero, like they did in the wake of the Great Recession. Rather, the longer run projection for the Fed Fund rate is 2.8%.

As a reminder, we began pointing out that we weren’t getting paid to take on the risk in bonds starting in the Great Recession and continuing through 2021. We encouraged people instead to lean into real estate between 2009 and 2015, and to always rebalance for a properly diversified portfolio with stocks and cash liquidity.

Today, we can make a 5% gain on the safe side of our plan, but it’s tricky. We’re getting a higher yield on short-term over long-term bonds. (So, we’re rewarded for taking on less risk.) Since creditworthiness is a problem, we have to know how to navigate between high credit quality, short term issuances, and speculative companies that want to keep our money for decades. Join us for our Bond & What's Safe Master Class on Oct. 26, 2024 to learn more. (Prerequisite: a Financial Freedom Retreat.)

It’s very important to remember that paper losses can be real. Many terms are longer than our own lifespan. And with the low credit quality in today’s world, the longer the term, the higher the risk that the company will have to restructure before they pay us back. I’ve been hearing a lot of pernicious rhetoric that clients are receiving with regard to the return on their managed portfolios, where “paper” losses are glossed over and not included in the calculation. The truth lies in the brokerage statements – which many of us never read (or don’t know how to read). It’s quite important for us to understand exactly what we own and why, and to be the boss of our money instead of having blind faith in whatever we’re being told. It’s a better idea to fix the roof while the sun is still shining. Everything gets more difficult when the economy slows down or hits a recession. While a recession isn’t forecast for 2024, 2.1% GDP growth is pretty anemic growth, particularly given the elevated prices of stocks and the alarming levels of debt.

Best Strategy for Stocks
We’re overweighting 20% safe in our sample pie charts based on the elevated risk of equities. Stocks are expensive. GDP growth is expected to be lower this year than last year. There’s a lot of political uncertainty in the world. Now would be a great time to do our rebalancing to make sure that our wealth plan is age-appropriate, properly diversified, and that we capture gains near an all-time high. (We have a free web app for you to personalize your own sample pie chart. Email [email protected] with FREE WEB APPS in the subject line for a link.)

Best Strategy for Bonds
Keep the terms short and the credit quality high. Under that umbrella, if you want to add a little duration, maybe two years, but under five years, be sure that all of the other safety nets are in place, including high credit quality and FDIC coverage (in bank products). I would also have rolling maturity dates. I would be mindful of the fine print, and understand what risks I was taking in any “safe” fixed income product. Remember that over half of the S&P 500 is at or near junk bond status, and that includes a lot of banks, brokerages, insurance companies, fund companies, fintech companies, etc.

Source: Treasury.gov

As you can see in the above par yield table of U.S. treasuries, investors are getting paid more for short duration than for long.

Bottom Line
The FOMC is considering a rate cut in September because the economy is slowing down, unemployment is creeping up, and inflation seems to be abating. All of those are signs of a soft landing that could indeed become a recession if they don’t get all of their calculations right. Because market conditions lag policy action, the FOMC always wants to be ahead of trends, rather than behind them. Likewise, when investors wait for the headlines, it’s too late. As you can see in the charts below, the recession announcement comes long after Main Street has lost a substantial part of their portfolio.

With this in mind, it’s important to have a defensive strategy in both stocks and bonds, and not rely upon the idea that a rate cut is going to fix everything. There’s just a lot more to the story in today’s Debt World.

Join us at our online Oct. 18-20, 2024 Financial Freedom Retreat. Learn how to:

* Invest in hot industries, such as Nvidia and artificial intelligence,
* Hedge against a weaker dollar,
* Invest and compound your gains,
* Green your retirement plan,
* Easy and efficacious nest egg strategies,
* Get hot and diversified (including in artificial intelligence and EVs),
* Evaluate stocks,
* Keep an age-appropriate amount safe, and,
* Know what's safe in a Debt World.

You'll even discover how to save thousands annually with smarter big-ticket choices. Yes, it's a complete money makeover.

Email [email protected] to register. Learn the 15+ things you'll master and read testimonials in the flyer on the home page at NataliePace.com. Register with friends and family to receive the best price.

"Ten minutes into the first day I was already much smarter about investing than I ever thought I would be in my life and I knew I was in exactly the right place at this retreat. I am amazed at how EASY and FUN it is to make my money work for me and those I love. I think this kind of information should be compulsory in schools. I wish I'd learned this sooner." CM

If you’d like an unbiased 2nd opinion on your current wealth plan, email [email protected] for pricing and information.

Check out Natalie Pace's Substack podcast on Apple and Spotify.
Watch videoconferences and webinars on Youtube.

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ALWAYS do your research and consult an experienced, reputable financial professional before buying or selling any security, and consider your long-term goals and strategies. Investors should NOT be all in on any asset class or individual stocks. Your retirement plan should reflect a diversified strategy, which has been designed with the assistance of a financial professional who is familiar with your goals, risk tolerance, tax needs and more. The "trading" portion of your portfolio should be a very small part of your investment strategy, and the amount of money you invest into individual companies should never be greater than your experience, wisdom, knowledge and patience.

Information has been obtained from sources believed to be reliable. However, NataliePace.com does not warrant its completeness or accuracy. Opinions constitute our judgment as of the date of this publication and are subject to change without notice. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. Securities, financial instruments or strategies mentioned herein may not be suitable for all investors.

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The Dow Drops 1400 Points.

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