 Thanksgiving’s here, it’s time to reflect, On family, friends, and your portfolio’s trek. The market’s a turkey, it squawks, and it dives, But smart, steady planning keeps your dreams alive. The gravy boat flows, like compound returns, Patience is key—it's the lesson that burns. If inflation’s the stuffing, bloated and dense, A diversified plate just makes more sense. The cranberry sauce may be bitter or sweet, Much like the risks we strategically meet. The feast takes some planning, with balance and care, So too does your future—we’ll always prepare. With gratitude flowing like fine cabernet, I’m thankful for trust you’ve shown every day. As you carve through life’s choices, both simple and tough, You are the reason I can’t thank you enough. So, here’s to your health, your wealth, and your cheer, May this Thanksgiving bring joy year to year. Let’s toast to the journey, through markets and strife, You are building a wonderful prosperous life! I hope you enjoyed my Thanksgiving Ode from Me, and a little help from ChatGPT. -Paul R. Rossi, CFA
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 The Dow Jones Industrial Average (DJIA), a cornerstone of U.S. equity markets, may reach the milestone of 100,000 points sooner than many might think. Although such a leap might seem daunting, historical data and realistic growth rates suggest it’s achievable within the foreseeable future. Scenario 1: 3% Annual Returns Even with abnormally low annual growth rate of 3%, substantially below the historical returns for the DJIA, the index would cross 100,000 in 2052 (about 27 years) from its current level of roughly 44,000. Scenario 2: 5% Annual Returns At 5%, the Dow would hit 100,000 in 2042 (just under 17 years). This scenario reflects balanced market conditions with modest corporate earnings and moderate interest rates. Scenario 3: 9% Annual Returns And if the Dow achieves a strong average growth rate of 9%, which would be driven by strong economic expansion, the index could reach 100,000 in 2035 (9.5 years). However, this path aligns with previous periods of rapid growth, such as the 1990s tech boom. Drivers of Growth Several factors could fuel these scenarios:
While reaching 100,000 might seem overly optimistic, the compounding effect of even moderate growth rates demonstrates how this milestone could become reality within a generation. Investors should stay focused on having a well-thought-out plan to capture these opportunities. -Paul R. Rossi, CFA  I don't typically make predictions, but... The S&P 500 Earnings Per Share (EPS) metric has seen significant fluctuations over the years, reflecting periods of growth, periods of modest growth, slowdowns, and more severe recession-induced downturns. Over the past three and a half decades, EPS growth has been largely positive, driven by corporate expansion, technological advances, and economic growth. However, several downturns have periodically interrupted this trend, some being triggered by economic recessions, financial crises, or global events.
Historically, it's taken the S&P 500 four to five years for quarterly EPS to recover from previous peak levels following significant downturns. However, this recovery time varies, depending on the nature and severity of the downturn, as well as the economic conditions and policy responses that follow. Despite these cycles, long-term EPS growth has been positive, with historical growth rates averaging over 6% per year, which in turn, has contributed to strong stock market performance. This trend of economic growth underlines the importance of staying focused on the long-term benefits of riding the wave of growth. Market prediction:
Bonus Prediction:
Why do I make this prediction and why is it important?
Understanding the hard truths might help make enduring the lumpy times ahead just a bit easier. -Paul R. Rossi, CFA P.S. *Ignore anyone that claims they can predict the short-term.  The challenge for investors is trying to come up with a reasonable value for a company that is growing fast but also is considered expensive when compared to other companies or the overall market. There is a solution. One idea to help investors understand some of the risks in valuation, is looking at current P/E (price/earnings) vs. future P/E ratios and then this relationship to future growth rates. Examples tend to help illustrate the thought process around this idea. Let's use an example to help us understand the concept. A company that has been growing it's EPS (earnings per share) on average by 25% for the last several years and the market has been valuing the company with a P/E of ratio of 45. In this example, we are comfortable with the future EPS growth rate of 25%, as we expect growth this to continue for some time. However, we are concerned that the P/E multiple might come down from its current 45 and be repriced with a more inline market multiple of 25. If the market reprices this company, how long will it take the companies EPS to justify a P/E of 25? Let's calculate. Current Valuation: The initial P/E is 45, so the P (Price) = 45 * EPS (Earnings Per Share) Target Condition (the risk): The company P/E will now be 25 without changing the price, so we'll need the EPS to grow until the stock price dividend by the EPS equals 25. (P / Future EPS) = 25 Growth in EPS: Future EPS = E * (1 + .250) ^ n Setting up and solving the equation: P/E * EPS = Future P/E * Future EPS
So this tells us that a company that is expecting to grow at 25% would take approximately 2 years and 8 months to support a P/E ratio of 25. If an investor is comfortable with this assumption of growth and possible P/E compression, then if could make sense to buy a company that is trading at what would initially look like a very lofty valuation in relationship to the market averages. We can also run various "what-if" scenarios, like reducing the growth rate from 25% to 20%. How much does this impact the number of years to support a P/E ratio of 25? In this case, it would take 3.22 years. Additionally, if you purchased a security, this process can be used to help determine if you "over paid," and if so, how long will it take for the company's earnings to catch up with its valuation. Like personal growth, strong company growth can help overcome a lot, even if your initial starting point was less than ideal. -Paul R. Rossi, CFA  What might (sort of) look like an EKG (Electrocardiogram) chart which measures the electrical activity of the heart, it's actually the CBOE (Chicago Board of Options Exchange) Put/Call Ratio. For savvy investors, the CBOE Put/Call Ratio can be used to help gauge market sentiment by comparing the number of traded Put options as compared to the number of traded Call options. What are Put and Call options? They are collectively part of a group of securities called derivative instruments. Put options give the holder the right to sell an asset at a specific price within a certain timeframe. Investors often buy puts when they believe the market, or a specific stock is going to decline. Put options are also used as a hedging tool. Call options give the holder the right to buy an asset at a specific price. Investors purchase calls when they expect the market or a stock to rise. The put-call ratio shows how many puts are being traded relative to calls. A ratio of 1 means an equal number of puts and calls are being traded. Interpreting the Put/Call Ratio High Put/Call Ratio (>1): A higher ratio indicates that more investors are buying puts, expecting a market decline. For example, if the ratio reaches 1.3, this means 1.3 puts are being traded for every call, suggesting investors are largely bearish and putting hedges in place. Extremely high levels can sometimes be seen as a contrarian signal. When too many investors expect a downturn, it can indicate a market bottom, where prices could stabilize or even rise. Low Put/Call Ratio (<1): A lower ratio can suggest more calls are being bought, reflecting optimism in the market. For instance, a ratio of 0.6 means more calls are being traded, signaling that investors are bullish. Again, extremely low levels could be a contrarian signal, suggesting the market is overly optimistic and may be ripe for a correction. For example, imagine the stock market has been declining for several weeks, and investors become increasingly pessimistic. The CBOE Put/Call ratio rises to 1.8, indicating that far more puts are being bought than calls. This heightened bearish sentiment might suggest that investors are hedging or speculating on further declines. However, such a high ratio could also be seen as a contrarian indicator, implying that too many investors are expecting bad news and that the market might be nearing a bottom. If the ratio starts falling, signaling more calls being bought, it could suggest a change in sentiment and the potential for a market rebound. In this way, the Put/Call Ratio offers a window into investor sentiment, and when used in conjunction with other market data, it can provide valuable insights for timing market turns. -Paul R. Rossi, CFA  Although markets have performed well this year, some investors may be nervous about upcoming events such as the presidential election, the Fed’s next rate decision, and the state of the economy. Along with the uncertainty of the past few years, it’s no wonder that gold prices have also risen to record levels above $2,600 per ounce. While gold can serve a purpose, some investors may focus on it as a standalone investment rather than as a component of a well-constructed portfolio. In today’s market environment, what role should gold play in long-term investment and financial plans? There are many reasons investors might be drawn to gold.
