Are We There Yet?

KFM Update

Our 14th Annual Ladies Night Out was a smashing success. We enjoyed our Sunset Cruise in the Dana Point Harbor with over 50 clients and friends coming from as far as Arizona and San Diego to participate. Thank you to all whom joined us for great scenery, weather, wine, food and conversation!

This has been yet another challenging quarter… the third in a row. Just like the past two quarters, we encourage you to take the long-term perspective. The Capital Market update has a lot of information relating to the quarter and the need to stay committed to the long-term. We would encourage you to re-read Chapter 9 in our book (15 minutes . . . if you need us to email you a copy of Chapter 9, please contact the office). You may also desire to skip the review of your quarterly report.

We are currently working on updates to our Client Portal. We believe the changes will be very subtle and believe it will be an improvement in our document vault and sharing process. We will let you know in advance when the Client Portal will be changed. Login information will remain the same and it will just have a new look and feel from the old.

The last 9 months have created a lot of financial strain for people. KFM has had an uptick for people simply looking for assistance on whether they are on the right track for obtaining financial security. We recognize the conflicting advice in today’s environment and believe our process can help people understand precisely where they stand. We thank you for the continued support through the many recommendations you have provided to KFM.  We appreciate your continued trust, confidence, and friendship.

As always, we look forward to seeing you face to face or virtually in the upcoming weeks and months.

Capital Markets Update

“Are we there yet?”

Do you remember hearing that from the back seat of your car from one of your children on a very long drive? Or perhaps instead you remember saying that to your parents on one of your long journeys. Remember that feeling of wanting to just get there and simply skip the endless hours of travel in the car? To us at KFM, that is precisely what this current economic environment feels like.

By now we all know the biggest economic concern facing all of us is inflation. In order to combat inflation, the Federal Reserve has raised interest rates substantially, with the threat that they will continue to raise interest rates until inflation has been tamed. The problem with raising interest rates is that it also causes “pain” in the capital markets, job markets and even real estate markets.

Real Estate is the easiest way to demonstrate that “pain”. It’s simple math really. The 30-year mortgage rate has increased from 2.5% at the beginning of 2022 to around 6.8% at the end of September. This represents an increase in costs of 65% to new buyers needing to obtain a loan to purchase a home. The affordability factor of real estate was already at an all-time low in January 2022, simply due to the increase in market value. With the increase in costs due to higher mortgage rates, the affordability factor is even lower.

Continuing the simple math, home prices would need to decline by 37% for new buyers to have the same payment that buyers had with lower interest rates in January of this year. This is not a prediction or suggestion that it’s going to happen. Higher costs invariably slow down the real estate market, which will result in reduced real estate values. Anecdotally, on average we have seen housing prices on Zillow drop by 10% since May 2022 (Zillow).

With Real Estate prices in decline, are you panicked? Are you changing your standard of living? Are you fearful prices will never get back to where they were at the beginning of the year? Are you selling? We hope these are rhetorical questions and the obvious answer is “no”.

Declining Real Estate prices should come as no surprise with the most recent runup in prices ever since the pandemic. However, we believe the decrease in prices is logical as a direct reflection of the fight over inflation being waged by the Federal Reserve.

So what happens to the capital markets when interest rates rise? Similarly, stock prices decline with the expectations earnings will decline due to higher costs. Reality is stock prices are down from their all-time highs in January (from the fight against inflation) due to the higher costs associated with increasing interest rates. Quite frankly, prices may fall even further (it may get worse before it gets better) depending on how far the Federal Reserve takes interest rates.

Are you panicked? Are you changing your standard of living? Are you fearful prices will never get back to where they were at the beginning of the year? We hope your obvious answer continues to be “no”.

“It’s Not Different This Time”

Every time we get into a declining market, there is always the tendency to believe “it’s different that time”. At KFM, we will agree that the “reason” the market is declining may be different “this” time, but we need to remember, recovery is around the corner, as it always is. Since 1950, we’ve had 11 recessions which have lasted on average 10 months. Over the same time, we’ve had 11 (recessions + one) expansions lasting on average 69 months. “Are we almost there yet?”

