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A Lesson From Yoga: Balance

A Lesson From Yoga: Balance

| January 20, 2023
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Thank you for watching today's video. My name is Rick Happle, portfolio manager at Jaffe Tilchin Wealth Management. Today, I have four things that I would like to discuss with you. Number one inflation, number two the trend of the S and P 500, number three my strategy, and number four the 60/40 allocation approach to investing.

#1 Inflation. The Dow is up 300 points at this moment based on a benign inflation report from the Fed. Benign, but still not apt to change the mind of Jerome Powell.

Point number two: update your retirement plan. The impact on your future retirement income from inflation is very corrosive. A 4% inflation rate, and again, CPI is over seven at the moment. A 4% inflation rate will take a $100,000 income and only deliver $67,000 in purchasing power after ten years.

Number three, rising inflation or, not rising from here, but inflation that stays relatively high is not good for growth stocks. The reason it's not good for growth stocks is capital is no longer cheap.

Growth stocks continue to borrow money to expand their business. And by the way, they're very bad at cutting expenses, unlike value companies. Value companies are large businesses that are in a mature stage that invest less money back into their business, and they return money to shareholders with dividend increases and stock repurchases. That's what you want to own again for this year.

For example, in the 1999 tech bubble, it took seven years for those stocks to recover, those growth stocks, and looking at the next event that followed after seven years, one year later was 2008. So from the tech bubble, we had a 13 year period of a virtual flat investment performance. I think what this speaks to is the value of dividend income and how that would have helped your performance significantly in the future as well as it has in the past.

Point number three: S & P 500. About an hour ago - this is up to date -about an hour ago, the S and P 500 crossed above the 200 day moving average line. I consider myself a trend follower. There's an old Wall Street adage that goes 'below the 200 day moving average, you have 75% risk and 25% return. Above the 200 day, which just happened, you have 75% return and 25% risk.'

Another adage is the rule of three. And my rule of three says to confirm a trend movement, give it either 3% or three days. So let's see if this movement above the 200 day moving average can last. If it does, it's going to change me to become much more positive.

Forecast: Below the surface performance has been better than it has for the index. Because the S and P 500 is market capitalization weighted, it means that the ten biggest stocks influenced 30% or more of the S and P 500 performance. Given that, if you go back, I don't remember the year, but in the past when Japanese banks controlled 30% of all global banking. Their market collapsed when those banks did, and it took 20 years for the market to come back. However, if you invested in Japan and avoided those banks, your investments recovered very quickly.

So today, let's take a lesson from what happened in Japan. Don't eliminate technology, but just reduce your allocation. Or buy legacy technology at a value that pays a dividend.

Rotation. Rotation is currently occurring from technology to material stocks. Now, in the past 30 years ago, technology was 6% of the S & P 500 and energy was over 20. The materials sector was also much higher than technology, but less than what energy was. Fast forward 30 years, the exposure of technology grew from 3% excuse me, grew from 6% to 25% over that 30 year period, and energy has fallen from 25% down to 5%. So energy and materials are both about 5% - have about 5% allocations today.

Given that in looking forward, take a lesson from yoga.

I've taken yoga lessons and learned to balance on 1 foot. While I could put a shoe on my other and tie it. The way that I learned how to do that is to not look at my shoe when I'm tying it, but to look at a spot on the ground. Otherwise I lose my balance. Do not look backward and expect what worked during a falling interest rate environment to work again, because that's over with.

Interest rate trends and Federal Reserve trends on inflation are the longest trends in the market. They typically last for 30 to 40 years. So you don't have the time to wait for technology to outperformance. What I do is look at overweighting sectors that are performing better than the index. That's the only way to outperform the S & P 500 is to underweight the four or five sectors that are not performing well, and overweight the sectors that are. It's really not that complicated.

As far as looking at what we expect from the materials sector, really is embraced by the electrification that's occurring worldwide.

This administration is putting charging stations all across the highway system in the United States. I don't know where the electric is going to come from for those charging stations to be functioning if it weren't for copper. I like copper and the industrial metals. And just yesterday, the price of copper, a ton of copper, cost above $6,000 is highest price ever, still a value. However, 50 years ago, a pound of copper was only $2.25 a pound, and today it's $4 a pound.

That price, when you compare it to the S & P 500 or real estate, is truly a gift, because we're likely to see a shortage of supply in copper, and the impact on price is going to be significant. So one final thought is low cost indexing. In the past couple of decades, Vanguard has pioneered or championed low cost indexing and how active management was not worth the price. However, I think last year did make a difference. In looking at the index performance last year, it was negative 19.4%.

So, if you were a low cost indexer versus someone that paid a 1% management fee, then by that comparison, instead of losing 19.4%, you only lost 18.4%.

Please consider me as steward of capital for your family's investment portfolio and reach out to me if you'd like to receive a copy of my 2023 market commentary.


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