The case for gold really depends on the portfolio objective. Across economic environments, gold can serve at least two investment purposes. 1. First, as a precious metal with consumer and industrial uses, the value of gold can rise over time due to limited supply and steadily increasing demand. This is in addition to demand for gold as a luxury good. As a result, it can serve as a store of value when the world is uncertain and can also protect against inflation as the economy heats up or as central banks increase stimulus, as they have done this year. It's also clear that many investors flock to gold for safety when markets get choppy. In many ways, this is no different from how some investor's view cash or bonds - as a tool to protect their portfolio from short-term market swings. Unlike cash and other safe-haven assets, however, gold does not generate any portfolio income. Thus, it's important to distinguish between gold as a one-off investment and as a part of a portfolio tailored to achieve financial goals. 2. The second and more important consideration is whether gold can help diversify portfolios. Much like bonds, gold tends to perform differently to stocks. The relationship between gold and the stock market since 2008, shown in the accompanying chart, makes this clear. Although gold outperformed stocks during the global financial crisis, it fell in value and flat-lined for years while the stock market climbed to new record highs. Gold also jumped in value during the pandemic, and again more recently as the Fed began to cut rates. 
What may be surprising is that gold was relatively flat during the recent inflationary period that began in 2021. This is partly because the Fed raised rates rapidly in 2022, increasing the attractiveness of cash and other short-term assets. This reveals that understanding the underlying drivers of gold price movements and Fed policy is important when it comes to making portfolio decisions. It’s also important to note that over this full period, the stock market outperformed gold, just as it has against most other asset classes. Of course, constructing a portfolio is not just about investing in the best performing asset – it’s about diversifying to reduce risk and help smooth the ride and to meet financial objectives. While gold may be attractive to investors for a variety of reasons, it’s always important to view it with respect to other asset classes, including stocks, bonds, cash, alternative investments, and real estate. Why Have Gold Prices Risen Recently? Gold often performs well when interest rates decline, as lower rates make non-yielding assets like gold more attractive. The Federal Reserve typically cuts rates to boost economic growth, which can signal an economic slowdown or rising inflation—both positive for gold as a hedge against rising prices. However, falling rates also benefit stocks and bonds. A "soft landing," where inflation slows and rates fall, can create a favorable environment for the stock market and boost bonds, as higher-yielding bonds become more valuable. Recently, though, market-based rates have risen, with the 10-year Treasury yield nearing 4.1%. Like all investments, gold is best (if used) as part of a diversified portfolio. Various asset classes, such as international stocks and small caps, have contributed to market performance this year. Rather than focusing on a single asset, building a resilient portfolio to weather changing market conditions is key. Geopolitics and other concerns will continue to impact markets, the principles of a well-designed portfolio remain steady. What’s the bottom line? Gold’s recent rally can be attributed to Fed rate cuts, geopolitical tension, and fiscal concerns. Investing in gold or any investment should always be considered in the context of a designed investment strategy rather than as a standalone investment. As Led Zepplin so aptly sang: And as we wind on down the road Our shadows taller than our soul There walks a lady we all know Who shines white light and wants to show How everything still turns to gold And if you listen very hard The tune will come to you at last When all are one, and one is all, yeah To be a rock and not to roll -Paul R. Rossi, CFA  Chances are you are not a billionaire, and chances are you will not become a billionaire. But you can ensure your great-great-grandchildren are. We’ll call this the Billion-Dollar Family Portfolio. Let’s describe it and how to do it. Starting with a $100,000, it's possible to build a $1 Billion Dollar Family Portfolio It might seem like an impossible goal, but with discipline and the power of time, it can be achieved over multiple generations. Assuming a 9% annual return (below the stock market's historical average) this ambitious target can become a reality by maximizing time and reinvesting returns. Let’s break down how you can create a lasting financial legacy for your family. The Power of Time Let’s use the sage ideas of Warren Buffett, “Time is the friend of a wonderful company and the enemy of a bad one.” A growth portfolio can be thought of similarly, a well-designed portfolio can grow to become something of wonder given enough time. Compound interest is one of the most powerful tools in wealth creation. By reinvesting your returns year after year (not spending it), you create a snowball effect where your money starts to generate more money on its own. The key to growing a $100,000 portfolio into $1 billion is to give your investments enough time to grow through compounding. At a 9% annual return, your portfolio will double approximately every 8 years. Let’s see how your $100,000 would grow over time: - After 8 years: $100,000 becomes $200,000 - After 16 years: $200,000 becomes $400,000 - After 24 years: $400,000 becomes $800,000 (8x original investment) - After 32 years: $800,000 becomes $1.6 million - After 40 years: $1.6 million becomes $3.2 million - After 48 years: $3.2 million becomes $6.4 million - After 56 years: $6.4 million becomes $12.8 million (128x original investment) - After 64 years: $12.8 million becomes $25.6 million - After 72 years: $25.6 million becomes $51.2 million - After 80 years: $51.2 million becomes $102.4 million - After 88 years: $102.4 million becomes $204.8 million - After 96 years: $204.8 million becomes $409.6 million - After 104 years: $409.6 million becomes $819.2 million (8,192x original investment) After just over a century—potentially spanning four generations—the portfolio would approach $1 billion. While this is a long journey, it illustrates the power of compound interest and disciplined investing over time. You’ll notice after the first 50 years it doesn’t seem like the portfolio will get anywhere near the $1 billion mark, however it’s the second 50 years where the “magic” happens. This is where the power of time really starts to have an unbelievable effect on the dollar value of the portfolio. Creating a Multi-Generational Legacy Building a billion-dollar portfolio requires more than just time and returns, it requires passing on sound financial principles to future generations. Over the course of a 3-4 generations, the family wealth could grow exponentially, providing financial security for future heirs. Consider the example of the Rothschild family, who amassed significant wealth in the 18th and 19th centuries...and still continues to this day. Some estimates have the vast family's wealth approaching a trillion dollars. By employing a long-term strategy and ensuring that future generations followed similar investment principles, they were able to sustain and grow their wealth. Today, the Rothschilds remain one of the wealthiest families in the world, thanks to the power of multi-generational investing. Doing What Most Won’t Do Most people are drawn to short-term gains and quick wins, which is why building a $1 billion portfolio is hard and requires the discipline to avoid instant gratification. Warren Buffett, famously said, “The stock market is a device for transferring money from the impatient to the patient.” Those who are patient, disciplined, and willing to stay the course reap the greatest rewards. The Biggest Challenge The difficulty lies in maintaining this discipline through difficult market cycles over generations. Tough times lie ahead, they always do. You can be virtually certain that over the next 100 years there will be many panics, wars, and countless scary times that will need to be endured to build the Billion Dollar Family Portfolio. Think about building this portfolio in 1900 and what happened over the next 100 years: 2 world wars, a great depression, countless recessions, stagflation, many smaller wars, a presidential assassination, and several government shutdowns. The key to building long-term generational life changing wealth is sticking to a consistent investment strategy over many decades, even when the vast majority will be tempted to deviate. How To
