Preaching to the Choir
KFM Update
Ladies Night Out
Every year we host a Ladies Night Out for an evening of fun and socialization. We started this tradition two decades ago as a recommendation of our Women’s Client Advisory Council. Last month, we held our 15th Annual Ladies Night Out and it was another wonderful evening to remember! We sailed around Newport Harbor with 45 clients and friends while being treated to a gorgeous sunset. Thank you to all who made the trip — even from Northern California! We spent the evening enjoying food, wine, and fantastic conversation! If you missed it, we hope you join us next year at our 16th Annual Ladies Night Out!
Save the Date: KFM Holiday Open House
Last year, your KFM Team wanted to make Christmas a little brighter for children in need. We chose to put together 50 boxes for Operation Christmas Child. While 50 was great, we thought it would be more fun to increase our Christmas spirit by inviting clients to participate as well. On Friday, November 17th from 11:00am – 2:00pm we will be packing shoeboxes for Operation Christmas Child. Come enjoy holiday treats and pack boxes with the KFM elves for children around the world! We will provide all the supplies. All we need is help. Please be on the lookout for more details to come.
New Client Portal
Your KFM Client Portal is getting an update! Starting on October 19th, the Client Portal will have a new look- but your login information, data, and documents will all remain the same. To access your shared documents, you will click on the folder icon in the top left of the Portal. Updated mobile apps for the Client Portal are also in the works and will be ready soon. As a reminder, you can always access the Client Portal login from the KFM website (kempfm.com) by clicking on the “Client Portal Login” link under the “For Clients” menu option. If you have any questions or need assistance with the Client Portal, please contact us and we will be glad to help.
4th Quarter Tax Summaries
It’s hard to believe the fourth quarter is already here! As a reminder, we will be collecting dividend and capital gain information for 2023 for your taxable accounts. This information will begin to flow to KFM at the beginning of November. We are hopeful to provide our summaries to you by the beginning of December, so that you can use the remainder of the year to make any adjustments to your tax planning for 2023.
Preaching to the Choir
Last quarter, we focused quite a bit on economics pre- and perhaps post-Covid. We discussed at length the effects of the pandemic and how it impacted industry groups at different periods of time. This quarter, we felt it was relevant to go back to our ongoing dialogue about “Investor Behavior”. It’s not because we believe you need more assistance with behavior, it’s simply because investment media continues to misrepresent what we see as the truth. We know this is “preaching to the choir”, but we feel it’s a good reminder given the flow of misinformation for many channels.
It never ceases to amaze us about the fallacy of picking individual stocks versus hiring a professional manager to do that for you. Discussions around success stories dominate topics of conversations- without including an accurate discussion about the stocks or money managers that didn’t work out so well. The sense that everyone is being successful by doing it themselves or finding the manager that is “beating” the market continues to be hyped in social media and traditional financial media.
We understand the ‘why’. If we were interviewed stating “buy the markets, diversify, don’t look at things day to day, and think long-term”- advertising dollars would quickly run dry. Yet the hard data continues to support this approach.
Prior to becoming a client, we introduced you to data from the company Dalbar. In summary, since the mid-90s we have purchased what is known today as the Quantitative Analysis of Investor Behavior. While we use this data for education, it has also been the foundation set forth in each of our clients’ Investment Policy Statements. Each year, the report examines the behavior and more importantly the performance results for both equity (stock) and fixed income (bond) investors. Our focus for this discussion will be limited to investor behavior with equity (stock) investors with the data period ending December 31, 2022.
For starters, investors say they are “long-term” investors, but the average investor sadly does not behave like one. As an example, for the last 10 years, the average investor changed their mind on average every 4.5 years. While we do not know the actual reason for this, onboarding new clients to KFM has provided some insight. Disappointment in not obtaining market returns has been one of the many reasons clients have made change.
While we do not “chase performance” that’s often one of the most common mistakes investors make. When they are unhappy with performance, they look at “past performance” to see if it meets their criteria. The problem with this theory is that past performance is not indicative of future performance. You probably recognize that disclosure statement, and it’s actually a great warning, but sadly it’s one of the few data points people consider. It seems natural that simply buying the markets are a better solution, but sadly the typical media channels state otherwise.