In your Legacy Action Plan, we’ve discussed “Bull vs. Bear”. Since 1946 we’ve had 13 corrections of 20% or more. Over the same period, we’ve had 12 recoveries and we are WAITING PATIENTLY to add number 13 to our chart. Recoveries always happen, so there WILL be a plus one. The average decline lasts 15 months, while the average recovery is 62 months.  It will come. “Are we there yet?”

Declining markets (real estate, stocks, bonds) simply just “stink” and we, just like you, can’t wait until we “get there”.

These are NOT investment strategies:

Market Timing: The most credible research has indicated that you cannot consistently time the market. Market fluctuations are most often based on emotional responses to random political or economic events. Furthermore, it requires you being correct, twice. Once, before the market deteriorates and again, when things are so bad, buying back at or near a market bottom. We believe being correct twice is statistically and emotionally improbable. Remember 2020? The capital markets were off by 30% or more in March, but finished the year positive.

Individual Security Selection: You may or may not remember names like Enron, Gateway, Home Grocer, AIG, Lehman Brothers or Sears, but the risk of owning individual securities is too great. One simple mistake can deplete and diminish your long-term plans overnight. 2022 has been the most difficult year we’ve seen for individual stock pickers.

Panic and Fear: Your two biggest enemies. Reaction to either can create irreparable harm to your financial well-being.

Greed: Thinking investments will only go up and the only reason to invest is for short-term gain or to make yourself feel better for following the “herd”. Greed can disrupt your long-term plans abruptly. Take a look at the year-to-date returns for Cryptocurrencies.

We believe the only correct investment strategy is asset allocation. It is only effective asset allocation that has, over time, provided investors with the consistent returns necessary to reach their financial goals. Asset allocation has moved from the intuitive “gut feel” to the realm of quantitative analysis with the advent of the computer age. The 1990 Nobel Prize for Economics was awarded to three economists for their work in how the financial markets operate. Their research led to the development of Modern Portfolio Theory (MPT), which has taken the allocation of investment assets to new heights.

Since day one of Kemp Financial Management, we have always, and continue to believe:

Investor Returns = Market Returns + Investor Behavior

Our goal with clients is to establish life-long relationships, allowing clients to live the lifestyle they desire for the remainder of their lifetime. This means we will go through numerous economic declines and numerous economic expansions. Our goal through both environments is to keep our clients focused on the long haul. Pat yourself on the back for being a part of this long journey and staying committed to your financial future. This newsletter is simply a reminder that bad times come, but good times are just ahead.

“Are we there yet?”  Not yet, but we will be there soon!

Legislative Update:

In March, the House of Representatives voted to approve the SECURE Act 2.0. The bill would increase the required minimum distribution (RMD) age from 72 to 73 next year, to 74 in 2030, and to 75 in 2032. It would also increase the catch-up contribution limit to $10,000 for those ages 62 to 64. Although over the summer, the Senate came out with its own version of the legislation. They would like to increase the RMD age to 75 as well, but all at once, and not until 2032. The $10,000 catch-up contribution would apply to those ages 60 to 63.

These numerous differences will need to be ironed out between the House and Senate but aren’t likely to be worked out until after the midterm elections. A December timeline seems likely. We will make sure to keep you updated should any changes take place set to start in the new year.

Cryptocurrency continues to be a hot topic in the press and is now capturing attention from various agencies and entities, and not necessarily the good kind. The SEC and CFTC (Commodity Futures Trading Commission) are competing for regulatory jurisdiction over crypto. It is the CFTC’s view that cryptocurrencies are a commodity, so naturally they should be the regulator. The SEC chair calls crypto “wild west…rife with fraud, scams and abuse”. The Department of Labor continues to push that crypto should not be an option in retirement plans. With all of the attention and looming questions as to how crypto fits into our society moving forward, the White House has gotten involved, stating we need a government wide strategy.

As always, we will do our best to keep you informed of any changes at the Legislative level that may have impact on your financial future. Should you have any questions or concerns about any of the material discussed, please reach out to KFM at your earliest convenience.