Achieving a $1 billion portfolio from $100,000 requires time, patience, and discipline, but it’s possible to achieve across a few generations. By ignoring the noise, and focusing on a long-term growth portfolio, and passing down sound financial principles, you can build a lasting legacy that ensures your family’s financial security for generations to come. While the journey may be long, the results will speak for themselves. -Paul R. Rossi, CFA P.S. Some interesting facts about the starting value. If you start with $10,000 instead of $100,000, you can factor that it will take an additional 25 years or so to get to a billion dollars. What if you start with $1 million dollars? It will take 20 years less, so the Billion Dollar Family Portfolio will be achieved in about 80 years. *The statistics show that 0.00022% of Americans are billionaires.  What are Alternative investments? They are financial assets outside of traditional stocks, bonds, and cash. They often include private equity, private credit, hedge funds, real estate, direct start-up investing, commodities, and venture capital. While they can potentially offer higher returns, they also carry unique risks. Investors commonly use alternative investments to enhance portfolio diversification, hedge against market volatility, or seek long-term growth opportunities in niche markets. These assets, often unlisted on traditional stock exchanges, promise unique opportunities and the potential for significant returns and the allure of alternative investments can be irresistible. However, while getting into these investments is easier than ever, a crucial question often goes unasked: How will you get out? Let's take a look at some of the positives and the potential drawbacks of investing in the alternative investment space. But keep in mind there are unique and sometimes stark differences between the various types of alternative investments and even within the same asset category. Positives of Alternative Investments 1. Diversification Benefits Alternative investments, such as hedge funds, private equity, and real assets (e.g., real estate, commodities), often have low correlation with the traditional stocks and bond market. This helps reduce overall portfolio risk by spreading exposure across different asset classes. 2. Higher Potential Returns These investments can offer the potential for higher returns compared to traditional investments. For instance, the top private equity firms and venture capital funds have historically provided substantial gains for investors willing to accept the risks and long holding periods. The big differential between the top tier funds and the rest is quite large, so having access to top firms is extremely important. 3. Access to Unique Opportunities Alternative investments provide exposure to opportunities unavailable in public markets, such as direct investments in startups, private real estate, or infrastructure. This can lead to enhanced portfolio customization and risk-adjusted returns. 4. Tax Efficiency Some alternatives, like real estate, offer tax advantages. Real estate investments allow for depreciation deductions, which can reduce taxable income. Additionally, gains in private equity and venture capital are often taxed as long-term capital gains, which have lower rates than ordinary income tax. Negatives of Alternative Investments 1. Illiquidity Many alternative investments are not easily tradable, which can make it difficult to access capital once you've invested. Investments in private equity or real estate funds often have long lock-up periods, many for up to 10 years or more. Always ask yourself, how will I get out? Selling these assets can be complex and expensive. Since there's no active market for these investments, you may have to sell at a deep discount, often far below their reported value. How deep is the discount? When exiting these investments, you may face a discount of 20% or more. And in a downturn, the lack of demand can make selling even harder, increasing your potential losses. 2. High Fees Alternatives typically come with higher fees than traditional assets. For example, private equity funds charge both a management fee (often 2%) and a performance fee (usually 20% of profits), which can eat into net returns. These fees dramatically impact what the investor actually make. 3. Complexity and Lack of Transparency These investments are often more complex, requiring a deeper understanding of the asset class and specific strategies. Additionally, most of the time they lack the same level of transparency as publicly traded assets, making it difficult to the management teams, assessing risks, or performance in real-time. Many times, these investments are a black box, you don't really know what's inside. 4. Potential Tax Disadvantages Certain alternative investments, such as hedge funds or limited partnerships, may generate taxable events such as unrelated business taxable income (UBTI) or require investors to file complex tax forms like K-1s. These tax issues can add complexity and add the additional need for professional tax help which reduces net returns. While alternative investments can provide diversification and higher returns, they come with real risks such as illiquidity, complexity, and tax implications. Investors need to weigh these factors carefully to ensure alignment with their financial goals and risk tolerance. -Paul R. Rossi, CFA  When the Federal Reserve cuts interest rates last week, it impacts consumers and investors alike. The recent 50 basis point cut (0.50%) affects borrowing, investing, and saving in both the short and medium term. Implications for Consumers Short-Term (3 months)
Medium-Term (12 months)
Implications for Stock Market Investors Short-Term (3 months)
Medium-Term (12 months)
Implications for Bond Market Investors Short-Term (3 months)
Medium-Term (12 months)
Important Considerations The Fed's decision to cut rates by 50 bps is an important piece of information, but it should not be the sole driver of your investment decisions. While rate cuts can influence market conditions, they are just one part of a complex economic and investment landscape. Investors should use the rate cut as a signal to review their portfolios and strategies but make decisions based on a comprehensive assessment of market conditions, risk tolerance, and long-term objectives rather than reacting solely to changes in interest rates. -Paul R. Rossi, CFA Lessons from the CEO of the first non-tech company to be worth more than $1 Trillion Dollars9/17/2024  In August 2024, Berkshire Hathaway, under Warren Buffett’s leadership, reached a historic milestone by becoming the first non-tech company in the U.S. to hit a $1 trillion market capitalization. This feat is particularly impressive when you consider that Berkshire is fundamentally different from its trillion-dollar peers, like Apple, Microsoft, Nivida, and Amazon. The milestone was achieved just two days before Buffett, the Oracle of Omaha, turned 94. The Origins of Berkshire Hathaway Berkshire Hathaway started as a struggling textile manufacturing company. When Warren Buffett began purchasing shares in the 1960s, he saw little future in textiles and pivoted the company into an investment powerhouse. By 1965, Buffett took full control, transforming Berkshire into one of the world’s most diversified conglomerates. His investment strategy buying undervalued businesses across a variety of sectors. Factors Behind Buffett's Success and the $1 Trillion Valuation: Diversification and Acquisitions Berkshire Hathaway’s success can be attributed to its highly diversified portfolio, which spans insurance, energy, railroads, and consumer goods. Key acquisitions such as GEICO, See's Candy, BNSF Railway, and Dairy Queen provided consistent cash flows, protecting the company from downturns in any one sector. The Power of Compounding Buffett has long championed the power of compounding. By reinvesting profits, Berkshire has grown its capital base significantly. This long-term approach has allowed Berkshire to avoid short-term pressures and steadily grow over time. He stated several times, it's not the person with a 160 IQ that does in the investment arena, it's the person with the right temperament. Insurance: The Cash Flow Engine Berkshire Hathaway’s insurance businesses, particularly GEICO, generate significant cash flow in the form of “float,” which Buffett reinvests in high-return opportunities. This strategy provides Berkshire with a continuous and low-cost source of capital. Strong Corporate Governance and Leadership Buffett’s leadership, marked by transparency and integrity, has built investor trust. His conservative investment philosophy has helped Berkshire weather financial storms and contributed to its long-term success. Warren Buffett has not only built an investment empire but has also shared his wisdom with the world, here are a few key lessons:
Standing the Test of Time Berkshire Hathaway’s journey to a $1 trillion market cap highlights Buffett’s disciplined approach, sterling reputation, and commitment to long-term value creation. As the first non-tech company to achieve this milestone, it serves as a model for investors seeking enduring success. -Paul R. Rossi, CFA  Investing in risky assets is a probabilistic endeavor. There are no guarantees, that is indeed why the returns can be greater than non-risky assets. Taking on risk is the price all investors pay for the potential for greater returns. However, taking risk doesn’t guarantee a better return, it just is one of the requirements for the possibility of a greater return. Question: Want to load the probability curve in your favor? Answer: Zig when the market zags. Question: What does this mean? Answer: Let’s look at history as a guide to give some perspective on what you might consider doing. Here are the stock market returns one year after the bottom during the three most recent major market downturns: Great Recession (2008-2009)
Dot-Com Crash (2000-2002)
COVID-19 Crash (2020)
