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Jaffe Tilchin Weath Management - Tampa, FL

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If You're Not Confused, You're Not Paying Attention

If You're Not Confused, You're Not Paying Attention

| February 16, 2023
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If your expectations are to generate $100,000 from your investment portfolio, if you're earning 3% after taxes, that will require $3.4 million. The same $100,000 income if you could generate 7% after taxes, will require $1.4 million. That's probably my most important message today. Second most important is your retirement plan. If your retirement plan has not been updated very recently, it's likely obsolete because your investment return assumptions are too high and your inflation expectations are too low.

Please reach out to me. We have a financial planning desk that offers great support to make the process of planning easy for both of us.

Number two macro considerations. The economy can have either a hard landing, soft landing, or the new terminology is no landing. No landing is things just continue as they're going.

Hard landing is a possibility, but my scenario is soft landing. In a soft landing scenario, I've experienced rolling recessions in the past, and let me explain what a rolling recession is. In a rolling recession, there may be some sectors that are not impacted while others are. For example, it could be that energy, industrials, consumer staples and healthcare are fine in a rolling recession, and the sectors that are impacted might be consumer discretion, utilities, technology. So that's what makes active management all the more important today.

I believe that we can still make money for clients in a recession that is similar to the one that I've just described. If inflation doesn't recede enough, however, it's going to postpone any recovery and lower investment returns. Yesterday I had a meeting with Kathy Wood of Arc Investments, and after about halfway through our discussion, she asked for my opinion on inflation, and my response was goods inflation seems to be under control because supply chains have opened up, but it's really services inflation and housing that is going to be stickier. Services inflation includes a lot of wages, and we see wages climbing all the time. Kathy feels that her disruptive technologies can really help inflation and for growth investors. I believe what she has to say is true.

Number three investment process. You must not just grow your wealth today, but you have to protect your wealth, because most people don't want to experience and can't afford to experience a decline like we've experienced last year. Your advisor needs to have an investment monitoring routine that on a daily, weekly, monthly, quarterly basis is checking all the economic indicators and the market itself to make intelligent, informed decisions. In that regard, allow me to discuss my model 811 to give you some insight to my investment process.

My 811 model was named after the eleven primary sectors in the market, and I don't necessarily want to own them all. There are three that I'm going to avoid and I'm going to overweight the other eight, and that's how I perceive we'll be able to deliver good performance that exceeds what the index does. This model is not tax efficient because it makes changes every month, so it's only for IRAs. Step two is there are three buckets. There is a risk on bucket, a risk reduction bucket, and a risk off bucket.

Right now, because of the market uncertainty, the largest bucket in model 811 is risk reduction. The risk reduction bucket also includes alternative investments, and it sounds like a mysterious investment strategy, but alternative investments are basically managers that do trend following, and they could follow trends profitably, whether they go up or go down. Portfolio rebalancing occurs on a monthly basis, and for my tactical growth model, the most aggressive model that I have for long term investors starts with a small one or one and a half percent position in the riskiest investments and only adds if those risky investments climb in value. We use a spreadsheet that looks at current values and then looks at the previous month's values. And as I match up current and proposed allocations, it gives me an opportunity to go line by line and see which investment selections have increased month over month.

And for that monthly rebalancing, if I have a 2% allocation to a stock and it's at 2.1, I'll investigate that further to see if I want to increase it and position sizing comes into play there. Can I afford to take this position from 2.1 to 2.5%, for example, or is that something that I really want to do? Conversely, if in the monthly rebalancing the percentage goes from 2% down to 1.9%, then I'll look at potentially eliminating, reducing, or doing nothing to that position. So the final step is stop alerts. Between the monthly rebalancing, I have alerts that are emailed to me if stocks go above or below a predetermined setting.

In summary, I'm a trend follower, which means if the market is going up, I want to participate. But I am not going to anticipate that the market is going to go up unless I see the actual performance of the market confirming what I'm reading in the Wall Street Journal and all my fundamental research. This is called dynamic hedging. Dynamic hedging is basically hedging portfolios to lower risk when the market calls for doing so. Right now, the level of the market that I'm watching is S and P 4100.

Above that I think we go to 4300, and below that we could retest lows. Although I think October is pretty solid in place as a recent low. As far as looking at clients retirement today, I think retirements are potentially in jeopardy. A lot of people are postponing retirement because of what's going on in the market and the economy and all its uncertainty. But I think having portfolio of dividend paying stocks and having a risk management strategy in place will help give your family some confidence in the future for your investments.

Please reach out for a second opinion on your portfolio. I promise to be a good steward of family capital and understand that this is an important position that treat with the utmost respect. Thank you very much for your time today.

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