Should You Buy The Dip?

Stocks are on sale this year. Should you buy the dip? While generally I would say yes, there are some important caveats.

  • Buy the dip is more reliable when you’re buying a diversified portfolio. Individual companies go out of business or fall into long-term slumps all the time. I can only think of one major stock market that has done that in my lifetime (Japan). In general, broad stock markets tend to recover.
  • Buy the dip only works if stocks are trading at a discount to fair value. If an overpriced stock falls, but it’s still overpriced, it can fall further. Need a possible example? Snap Inc. hit a high of $83 last year. It’s trading at $15. Don’t buy it today thinking it has to get back to $83 someday. It doesn’t. The company has never turned a profit…ever. How do you think it will do if we hit a recession?
  • Be prepared for further drops. If your only bear market experience was 2020, you must understand that rapid recovery was unusual. During the great recession (2007-2009), stocks fell for 17 months before they hit bottom. There were rallies in between that turned out to be head fakes. It took much longer than expected to get your money back.

As I apply those caveats, I would caution against buying the dip in U.S. tech (growth) stocks. They may still be expensive and don’t qualify as a diversified portfolio.

What does qualify? A global portfolio with thousands of stocks would be best.

About the Author:

John has more than ten years experience as an Investment Advisor. He focuses on devising and maintaining portfolios that meet individuals’ needs, investment research, and investment strategy. John has been recognized as a “FIVE STAR wealth manager” by Twin Cities Business Magazine 2016-2022. He is a CFA charterholder and CERTIFIED FINANCIAL PLANNER™ Professional.

Legal Disclaimer: These posts do not constitute an offer or recommendation to buy or sell any securities or instruments or to participate in any particular investment or trading strategy. They are for informational purposes only. CTW gathers its data from sources it considers reliable. However, CTW makes no express or implied warranties regarding the accuracy of this information or any opinions expressed by the author and may update or change them without prior notification.

Run Your Race

Did you watch the Kentucky Derby on Saturday? I had to watch it twice to understand how Rich Strike won the race. I’m not a horse racing expert, but here’s what I saw. The favorites went out too fast. The announcer even commented on it – “That opening half mile was…blazing fast.” Rich Strike spent most of the race at the back of the pack, running his race. He paced himself and waited for his opportunity. When the leaders faltered, he sprinted by all of them to an improbable victory.

A similar story is happening in the stock market today. For years, growth stocks have been the darling of wall street. Companies that showed the tiniest bit of potential for huge future earnings received premium valuations. As a value investor, I spent a lot of time analyzing why growth stocks were doing so well. Was I missing something? Each time I concluded that growth stocks were preforming so well due to multiple expansion. That’s a fancy way of saying the price went up, but earnings didn’t support it.

Rising interest rates have changed things this year. Many of the growth stocks that sprinted out to huge valuations are crashing down, looking a lot like Messier, who went out with the lead pack and died down the home stretch to finish in 15th in the Derby.

Of course, even value stocks don’t look as good as Rich Strike did at the finish. Many value stocks have also lost money, but far less than growth stocks on average. That may not seem important, but it’s very important if you’re in withdrawal mode. Having something to sell that isn’t down a lot is key to making your money last through retirement.

That brings me back to my point. You should have a portfolio that is designed to fit your needs. If you’re looking for reasonable growth with less volatility, you should own some value stock funds, some growth stock funds, some bond funds and be invested around the world. If you have a solid investment strategy, stick with it when it’s out of favor. Stay disciplined. Your time will come.

About the Author:

John has more than ten years experience as an Investment Advisor. He focuses on devising and maintaining portfolios that meet individuals’ needs, investment research, and investment strategy. John has been recognized as a “FIVE STAR wealth manager” by Twin Cities Business Magazine 2016-2022. He is a CFA charterholder and CERTIFIED FINANCIAL PLANNER™ Professional.

Legal Disclaimer: These posts do not constitute an offer or recommendation to buy or sell any securities or instruments or to participate in any particular investment or trading strategy. They are for informational purposes only. CTW gathers its data from sources it considers reliable. However, CTW makes no express or implied warranties regarding the accuracy of this information or any opinions expressed by the author and may update or change them without prior notification.