These periods highlight the power of buying when most investors are selling. Essentially all three periods experienced 70%+ returns over the next year. Incredible returns to say the least. This tells us, you can do very well, by doing the opposite of what most others are doing during periods of frantic selling. Of course, it’s not a guarantee, but you are stacking the odds in your favor. It’s a bit like counting cards at the casino, and who doesn’t like to beat the house. Hit the easy button. -Paul R. Rossi, CFA  On September 11, 2001, the world changed forever, and for those of us alive then, we all remember exactly where we were when the attacks happened. The tragic events of that day, when terrorists attacked the Twin Towers, the Pentagon, and attempted a third strike, left an indelible mark on our collective memory. But amid the heartache, we saw extraordinary acts of courage and heroism—especially from the first responders who ran toward danger to save lives. Firefighters, police officers, paramedics, and countless volunteers worked tirelessly in the immediate aftermath. Many lost their lives while rescuing others, and many more have since faced long-term health challenges from the conditions at Ground Zero. Their selflessness reminds us of the incredible bravery it takes to protect and serve, even in the face of danger. In the days and months following the attack, our nation turned its focus to protecting the freedoms we hold dear. Thousands of men and women in our military answered the call to serve, deploying to unfamiliar lands, often far from their families. These brave soldiers, sailors, airmen, and Marines carried with them the responsibility of defending our country and ensuring that such acts of terror would not happen again. Today, we remember and honor all those who sacrificed on 9/11 and in the years since. Whether first responders running into burning buildings or military members serving in far-off battlefields, their commitment to defending our freedoms remains an inspiration. As we reflect on this day, let us not only express gratitude but also ensure that we never forget the spirit of unity and resilience that carried us through, we need to remember this unity now more than ever. We owe an immeasurable debt to those who have stood on the front lines, protecting the values that make our nation strong. -Paul R. Rossi, CFA  1. Thousands of Investment Choices, (literally thousands more) A huge advantage of rolling over a 401(k) into an IRA is the expanded range of investment options. While most 401(k) plans offer a limited menu of funds (typically under 30), an IRA opens up access to literally thousands of investments, which includes individual stocks, bonds, ETFs, options, mutual funds, and alternative assets. This gives you more control over tailoring your portfolio to your investment goals, risk tolerance, and financial goals. 2. Lower Fees and Better Cost Control, (substantially lower fees) IRAs are far less expensive. 401k plans, have (often hidden) administrative fees and higher expense ratios on the available funds within the plan. I've seen plans where the all-in fees are north of 2% annually. Why? Well, 401k plans incur expenses running the plan for the company you worked for, expenses like the Third Party-Administrator (they handle reporting, tax filing, legal testing requirements, etc.), the plan advisor (picks and manages the investment options), and the record keeper (handles the trades, record keeping, and statement generation). All of these groups charge for their services, which comes out of your 401k returns. With an IRA, these pieces can be eliminated, so you can actively seek out low-cost options which can translate into significant savings over time. 3. Consolidation and Simplified Management Many investors accumulate multiple retirement accounts over their careers, which can make managing your overall retirement strategy complicated. Rolling over your old 401(k)’s into one IRA allows you to consolidate your retirement assets in one place, making it easier to manage and adjust as needed. In addition, the ability to make changes to your holdings is vastly easier within an IRA. 4. Greater Flexibility for Beneficiaries and Estate Planning IRAs offer more flexibility when it comes to naming beneficiaries and structuring how those assets will be passed on to heirs. Many 401(k) plans have strict rules regarding spousal inheritance or limited options for non-spouse beneficiaries. With an IRA, you have more control over how your assets are distributed, giving you the ability to create a more comprehensive estate plan. -Paul R. Rossi, CFA P.S. What does the picture of the world's fastest plane (SR-71) have to do with rolling your 401k into an IRA? Nothing, I just like picture. My family, not too long ago, attended a special presentation by a former SR-71 pilot (Brian Shul) who described what it was like being a part of this planes storied past during the cold war.  What's the worst month of the year for investors? September has earned a reputation as a challenging month for investors. Understanding why this is the case, and what the data shows, helps set proper expectations and guide decision-making. Looking back at over a century of data, September consistently stands out as one of the weakest months in terms of average returns. Since 1928, the S&P 500 has averaged a decline of about -1.0% during September, and -1.7% since 2000. This performance is in stark contrast to other months like April or November, which typically boast more positive averages. This phenomenon isn’t just a recent trend. In fact, between 1950 and 2023, the Dow Jones Industrial Average has dropped in September about 60% of the time. The idea behind September’s poor performance is the impact of institutional investors, who may be adjusting their portfolios at the end of the third quarter. Additionally, the end of the summer typically sees lower trading volumes, which can lead to increased volatility as trading can have a larger impact on pricing. The good news is that these declines are often relatively small and short-lived. For savvy investors, September’s volatility doesn’t necessarily need to be a cause for alarm, in fact it can be an opportunity take advantage of some mispricing. It’s also worth noting that while September has historically been a weak month, there have been some notable exceptions. For instance, in 2010, the posted a +8.8% gain, defying the typical September trend. Similarly, 2013 saw the index rise +3.0% in the month. -Paul R. Rossi, CFA  What do the following dates have in common? October 27, 1997 March 16, 2020 December 1, 2008 October 19, 1987 March 12, 2020 These are the 5 single worst days in stock market history since the great depression. On October 19, 1987, often referred to as Black Monday, the Dow Jones Industrial Average dropped by an unprecedented 22.6% in one day, marking it the largest one-day percentage decline in its history. Other global markets experienced similar collapses, triggering a widespread financial panic. To put this drop in perspective, that would be similar to a 10,000+ point drop in the market today. What caused the 1987 crash Several factors contributed to the crash, including growing concerns about rising interest rates, economic uncertainty, and the overvaluation of stocks. One significant factor was the rise of computerized trading and portfolio insurance strategies that automated sell orders once prices started falling, exacerbating the market's decline. Some news goods about the ’87 crash The crash led to reforms in market regulation, such as circuit breakers, which pause trading during extreme volatility, to prevent a similar collapse. Despite its severity, the 1987 crash didn’t trigger a prolonged economic recession but served as a reminder of the dangers of market speculation (the market ended up for 1987) and automated trading systems. Sounds familiar. What would you do if there was a 10,000+ point drop in the stock market, do you have a plan in place should something similar happen today? Do you know how your investments would fare? Do you know what you own, and why? The best time to make changes is well before the possibility becomes a reality, when you are not under mental anguish. While I’m not predicting another 1987, you shouldn’t completely rule it out either. History has shown the market can drop hard and fast. What should your next 3 moves be? Plan. Prepare. Execute. -Paul R. Rossi, CFA 
