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.