Category Archives: Insights

Staying the Course: Why We Aren’t Afraid of the Economy

6/2024

By Crawford Asman

While we acknowledge the imperfections of surveys and how they are used, a recent Harris Poll taken exclusively for the Guardian revealed wide-spread pessimism regarding the economy. The results caught our attention not for the accuracy of the results but for how it demonstrates the power of a concentrated narrative on public opinion.  The results showed that nearly 3/5 Americans believe the US is in the midst of an economic recession. The poll emphasized many misnomers about the economy, with the most notable being:

  1. 49% believe that unemployment is sitting at a 50-year high, however, the current rate has been below 4% since February of 2022.
  2. 49% believe that the S&P 500 is down for the year, though the index saw a 26% total return in 2023 and nearly 12% YTD.
  3. 55% believe the economy is shrinking and 56% believe the US is in the midst of a recession – we’ve now had 6 consecutive quarters of GDP growth.

Clearly, financial journalism has a role in creating this sentiment; after all, it’s difficult to think the economy is doing well while being bombarded by click-bait titles citing whatever global issue as the cause for the down markets that day. These headlines are meant to draw you in with borderline “fear-mongering” tactics, and it can lead to a great deal of confusion to the individual investor. However, the real “issue” here is not the election, nor is it the media. Rather, it’s us simply being human.

Humans are inherently very emotional, and there is especially no exception to that rule when it comes to the broader economy and markets. It’s normal to feel uncertain. That’s why, at Cahaba, it’s our job to provide our clients with a personalized financial plan that will give them a sense of security that they can accomplish their  long-term goals. We don’t focus on the “apocalypse du jour”. Rather, we focus on the plan we originally agreed to, and stand by it. While it may not seem logical at first, long-term investors are more successful when they stick to their investment plan. In both bull and bear markets, the key is staying the course.  

The chart above showcases the total return (including dividend reinvestment) of a $1,000 initial investment into the S&P 500 in 1926. You’ll notice that despite the countless recessionary periods and global crises, simply sticking to the long-term plan and allowing the investment to compound is incredibly powerful.

At this point, you may be asking yourself why you need an advisor in the first place if “staying the course” is all it takes to be successful. Well, the true benefit of an advisor is not how good they are at timing the market or their supposed “superior” abilities to pick undervalued stocks. It’s the guardrails they enact to prevent their clients from engaging in poor decisions that can significantly alter their financial futures.

We at Cahaba, like most people, are not capable of knowing what will happen later this year in the markets, or even later today! What we do know, however, is how to control the controllables. In essence, no matter what is going on in the world, it will not dictate your financial plan – your plan’s objectives and goals will always be the focus. I’ll conclude with one final thought from the well-respected behavioral finance expert, Daniel Crosby:

“Maybe we as a human race aren’t very well suited to help ourselves and listen to our own best advice. But we do seem equipped to help each other when times get tough – and that’s worth a whole lot.”

Sources:

  1. https://www.theguardian.com/us-news/article/2024/may/22/poll-economy-recession-biden#:~:text=Nearly%20three%20in%20five%20Americans,as%20election%20day%20draws%20closer.
  2. https://www.nickmurraynewsletters.com/members/login.cfm?hpage=June%2D2024%2Ecfm&loggedout=y
  3. https://www.linkedin.com/pulse/you-need-financial-advisor-reason-think-daniel-crosby-ph-d-/

Crawford Asman is a Financial Planning Analyst in the Atlanta office of Cahaba Wealth Management, www.cahabawealth.com.

Cahaba Wealth Management is registered as an investment adviser with the SEC and only transacts business in states where it is properly registered, or is excluded or exempted from registration requirements. Registration as an investment adviser does not constitute an endorsement of the firm by the SEC nor does it indicate that the adviser has attained a particular level of skill or ability. Cahaba Wealth Management is not engaged in the practice of law or accounting. Always consult an attorney or tax professional regarding your specific legal or tax situation. Content should not be construed as personalized investment advice. The opinions in this materials are for general information, and not intended to provide specific investment advice or recommendations for an individual. Content should not be regarded as a complete analysis of the subjects discussed. To determine which investment(s) may be appropriate for you, consult your financial advisor.

Top 3 Actions to Take if Your Tax Outcome Was Unexpected

4/2024

Receiving a tax refund larger than expected or owing more tax than anticipated can both be surprising. Such scenarios often indicate discrepancies in your tax planning or withholding. Whether you’re puzzled by a hefty refund or a significant tax bill, here are three practical steps to manage and adjust your tax situation for future financial stability.

1. Reassess Your Withholdings

If your tax refund is larger than expected, it could mean that too much tax is being withheld from your paycheck. While a large refund might seem like a boon, it’s essentially an interest-free loan to the government. To optimize your cash flow throughout the year, consider adjusting your withholdings. You can do this by filling out a new W-4 form with your employer to decrease the amount of taxes withheld from your salary. This adjustment will increase your take-home pay, allowing you to invest, save, or spend those funds throughout the year instead of waiting for a lump sum refund.

Conversely, if you owe more tax than you anticipated, this could be a sign that not enough tax is being withheld from your earnings. In this case, you might want to increase your withholdings by updating your W-4 form. For instance, even if you’re married with kids, it may make sense to claim “Single” to ensure more dollars are paid in through payroll. This can help avoid owing a large sum when you file your next tax return, and it can also prevent potential penalties for underpayment throughout the year.