When investing, concerning yourself with who is currently, or who will be occupying the White House, isn’t as important as you might think. (But this isn't to say elections don't matter, they absolutely do. Policies have important and long-lasting implications). So, if the person who calls the White House home isn't important in terms of investing, what is important? Investing is about probabilities, understanding those probabilities and taking measured risks. What is important? It is understanding who the likes of Tim, Darren, Mary, Jane, Andy, Satya, Mark, and Sundar are. Who are these people? They are Tim Cook of Apple, Darren Woods of Exxon Mobile, Mary Barra of General Motors, Jane Fraser of Citigroup, Andy Witty of United Health Group, Satya Nadella of Microsoft, Mark Zuckerberg of Facebook, and Sundar Pichai of Google. These are some of the largest and most important companies in the world, and these people, as well as other CEOs, are more important to how well your investments will do than any politician. Do interest rates affect the market? Yes. Does tax policy affect companies? Yes. Can legislation affect business climate? Absolutely. All of these effect businesses (and many more). But CEO’s and their management teams are paid hefty sums to navigate the ever-changing hyper competitive business landscape. No matter what is thrown at them, they are expected to overcome virtually any obstacle, even poor policy decisions made by elected officials. While parties change, including who is President or who controls Congress, they are often less important than the internal factors that define a company's success. Betting on CEOs and Management Teams The quality of a company’s leadership is arguably one of the most critical factors in determining its long-term success. A great CEO can steer a company through difficult times, capitalize on opportunities, and foster innovation and growth. Take Apple, for example, under the leadership of Steve Jobs, Apple transformed from a struggling computer manufacturer into one of the most valuable companies in the world. Jobs’ vision, innovation, and relentless pursuit of excellence were key drivers of Apple’s success. Even after his passing, the strong culture and management team he built have continued to lead Apple to new heights under Tim Cook. Similarly, companies like Amazon, Tesla, and Berkshire Hathaway owe much of their success to the vision and execution of their CEOs—Jeff Bezos, Elon Musk, and Warren Buffett, respectively. These leaders have not only created strong business models but have also built teams that can execute their visions effectively. For investors, betting on these leaders and their ability to continue driving growth is often a more reliable strategy than worrying about political shifts. The Importance of Business Models While leadership is crucial, the underlying business model is equally important. A solid business model provides a competitive advantage, ensures sustainable revenue streams, and allows a company to adapt to changing market conditions. Companies with robust business models can withstand economic and political fluctuations, making them more resilient investments. Consider companies like Google and Facebook, their platforms have become essential parts of our lives, giving them a competitive edge that is difficult to challenge (up to this point). The recurring revenue from advertisers, coupled with massive user bases, provides a strong foundation that can weather political or economic changes. Similarly, companies like Visa and MasterCard operate on business models that are deeply embedded in the global financial system. Their networks facilitate billions of transactions daily, and their value is tied to the growth of digital payments, a trend that is likely to continue regardless of who holds political power. Politics vs. Corporate Fundamentals It’s easy to get caught up in the news cycle, especially during election seasons, and to worry about how political changes might affect the market. However, history has shown that while political events can cause short-term volatility, the long-term success of investments is more closely tied to corporate fundamentals (management and business models) than to political leadership. Great business models and management teams have shown to do well in both good times and bad, regardless of what is going on around them. By betting on strong CEOs, capable management teams, and resilient business models, investors can position themselves for long-term success, regardless of who is in the White House or Congress. The key is to remain focused on what truly drives value in the companies you invest in, rather than getting distracted by the noise of politics. -Paul R. Rossi, CFA  Noise is all around us, it's everywhere. The phone we all carry not only makes calls, it's also a noise amplification machine...making it difficult to discern between all the noise around us and valuable signals. The stock market is no different. Stock market "noise" refers to the short-term fluctuations and irrelevant information that can obscure the truth and the true underlying value of financial assets. Noise is the background chatter that can cloud good judgment. It includes the daily price swings, news headlines, rumors, and random market movements that do not reflect the underlying fundamental value. Noise is often driven by factors such as investor sentiment, market speculation, and external events that have little to no long-term impact on a company's performance or the broader market. For example, a sudden drop in stock prices due to a rumor about an economic policy change, which later proves to be unfounded, would be considered market noise. Noise can make it difficult for investors to distinguish between meaningful signals—indicators that genuinely reflect changes in value—and irrelevant distractions. This can lead to impulsive trading decisions based on short-term events rather than long-term investment strategies, potentially resulting in suboptimal financial outcomes. While short-term market volatility is noise. Over the course of market cycles, the stock market mirrors the trajectory of corporate profits - this is the signal. This is because shares of a stock represent an ownership claim on a company's profits. So, while markets can and do experience short-term turbulence, a steadily growing economy and rising corporate profitability drive long-term market returns. This is clearly demonstrated in the accompanying chart which shows that while markets and earnings do not move in perfect lockstep, over the medium to long-term they are highly correlated.  Over the past twelve months, S&P 500 earnings have risen to $232 per share, a healthy growth rate of 7.4%. This has accelerated with second quarter S&P 500 earnings rising at a blended growth rate of 10.9% (FactSet data). If there was one superpower to have, it would be the ability to accurately filter out the everyday noise. We are being bombarded with noise...ignore the noise and focus on the signal. -Paul R. Rossi, CFA  I was extremely close to my grandfather growing up, we spent a lot of time together, which I am eternally grateful for. He was part of what has been colloquially called the “greatest generation,” a proud American, my grandfather dropped out of high school and enlisted in the Marine Corps at 17. He always took great pride in being a Marine in WWII, which included combat in the Pacific on the islands of Tinian and Saipan where he “acquired” a samurai sword from a Japanese solider when he and other Marines were attacked in the early morning of August 2nd, 1944. The formative years of his life were spent in the Marines where he learned and embraced the Marine Corps tenants, such as Semper Fidelis (Always Faithful), honor, courage, and commitment. He always had a strong belief in taking personal responsibility for his safety and instilled this into me. With these thoughts in mind, I've been wanting to enhance my family's awareness and preparation around personal safety. My daughter is now driving and will soon be heading off to college, and my oldest son will be driving before long. My children are now out and about, getting gas, shopping, etc., which is now happening without their dad’s watchful eye. So, the timing for getting the best professional training was important, and I wanted the training to cover various aspects of personal safety. Fortuitously, I recently heard Robert “Ninja Bob” Porras on a recent episode of The Shawn Ryan Show podcast, and his background and demeanor were exactly what I was looking for. Link here ninjabobsolutions.com/about/ Bob served in the United States army for 20 years in a variety of capacities, most of which were in elite Special Forces units within the Army. While most have heard of the Army Rangers, the Green Beret and Navy SEAL’s, which are Special Forces themselves, there is an even more elite unit in the Army, called Delta Force, officially known as the 1st Special Forces Operational Detachment-Delta (1st SFOD-D), it is the U.S. Military’s most elite and secretive special operations unit. It was established in 1977 in response to the increasing need for a highly specialized force capable of counterterrorism, hostage rescue, and other high-risk direct-action missions. Colonel Charles Beckwith was the driving force behind the creation of Delta Force, he himself a highly experienced Green Beret who had served with the British Special Air Service (SAS) on an exchange program in the 1960s. During his time with the SAS, Beckwith was impressed by their counterterrorism capabilities and saw the need for a similar unit within the U.S. military. Delta Force quickly became known for its rigorous selection process and intense training regimen. The unit recruits from all branches of the U.S. military, though most candidates come from the Army Special Forces and Rangers. The selection process is grueling (to say the least), with a focus on physical endurance, mental toughness, and the ability to operate independently under extreme stress. It is known that a very small percentage of candidates successfully complete the training and are admitted into “the Unit.” Some numbers floating around suggest a failure rate of 90+%, in fact, there have been selection classes where no one met the standard, and therefore zero new candidates progressed, confirming that the standard at Delta is never compromised. Former Delta Force operators have said, “It’s the hardest job to get, and the easiest to lose.” And “You never really make it; selection is an ongoing process.” Over the years, Delta Force has become a key contributor in the United States counterterrorism efforts, conducting missions around the world, including hostage rescues, direct action operations, and high-value target captures. The unit operates typically under a veil of secrecy, and its missions are rarely publicized. However, from time to time, news gets out about the work Delta has been doing. Some of these include operations in Somalia, most famously during the Battle of Mogadishu in 1993, which inspired the book and movie “Black Hawk Down.” Delta was also involved in the capture of Panamanian dictator Manuel Noriega and the capture of Saddam Hussein. Following the 9/11 attacks, Delta operators were among the first U.S. forces on the ground in Afghanistan, hunting Taliban and al-Qaeda leaders. They were also involved in the successful 2006 mission that resulted in the death of al-Qaeda leader Abu Musab al-Zarqawi in Iraq. More recently, Delta Force operators were part of the 2019 mission that led to the death of ISIS leader Abu Bakr al-Baghdadi in Syria. Delta’s contributions to our national security have made it one of the most respected and feared special operations forces in the world. They develop their operators into real-world John Wicks. This was the world Bob Porras operated in for years, and after a full career in Delta, he spent an additional 16 years working for the CIA. So, to say Bob was qualified to teach what I was looking for is a gross understatement. When I reached out to Bob to set up training, he was gracious enough to travel out with his wife to provide 3 full days of instruction for my family, which included:
