Choose Relationships over Politics

Election Year – Relationships Matter

Here we go! Election season is now upon us. Over the next 7 months, we will be inundated with texts and emails, mailbox stuffers, and unsolicited phone calls hoping to sway our vote. We believe this election season is going to be the MOST divisive election season we have ever witnessed in our lifetimes. Most polls demonstrate the Country is equally divided as to how they intend on voting. Our concern is not the elections, but potential damage to relationships over the divisiveness this election will bring.

Last month, your KFM Team attended an investment conference where one of the keynotes addressed lamenting about the upcoming election. Much of the data displayed was very consistent with data we shared with you four years ago. We have updated this data and plan to share it again in your upcoming meetings. 

While most people think elections sway the market, history shows us that simply is not true. When your KFM Team looks back at the capital markets over the past 100 plus years, we agree the capital markets do go up and down. But we DO NOT agree that movement is based upon elections or who is in office. It goes up and down due to business and economic cycles, not elections. We believe what happens in the next 5 to 10 years will not be based upon who wins this next election but will be based upon what happens with the economy. We will prove this to you with data at your next meeting!

When our founder, Rob Kemp, was in college, he witnessed the S&P 500 increase in value by over 50% between his sophomore and senior years. One of his finance professors discussed the power of politics and the power of business cycles.

Back then, people actually wanted to be President! However, his professor made a strong case for power—not in politics, but specifically in being the Chairman of the Federal Reserve (Hint for timeframe: Paul A. Volcker). It was stated then, if you want to influence the Capital Markets, the best way to accomplish this feat was to be selected as the Federal Reserve Chair.

Looking back over the past 37 years, this professor has been pretty accurate with historical data validating this point. Again, this data will be provided during your next update meeting. Political marketing materials (junk mail), social media, and news outlets will attempt to persuade you otherwise—that elections matter. Just like all media, don’t let that frighten you about the future results of the 2024 election.

For those of you who think trading around election outcomes is a good idea, you might take the chart below into consideration. If one had invested $100,000 in a 70/30 portfolio (70% equities/stocks and 30% fixed income/bonds) in 1977 and was only invested when a Republican or Democrat was in the White House, you can see the results. While you are more than welcome to do that, the real moral of this chart is “Staying Invested” regardless of who is in office. In its simplest form, staying invested mattered, not who was in the White House. Bottom line: vote with your ballot, not your life savings!

Data Source: DFA Returns

The above chart shows what a hypothetical portfolio value would be if an investor invested $100,000 in a portfolio consisting of 70% equities (stocks) and 30% fixed income (bonds) in 1977 under three different scenarios. The first two scenarios are what would occur if an investor only invested when one particular party was president and left their portfolio in cash otherwise. The third scenario is what would occur if an investor had stayed invested in the 70/30 portfolio throughout the entire period. Past performance is no guarantee of future results.

While we know the election cycle is most likely going to be ugly, we grow increasingly concerned about relationships. How many stories did you hear about friendships and family relationships strained by the last election cycle? How many will be strained this election cycle? While we are all passionate about whom we support, we do believe many of the politicians will work very hard and say anything to get your vote. We think people are going to be very passionate about their feelings. We absolutely encourage you to vote! Although, it's the dinner table conversations and perhaps even social media engagements that might hurt. Regardless of who we feel passionate about, let’s not lose our close relationships over the next several months. Time is precious, keep the peace, don’t lose sight of what matters most.

Capital Market Update

The first quarter is behind us. While the capital markets have advanced, they did not do so in a straight line. In our update meetings throughout the first quarter, we’ve talked a lot about “recovery”. While the markets recovered substantially in 2023, we believe we are still in recovery mode. Does that mean 2024 will be another great year? Like you, we hope so, but that inevitably is the “crystal ball” question that nobody owns.

The story in the financial media and outlets continues to be “recession” or economic slowdown forthcoming. While there have been few signs of either, many financial economists and analysts are still making predictions to include either or both in 2024 or 2025. Whether or not this occurs should not dictate nor distract you from your long-term or short-term desires. Your portfolio has been allocated in such a way to support those goals throughout your lifetime.

We believe you will be proud of the results from the 1st quarter should you choose to review your quarterly statements. If you have any questions or any changes in your financial situation, please contact KFM today. We look forward to discussing all of this and more and your next update meeting!

KFM Update

Passcode Request

Mentioned earlier, your KFM Team attended a conference in San Diego, California. Another keynote speaker presented an update on Artificial Intelligence also commonly known as “AI”. While most of the context discussed the incredible opportunities for the future with AI, the perils and potential dangers of AI were also reviewed.

Our technological world is changing every second. It is becoming increasingly difficult to determine what’s real and what’s not. Voice, video, and written communication which appears to be real, may not be.

While our Custodians are working diligently to protect our clients, your KFM Team feels it would be wise to obtain a verbal “passcode” to keep on file at KFM that only you and your Team at KFM know. While we NEVER share financial information without consent from clients, it is not outside the realm of probability that AI driven forces contact our firm. As a preventative step, we would like to have a passcode on file to ensure we are protecting you as best as possible.

We are not trying to be alarmist for anything current or future. Our desire is simply to take an extra step for precautionary purposes. Please be thinking about a passcode that only you would know, and plan on having this discussion with your KFM Team during your next meeting with the firm.

Legislative Update

Lastly, we have had an "uptick" in interest for those of you who are subject to taking mandatory Required Minimum Distributions (RMDs). As a reminder, 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.

We look forward to seeing you soon, whether that’s in person or virtually. Thanks again for your continued trust, confidence, and friendship!