As it relates to being a long-term investor and actual investor performance, the data is quite staggering.
* Source: Dalbar
If an average investor had invested $750,000 in January of 2012, the ending balance would have been $1,830,015 compared to the “market” at $2,448,511 for a difference of $618,496. Think of it as additional years of cash flow. If you were taking $37,500 (5%) annual income, that’s an additional 16.5 years of cashflow. If not taking said income- think of the additional legacy one can leave to family and/or charitable organizations. The power of accepting the “market” is real.
* Source: Dalbar
We know that competition motivates many. Beating the market, in our mind, should never be a driving force behind any investment decision. But accepting that “the market” is better than professional money management and/or picking stocks on our own, continues to seem obvious but most often ignored by the average investor. You are NOT an average investor. This is why it seems as if we are “preaching to the choir”.
We are not sharing this data with you to encourage you to become long-term investors. That would be preaching to the choir. But this is data you can celebrate. You are not getting caught in the noise and confusion. We define noise as social media, casual conversation with confident friends, and investment media. All too often we get tricked into believing there is a better way. We hear it from our friends too—how they bought the life changing stock. Those odds are just about as good as winning the lottery.
September 2023 DID live up to its traditional reputation. That is, the capital markets went backwards. Historically, September is the worst month for the capital markets than any other calendar month of the year. Most people would guess it’s October—which is because of the major declines that have occurred in that month historically. Consequently, this last quarter ended negatively from the prior quarter, but the capital markets are still positive for the year. This is yet another reason we wanted to focus on the long-term. Please don’t expect much when you review your most recent quarterly statement. However, we look forward to putting it into proper perspective during your next update meeting.
If you would like a more detailed discussion about the data, please make sure you request more “preaching to the choir” data when you schedule your next meeting. If we’ve bored you to tears, please tell us to write something more interesting next time. We look forward to getting caught up in the next few weeks and months during your next update meeting! Until then, if anything has changed in your financial situation, please let us know.
Legislative Update
On October 1st we saw a turn of events after a few weeks where a government shutdown seemed inevitable. The House and Senate passed a bipartisan bill with just hours to spare.
Congress managed to establish an extension of funding through November 17th, which includes $16B in emergency aid for victims of recent natural disasters like the Hawaii wildfire and Florida hurricane—the bill passed overwhelmingly. The extension did not include any new aid for Ukraine, which is a big sticking point for the White House and members from both parties. They will want to address the issue in the next few weeks.
Since the underlying dynamics of the situation have not changed, it seems they have simply kicked the can down the road another 45 days. In the meantime, the House and Senate are going to work separately on trying to pass as many of the twelve appropriations bills that fund every government agency as they can. The issue is their fundamentally different approaches to that process. As of now there is no clear path as to how they’re going to bridge those gaps between the House and the Senate. Come mid-November, we’ll see whether they can come to a consensus.
Lastly, a reminder to all clients taking mandatory Required Minimum Distributions (RMDs)—you may be allowed to use your RMD’s for making contributions to your favorite charities through a Qualified Charitable Distribution (QCD) also known as a charitable IRA rollover. The QCD allows a donor to instruct an IRA administrator to send up to $100,000 per year—all or part of the annual RMD—to one or more qualifying charities, excluding donor-advised funds. Couples who submit tax returns with married filing jointly status qualify for annual QCDs of up to $100,000 each, for a potential total of $200,000. Starting in 2023, donors can also direct a one-time, $50,000 QCD to a charitable remainder trust or charitable gift annuity as part of recently passed SECURE Act 2.0 legislation. And starting in 2024, annual QCD limits will be indexed for inflation. With QCDs, more of your assets can be used to support your favorite charities that are making a difference!
These IRA assets go directly to charity- so donors don't report QCDs as taxable income and don't owe any taxes on the QCD, even if they do not itemize deductions. Some donors may also find that QCDs provide greater tax savings than cash donations for which charitable tax deductions are claimed. This is because adjusted gross income (AGI) is reduced and AGI is used in several key calculations, such as determining the taxable portion of Social Security benefits or what deductions and credits donors qualify for receiving. You may want to discuss this with your tax professional to confirm its appropriateness to your tax situation prior to execution.