The training more than met my expectations, and we all learned a tremendous amount. We learned so many valuable life skills that we will take with us wherever we go, and with all that is going on, personal safety is more important than ever. The added benefit of our training is that my children now want to go shooting at the range as they feel very comfortable safely handling a handgun, and their dad now gets more quality with them. A win/win. Thank you Bob (and Laura), and thank you for your service to our country. -Paul R. Rossi, CFA  A bear market in the stock market is defined as a period during which stock prices decline by 20% or more from recent highs across a broad market index, such as the Dow Jones Industrial, the Russell 2000 or it could be a somewhat narrower part of the market, such as the Technology sector, or Consumer Discretionary, etc. This decline is typically sustained over a period of time, reflecting widespread pessimism and negative investor sentiment. Definition and Key Points A bear market is defined as a decline of 20% or more in from its recent peak. Historical Data
Comparisons
Factors Influencing Duration
Recent Examples
 What causes a Bear market? Bear markets can be sparked by various factors, including economic recessions, geopolitical events, financial crises, or significant changes in investor expectations. During a bear market, investor confidence is generally low, leading to reduced spending and investment, which can further exacerbate an economic downturn. And unfortunately, a powerful negative loop cycle can take hold that deepens what was the initial catalyst. A bear market in the stock market can be triggered by several factors that lead to widespread investor pessimism and a significant decline in stock prices. Here are the top five triggers: Economic Recessions
Rising Interest Rates
Geopolitical Events
Financial Crises
Negative Corporate Earnings
Bear markets are typically triggered by a combination of these factors, often occurring simultaneously or sequentially, creating a feedback loop that drives stock prices lower. Investors react to these triggers by selling stocks, which further amplifies the downward momentum. Investors often use this historical context to help set expectations during market downturns, although smart investors understand that each bear market has its unique characteristics. -Paul R. Rossi, CFA  To paraphrase Ernest Hemingway, stock market shifts occur “gradually, then suddenly.” This has been evident recently as the market has transitioned from large-cap technology to other sectors. Following the latest jobs report, global stocks saw a sharp pullback due to concerns over the timing of Federal Reserve rate cuts and a weakening labor market. Financial markets are on edge as investors adjust to these changes. The Nasdaq has now entered correction territory with a 10% decline from recent highs, while the S&P 500 has fallen 8.4% from its peak three weeks ago, and the Dow has seen a somewhat more modest decline of 6.1%. The VIX, or market’s “fear gauge,” has surged to its highest level since early 2023, and the 10-year Treasury yield has dropped below 3.8% from 4.7% three months ago. Despite current concerns, macroeconomic conditions such as inflation below 3%, low but rising unemployment, falling interest rates, and significant stock market gains are what investors had hoped for at the start of the year. Investors need perspective to navigate these volatile markets and achieve their financial goals. S&P 500 earnings are projected to grow 13% over the next 12-months, with more than half of its sectors anticipated to grow earnings by double digits. Long-term earnings drive stock market returns, so the economy's overall health is more crucial than short-term trading activity. Concerns are growing about potential Fed policy mistakes. The Fed has kept rates unchanged for over a year, seeking “greater confidence” that inflation is returning to its 2% target. However, this focus has led to a weakening labor market, sparking fears of a “hard landing.” Market expectations for Fed rate cuts have fluctuated throughout the year, reflecting the challenge of getting monetary policy right. The Fed’s focus has shifted to the labor market. The latest jobs report showed the economy added 114,000 new jobs in July, below the consensus estimate of 175,000. Unemployment rose to 4.3%, the highest since the pandemic, but still low from a historical perspective. One reason economists are concerned about this increase in unemployment is an economic indicator known as the Sahm rule. The Sahm rule, named after a former Fed economist, predicts the onset of recessions based on the trend in unemployment. The simple intuition is that a sudden jump in the unemployment rate is highly correlated with economic downturns. In fact, the very definition of a recession depends on the state of the job market. However, higher labor force participation and immigration, both positive factors, contributed to rising unemployment. Both sides of the Fed’s mandate—maximum employment and stable prices—now point to a September rate cut, though some worry the Fed has waited too long. Historically, both soft and hard landings have occurred based on Fed policy decisions. Current debates focus more on the timing rather than the correctness of Fed actions. Whether this is the case has yet to be seen. There have been several historical instances that could be called “soft landings.” Perhaps the most notable occurred from 1994 to 1995 under Fed chair Alan Greenspan when the Fed doubled the federal funds rate from 3% to 6%. Inflation remained under control and the economy continued to grow, avoiding a recession. Despite the positive outcome, this was a harrowing time for investors since it resulted in the worst bear market for bonds up to that point. Historical hard landings, on the other hand, have often been the result of policy missteps rather than just sub-optimal timing. The Great Depression, for instance, was worsened by the Fed’s decision to tighten monetary policy at a time when expansion was needed. Similarly, the high inflation of the 1970s can be attributed to the Fed's overly accommodative stance when prices were rising rapidly. In both instances, the Fed’s actions were essentially the opposite of what economic conditions required, underscoring how severe policy mistakes can be. Where does the Fed stand today? Very few argue that the Fed has made the wrong moves per se—just that they have not timed them well. While many may wish the Fed had cut rates at its last meeting, it is likely they will do so soon. Investing is about both returns and managing risk. Investing is never a sure thing. In the classic book “A Random Walk Down Wall Street,” author Burton Malkiel writes that “the stock market is like a gambling casino where the odds are rigged in favor of the players.” Investing in the stock market comes with many risks that can be managed with proper portfolio construction and a long time horizon. History shows that despite the ups and downs of the market, being invested in quality companies is still the best way to grow wealth and achieve financial goals over the course of time. Stocks never move up in a straight line, so >>> how we react to market volatility is perhaps more important than the volatility itself. The S&P 500 has now experienced its second 5% or worse pullback this year. This is below the average of 4 to 5 pullbacks experienced in the average year, and the dozens during bear markets. Investing in the stock market involves both returns and managing risks. Despite market ups and downs, staying invested is crucial for long-term wealth growth and achieving financial goals. The S&P 500 has experienced two significant pullbacks this year, below the average for a typical year. Current concerns about tech stocks, the Fed, and the labor market have silver linings, including a healthy economy and growing corporate earnings. Seeing past short-term market moves is essential for benefiting from long-term trends. The bottom line: Recent economic data and concerns over Fed actions and tech stock valuations have led to market volatility.