Tax Review

Hooray! We all survived another tax season. I hope it wasn’t too bad for you. I know many people had to pay larger than expected tax bills this year. Mostly that was due to people earning a lot of money in 2021…but it also could be a sign of poor planning. Here are a few questions to help you determine the cause of your tax bill:

  • Do you know what caused your tax bill to be bigger than expected? If not, look at what numbers changed from the previous year.
  • Did your tax status change? Did you resume IRA withdrawals (waived in 2020)? Either could cause a big change in taxes due.
  • Is there anything you could have done differently to get a better result? Could you have withdrawn income from another account or avoided capital gains by rebalancing in a tax-smart way?

Depending upon those answers, it could make sense to adjust withholding or at the very least have an awareness of any potential liability needing to be planned for in April of 2023.

If those questions make your head spin, reach out to me. One of our advisors, Conner, is a CPA. He would be happy to do a quick review of your tax situation. It doesn’t take him long to determine if there is room for improvement.

About the Author:

John has more than ten years experience as an Investment Advisor. He focuses on devising and maintaining portfolios that meet individuals’ needs, investment research, and investment strategy. John has been recognized as a “FIVE STAR wealth manager” by Twin Cities Business Magazine 2016-2020.

Legal Disclaimer: These posts do not constitute an offer or recommendation to buy or sell any securities or instruments or to participate in any particular investment or trading strategy. They are for informational purposes only. CTW gathers its data from sources it considers reliable. However, CTW makes no express or implied warranties regarding the accuracy of this information or any opinions expressed by the author and may update or change them without prior notification.

More Roth Conversion Opportunities

Congress is working on legislation that will change retirement account rules yet again. The bill dubbed “Secure Act 2.0” passed the house this week. Many of the proposed changes have broad bipartisan support and are expected to be reconciled with a Senate bill this year. I won’t dive into all the details because some will change through the reconciliation process.

I am confident that the bill that is passed will include provisions moving the age for required minimum distributions (RMDs) from retirement accounts (IRA/401k/403b) to age 75 over the next decade. That’s good news. It offers retirees a few more years to do advanced planning moves like Roth conversions.

Of course, you can do Roth conversions after your RMDs start. It’s just that normally pushes people’s income into higher tax brackets than they would like. Doing so before you hit RMDs allows you to keep your income lower.
Roth conversions in the pre-RMD years are especially valuable because they reduce the amount of traditional IRA assets subject to RMDs down the road. They also reduce traditional IRA assets that the next generation has only 10 years to withdraw.

You can look forward to more information as this bill moves through congress. Each situation is unique. A comparison of your expected tax rates through retirement and your heirs expected tax rates can help determine if this strategy is right for you. Do you need help with that?

About the Author:

John has more than ten years experience as an Investment Advisor. He focuses on devising and maintaining portfolios that meet individuals’ needs, investment research, and investment strategy. John has been recognized as a “FIVE STAR wealth manager” by Twin Cities Business Magazine 2016-2020.

Legal Disclaimer: These posts do not constitute an offer or recommendation to buy or sell any securities or instruments or to participate in any particular investment or trading strategy. They are for informational purposes only. CTW gathers its data from sources it considers reliable. However, CTW makes no express or implied warranties regarding the accuracy of this information or any opinions expressed by the author and may update or change them without prior notification.

Bonds and Interest Rates

The Fed raised interest rates for the first time since 2018 this week. What does that mean for you? Most people have a general idea that bonds lose value when interest rates rise. Do you know what to expect from your bonds? Bond geeks did you a favor. They have a measure of interest rate sensitivity called duration.

Duration is a measure of how much the price of a bond will move based on a move in interest rates. If a bond portfolio has a duration of 5, it will lose about 5% of value when interest rates rise by 1%.

A few factors go into the calculation of duration, but the biggest factor is average bond maturity. The longer the maturity, the higher the duration. A high duration was really good as interest rate fell from 1981-2021. It boosted bond returns most years. It hasn’t been a good thing this year. Short-term bonds and floating rate bonds have fared much better in this tough interest rate environment.

Coming back to you, how is your bond portfolio positioned today? What’s your duration?

About the Author:

John has more than ten years experience as an Investment Advisor. He focuses on devising and maintaining portfolios that meet individuals’ needs, investment research, and investment strategy. John has been recognized as a “FIVE STAR wealth manager” by Twin Cities Business Magazine 2016-2020.

Legal Disclaimer: These posts do not constitute an offer or recommendation to buy or sell any securities or instruments or to participate in any particular investment or trading strategy. They are for informational purposes only. CTW gathers its data from sources it considers reliable. However, CTW makes no express or implied warranties regarding the accuracy of this information or any opinions expressed by the author and may update or change them without prior notification.