2. Review and Adjust Estimated Tax Payments

For freelancers, self-employed individuals, or those with additional income sources (such as rental income or dividends), large discrepancies in expected tax outcomes may suggest that estimated tax payments need adjustment. If you owe a significant amount, consider recalculating your estimated payments for the current year to better align with your actual income. This proactive approach can help manage cash flows more efficiently and avoid surprises in the next tax season. Conversely, if your payments are too high, reducing them can free up monthly resources for other financial priorities.

3. Consult a Financial Planner and a Tax Professional

Changes in income, life events (like marriage or having a child), or changes in tax law can all affect your tax liability. If you receive a much larger refund or owe more than expected, it may be time to consult with a financial planner and a tax professional. A professional can help you understand why your tax outcome was different than expected, provide guidance on adjusting your withholdings or estimated payments, and help you plan for future tax implications of any major financial decisions you anticipate making in the upcoming year.

In conclusion, an unexpected tax outcome, whether it’s a larger refund or a bigger tax bill, often signals a need for adjustments in your financial planning. By taking these steps, you can ensure that your tax withholdings or payments align more closely with your actual tax liability, avoiding surprises and optimizing your financial strategy for the year ahead. This approach not only helps in better managing your finances but also in making informed decisions that enhance your overall financial well-being.

Cahaba Wealth Management is registered as an investment adviser with the SEC and only transacts business in states where it is properly registered, or is excluded or exempted from registration requirements. Registration as an investment adviser does not constitute an endorsement of the firm by the SEC nor does it indicate that the adviser has attained a particular level of skill or ability. Cahaba Wealth Management is not engaged in the practice of law or accounting. Always consult an attorney or tax professional regarding your specific legal or tax situation. Content should not be construed as personalized investment advice. The opinions in this materials are for general information, and not intended to provide specific investment advice or recommendations for an individual. Content should not be regarded as a complete analysis of the subjects discussed. To determine which investment(s) may be appropriate for you, consult your financial advisor.

Should I Invest at All-Time Highs?

3/2024

By Don Keeney, CFA, CFP®

“Should I invest now (or stay invested) if the stock market is at all-time highs?” Given there are so many all-time highs in the stock market, we are asked to answer this question with shocking frequency. We know that over time the market goes up, but there tends to be more emphasis and concern about the timing of the next drop or bear market. It is enticing to think we can manage our portfolios to avoid such situations. In reality, if an investment’s time horizon was long enough, the stock market has ALWAYS provided positive returns. So, how long is “long enough”?

Since 1928, S&P 500 returns have been positive over a one-year period 73% of the time1. Not a bad percentage! If you have a ten year investment time horizon, which most of our clients do, the stock market has produced a positive return in 94% of those ten-year periods. When we extend the time horizon to twenty years, we see that returns have been positive 100% of the time. Although past performance is not indicative of future results, historical data shows that staying invested through market turbulence has always been the better decision.

Conversely, what happens when the market is at all-time highs? Let’s first look at a chart depicting S&P 500 returns since the 1950s:

Each red instance on the accompanying chart represents days when the stock market reached an all-time high. As expected, this chart does have periods where the market did not reach its peak (i.e., returns represented by a black line), but there are more red sections than there are not. One of the most interesting components of the chart is that the red portions tend to bunch together. In other words, all-time highs have historically signaled more all-time highs. While different analysts and economists often debate the market and its parameters, the data supports this general concept in almost every case!

The following table pulls from a 1988-2020 dataset of market returns and supports the claim that investing during all-time highs has not been detrimental to investors. Over this time period, the average one year return in the stock market following an all-time high was 14.6%, beating the average return from investing on any given day throughout the data sample. Cumulatively, over the next five years following an all-time high in the market, an investor’s portfolio would have done materially better by investing at an all-time high as opposed to picking any other starting day at random (78.9% vs 71.4%).

The data – despite its source or time frame – generally comes to the same conclusion: one is better investing at all-time highs than they are by picking a day at random to invest. There is a consensus throughout financial research that this benefit has the greatest impact  for time periods in the 1-5 year range. Said differently, as your investment horizon extends, timing takes a back seat to consistency when considering the long-term benefit.  In the long run, the market goes up and investors are compensated time and time again for the risk they are taking.

By knowing your risk tolerance and your investment horizon (the time you have until you need to access your money), you can invest intelligently and improve your specific long-term outcomes. We encourage portfolio diversification and client-specific market risk exposure. This is why we prioritize knowing clients’ parameters and risk tolerances here at Cahaba Wealth.

Arguably the greatest caveat to our discussion is that no one can successfully and consistently time the market over the long run. This has been proven time and time again! Pretending to know which all-time high is the last one for the foreseeable future is nearly impossible. Stay away from this trap. Be diversified, take the appropriate amount of market risk and stay invested!

1 https://farrmiller.com/blogs/insights/the-power-of-staying-invested

Don Keeney, CFA, CFP® is a financial advisor in the Nashville office of Cahaba Wealth Management, www.cahabawealth.com.

Cahaba Wealth Management is registered as an investment adviser with the SEC and only transacts business in states where it is properly registered, or is excluded or exempted from registration requirements. Registration as an investment adviser does not constitute an endorsement of the firm by the SEC nor does it indicate that the adviser has attained a particular level of skill or ability. Cahaba Wealth Management is not engaged in the practice of law or accounting. Always consult an attorney or tax professional regarding your specific legal or tax situation. Content should not be construed as personalized investment advice. The opinions in this materials are for general information, and not intended to provide specific investment advice or recommendations for an individual. Content should not be regarded as a complete analysis of the subjects discussed. To determine which investment(s) may be appropriate for you, consult your financial advisor.