-Paul R. Rossi, CFA The stock market has continued its historic rally with the S&P 500 gaining 14+% year-to-date, contributing to a total return of 55%+ since the market bottom in 2022. While much of this performance has been driven by large cap technology stocks over the past 18 months, there are now signs that other parts of the market are benefiting as well. These shifts highlight the important fact that while investing trends may come and go, it’s the tried-and-true principles of investing that help investors grow their portfolios and achieve their financial goals over years and decades. What should investors know about diversifying across sectors and styles over the next several quarters? Performance is broadening beyond large cap growth While investors tend to focus on major market indices and the one or two areas driving recent returns, the reality is that performance leadership tends to change over time. Large cap tech stocks have dominated headlines recently and for good reason – the Magnificent Seven stocks have gained 180+% over the past year and a half. This is partly due to excitement over artificial intelligence breakthroughs, and partly because lower interest rates are generally positive for growth. This recent performance is also a reversal of the tech crash in 2022 when the Fed hiked rates. However, as the accompanying chart shows, there are now signs that other areas of the market are beginning to participate, with three important implications for investors. First, recent economic reports confirm that inflation is improving which could lead the Fed to cut rates. This has propelled areas such as small cap stocks and large cap value. Small caps in particular tend to be more sensitive to interest rates since they represent less mature companies that often have more limited access to capital. Thus, the prospect of lower rates can be a catalyst for many of these stocks. These companies also tend to be more U.S.-focused, so they often outperform when there is positive news on economic growth. Growth and value can each outperform over long periods What exactly are value and growth stocks? While their exact definitions can differ among investors, these factors tend to be characterized by each stock’s valuation level. Those with lower valuations (P/E, P/S, P/FCF. P/B) tend to be characterized as “value” while those with higher valuations (P/E, P/S, P/FCF, P/B) are classified as “growth.” More broadly, value investors hope that a stock’s share price will adjust based on what it “should” be worth based on fundamentals such as earnings and free cash flow. Growth investors, on the other hand, hope that a company will continue to grow substantially, and are thus less concerned about the current valuation level or share price. The accompanying chart provides historical perspective on how value and growth have fluctuated over time. In the late 1990s and early 2000s, growth stocks outperformed during the dot-com boom. This then gave way to strong outperformance of value stocks through much of the 2000s. This cyclical rotation from growth to value and back has occurred throughout history, driving much of the academic research around the value premium. So, while growth stocks have strongly outperformed most recently, history shows that leadership changes are not unusual.  Diversifying across styles helps to reduce portfolio risk Finally, the outperformance of growth stocks does not mean that diversification is no longer relevant. In fact, the opposite is true: diversifying across styles allows investors to benefit from recent market trends while also protecting their portfolios from potential risks. For example, the accompanying chart shows that those parts of the market that have performed well also have excessive valuations. The price-to-earnings ratio of large cap growth is now 28.4, driving the overall S&P 500 index P/E to 21.2. In contrast, large cap value only has a P/E of 15.7 while small cap value is far less expensive at 13.8. This is the case even though small cap value stocks are expected to experience earnings growth rates similar to large cap growth stocks over the next twelve months.  Performance has broadened across sectors as well. Ten of the eleven S&P 500 sectors have positive returns this year, with only the real estate sector slightly negative. Many sectors have year-to-date gains of 8% or more including financials, utilities, consumer discretionary, industrials, consumer staples, healthcare, and energy. While tech stocks have received most of the attention, and a few individual stocks have significantly outperformed the market, there are signs that other sectors are benefiting from the rally as well.
The bottom line? History shows that long-term investing isn’t just about “predicting winners” – it’s also about diversifying across styles, sectors, and more. Market leadership not only changes over time but also can do so swiftly. Staying diversified allows long-term investors to benefit from opportunities while also having a smoother ride as they work toward their financial goals. -Paul R. Rossi, CFA A question that investors need to ask themselves today, should I choose a longer-term bond/bond fund when money market funds are yielding more than 5% with no risk (however there is interest rate risk). With money market yields at their highest level in years, it’s not necessarily an easy decision. This perspective has some validity, especially if you expect rates to rise. In that case, money market rates would likely increase while longer maturity fixed income would suffer. However, if you believe the Federal Reserve's indication that rate hikes are unlikely and you expect the next rate move to be lower, then moving into longer duration bonds makes sense. As an example, investing in a money market fund today yields a little over 5% which represents the maximum possible return (assuming no further Fed rate hikes). While you won't lose money, your returns could drop below 5% if the Fed cuts rates. For instance, if rates fall to around 4% in a year, your returns might average 4.5%. A faster or more aggressive rate cut could reduce returns to around 4%. Essentially, 5% is the ceiling, with only potential downside. On the other hand, even a modest 1% rate cut by the Fed can potentially push fixed income returns (like those in the Bloomberg Aggregate Index) to over 10%. And a more significant rate cut (like 2%) could drive total performance to over 16%+. The idea that the next move the Fed initiates is a rate cut, makes a strong case for choosing moderately longer maturity fixed income investments over money market funds.  -Paul R. Rossi, CFA PS. If you want to dig a bit into the mechanics of bond pricing, keep reading. What is the relationship between interest rates and bond prices, and how is it calculated? For those that are a little more math inclined, it’s called Modified Duration, and it measures the price sensitivity of bonds to changes in interest rates. In a nutshell, bond prices and interest rates are inversely related, and the longer the maturity of a bond, the more sensitive the bond is to changes in interest rates.  t = time period
PV(CFt) = present value of the cash flow at time t P = price of the bond YTM = yield to maturity n = number of periods per year (e.g., 2 for semi-annual payments)  As my family gathers to celebrate July 4th, I'd like to honor the spirit of independence that our founding fathers instilled in this great nation. Independence Day is a time for reflection, gratitude, and celebration. It’s a day to commemorate the bravery, vision, and determination of those who fought and continue to fight for the freedoms we enjoy today. The founding fathers, through their foresight and unwavering commitment, laid the foundation for a nation built on the principles of liberty, justice, and the pursuit of happiness. Their vision was not just about breaking free from colonial rule but also about establishing a country where individuals could thrive and achieve their dreams. July 4th is a reminder of the enduring values that make our country strong. It’s a day to appreciate the freedoms we sometimes take for granted – freedom of speech, freedom to pursue our ambitions, and the freedom to shape our own destinies. These are the same freedoms that allow us to dream big and strive for financial independence, securing a prosperous future for ourselves and our families. As we celebrate with fireworks, barbecues, and parades, let's take a moment to reflect on the sacrifices made by those who came before us. Their dedication and hard work laid the groundwork for a nation that thrives on innovation and resilience. It’s this same spirit that drives us to plan for our futures and achieve our goals, ensuring that the legacy of independence lives on. This July 4th, while we enjoy the festivities with our family and friends, I'd like to also remember the importance of unity and community. Just as our founding fathers worked together to build a strong nation, we too can work together to build strong communities and support each other’s journeys towards achieving personal and financial goals. Happy Independence Day! May the spirit of freedom, courage, and resilience continue to guide us all in our pursuit of happiness and prosperity. Here's to the enduring legacy of our great nation and the bright future that lies ahead. -Paul R. Rossi, CFA P.S. Can you find me, my wife Sabrina, and our little guy in the picture from last's year July 4th celebration at Town Center in El Dorado Hills?  Understanding Genuine Market Bubbles vs. the Natural Flow of Market Cycles
The concept of a bubble in asset markets typically involves rapid wealth accumulation followed by a dramatic collapse, resulting in significant financial losses. Trying to understand this phenomenon has captivated investors and economists for decades. The term "bubble" is frequently used in discussions about various markets, the stock market, AI, real estate, or art. But what exactly constitutes a market bubble, and how can investors recognize one? Defining a Market Bubble A market bubble is characterized by a rapid escalation in asset prices to levels significantly higher than their intrinsic value, driven by exuberant market behavior rather than fundamental economic factors. These unsustainable price increases create a false sense of fundamental understanding and FOMO (fear of missing out) takes hold, which leads to further speculative buying. However, eventually (and always) reality sets in, the bubble bursts, and prices plummet causing substantial financial losses. Market Bubbles vs. Market Cycles It is crucial for investors to distinguish between market bubbles and regular market cycles. Market cycles are driven by fundamental economic factors and are a natural aspect of market dynamics. Prices rise and fall in response to changes in economic indicators, corporate earnings, and investor sentiment. These cycles are expected and generally do not result in catastrophic losses. In contrast, a market bubble involves price increases that are unsupported by underlying fundamentals and when a bubble bursts, it results in a sharp decline in prices, often leading to significant and permanent losses for investors.
The Balloon Analogy The term "bubble" might be overused, and a more fitting analogy could be a "balloon." Just as a balloon can expand and contract without bursting, the economic system can and often does manage periods of exuberance, unless they reach extreme levels. Recognizing the difference between a balloon that is simply expanding and one that is on the verge of bursting is key for investors. Current Market Conditions Analyzing the current state of the U.S. equity market reveals that while there may be pockets of overvaluation, the overall market does not exhibit the hallmarks of a bubble. Here are some observations:
Focus on Fundamentals The fear of market bubbles is understandable, given the historical impact they have had just in the last 25 years. However, it is essential for investors to discern between a genuine bubble and the natural ebbs and flows of market cycles. By maintaining a vigilant approach and focusing on fundamental economic indicators, investors can better navigate periods of market exuberance and avoid the pitfalls of true bubbles. While the U.S. equity market currently shows signs of overvaluation in some areas, it does not exhibit the widespread, unsustainable price increases characteristic of a bubble. Thus, a balanced perspective and prudent investment strategy remain crucial for long-term financial success. Investors Should Remain Focused On:
While the market cycles through phases of growth and contraction, recognizing the signs of a true bubble and maintaining a disciplined investment approach can help investors achieve better long-term outcomes. Knowing what you own, why you own it, and how it reacts to various economic shocks is important. -Paul R. Rossi, CFA As with many things in life, knowing what we’re supposed to do and actually doing it are two separate things. This is true for our health, relationships, careers, and of course, our finances. When it comes to investing, it’s well known that having a plan, properly diversifying, and staying invested are the best ways to achieve long-term financial goals. However, this is often easier said than done, especially when market and economic outlooks are uncertain, as they have been for some time. Fortunately, there are investment methods for managing the emotions that come from market volatility. What should investors know about how they can stick to an investment plan through years and decades? The Answer: Dollar-Cost Averaging & Lump Sum Investing  Knowing when and how to invest in the stock market can be challenging, especially if you suddenly come into a large sum of money through an annual bonus, the sale of a business, an inheritance, etc. In the long run, investing properly can turn savings into wealth. In the short run, however, market volatility can derail even the most steadfast investors. This is where dollar-cost averaging can help. With dollar-cost averaging, investors regularly invest a set amount on a pre-planned schedule. This reduces the temptation to follow and react to every market move or to try to time the market. If you already make regular, automatic contributions to your portfolio with each paycheck, such as through a 401(k) plan at work, you are technically already using dollar-cost averaging. Whether these investments occur monthly, quarterly, or annually turns out to matter much less than simply sticking to a plan. The opposite, investing all at once, is often known as lump sum investing. How your portfolio performs in the short run is very much determined by how the market performs immediately after the investment. This can be seen in the chart above (first page) which shows the hypothetical returns between these two methods beginning in 2000. Investing $100,000 in the S&P 500 would have lost value almost immediately due to the dot-com crash. This would have recovered over the next several years until the housing crash. Finally, the value of this investment would have recovered in 2013 when the S&P 500 returned to all-time highs and then benefited from the long bull market that followed. This chart also shows the hypothetical returns of a dollar-cost averaging approach in which the investor splits up the $100,000 into monthly investments over this full period. This is a rather extreme example given the length of the time period, but it serves to highlight some key facts. Dollar-cost averaging on a monthly schedule would have avoided the market drawdowns early in the period when the portfolio would have mostly been held in cash, remaining relatively flat through the mid-2010s. There is an inflection after this when the lump sum portfolio catches up and outperforms due to the strong bull market. So, both methods had their benefits and time to shine over the past two-and-a-half decades. Dollar-cost averaging can make it psychologically easier to invest The takeaway here is less about how to maximize returns than how to stay invested through years and decades. Dollar-cost averaging can help reduce risk in situations where markets fall sharply, especially early on. However, lump sum investing tends to outperform dollar-cost averaging in the long run since, historically, markets have steadily risen over time. This is analogous to comparing a 100% stock portfolio to a properly diversified one that holds a balanced mix of stocks, bonds, cash, and other asset classes. The 100% stock portfolio might outperform over long periods, especially during strong bull markets like todays, but it will also experience sharper and more painful pullbacks. A well-designed and diversified portfolio, on the other hand, will experience steadier growth and more muted declines, making it easier for investors to stay levelheaded. This is especially relevant today with the market near all-time highs. The truth of the matter is that markets are always uncertain. Whether it’s the upcoming presidential election, geopolitical conflict, or the direction of interest rates and the economy, investors may worry that the market could pull back just after they invest.  It’s important to keep in mind that just because the market is near a current peak doesn’t necessarily mean it’s “due for a pullback.” By definition, markets achieve many new all-time highs as they rise during bull markets. While there has been significant uncertainty this year due to interest rates, inflation, and the Fed, the S&P 500 has already experienced 24 new all-time highs. This includes a sharp rally in May after a slump in April. Ironically, it can be psychologically difficult to invest both when the market is rising and when it is falling, for fear that the market might be at its peak in the first case, and that it might fall further in the second. So, whether dollar-cost averaging or lump sum investing makes more sense depends on the individual investor, their ability to handle risk, and their time horizon. Having a plan to get invested is better than trying to predict the unknowable future. Just as a diversified portfolio can help reduce overall risk and volatility, so can dollar-cost averaging when it comes to investing over time. Dollar-cost averaging may not be the mathematically optimal way to invest, since lump sum investing has tended to outperform over history. However, it can help investors to stay focused on the long run without worrying about every market event or trying to time the market perfectly. The Bottom Line: Dollar-Cost Averaging and Lump-Sum Investing are both ways to start getting invested. History shows that getting invested sooner and staying invested is the most important way to achieve long-term financial goals. -Paul R. Rossi, CFA |