Building Blocks – A Solid Financial Foundation
I was reminiscing the other day about my childhood and an old memory popped up. My family had just moved from the Bronx to a new home in the New York City suburbs. I must have not yet adjusted to my new surroundings, for there I was, all of ten years old, sitting in the principal’s office at my new elementary school, guilty of an infraction that to this day I cannot remember.
The school principal, Mr. Amundsen, began asking me questions:
Mr. Amundsen: Do you live in a house?
Richard: Yes.
What is your house built on?
The ground.
Yes, but what is in the ground that the house is built on?
Dirt?
On it went until Mr. Amundsen finally revealed the answer he was looking for: foundation. My house was built on a foundation and that is what we were doing in 4th grade — building a foundation.
Though not fun at the time, it strikes me now that Mr. Amundsen was giving me well-intentioned advice that remains broadly relevant today. Here at MJB Asset Management, I build every client portfolio (except for income-oriented clients or where a client specifically instructs us otherwise) on a solid financial foundation of major US stock market indices (e.g., the S&P 500) that provides broad long-term diversified stock market exposure. With that foundation in place, I am able to look for additional value with smaller, shorter-term positions in sub-sectors of the market (e.g., semiconductors, gold miners, etc.) when there is an opportunity for gains that I reasonably anticipate will beat the gains available in the broader market.
For income-oriented clients I maintain a solid financial foundation in diversified high quality bond funds and will typically augment that position with dividend paying stocks. Dividend stocks are important because large dividend paying companies tend to increase their dividends over the years, whereas interest payments on bonds stay level for the duration of the bond. The long-term increase in dividends is a crucial way for fixed income portfolios to keep pace with inflation.
In all cases, I make decisions based on rigorous statistical analysis of the broad markets and the sectors and adjust positions when necessary due to changes in market dynamics or changes in client investment goals. At the moment, interest rates and inflation continue to be the driving forces in the markets and continue to be inextricably linked. (Note: when inflation runs hot, the primary tool available to the Federal Reserve is to raise interest rates to slow the economy by making it more expensive for companies and individuals to borrow money. Markets generally do not like higher rates because a slower economy can eat into corporate profits.) As inflation has begun to ever-so-slowly cool down, investors have been waiting anxiously for the Federal Reserve to begin lowering rates. Any hint of rates coming down has spurred gains in the markets; any indication that rates are staying at current levels has put a damper on any of those gains. As the tug of war between investors and the Fed continues, I have broadened our exposure to the US equity markets by adding a small position in smaller cap stocks. Overseas, the European Central Bank has begun to lower interest rates for the EU countries and in response I have added a small position in non-US stocks. For income-oriented accounts, the Fed’s decision not to lower rates has provided the opportunity to continue buying short term US Treasuries that are paying over 5% per year. I also remain invested in a broad range of income-producing funds that hold high quality bonds, high quality dividend paying stocks, preferred stocks and (for taxable accounts) tax-free municipal bonds.
Going back to my lesson on the importance of a foundation, I cannot say definitively where, when or how I learned this, yet I know with certainty that the foundation of any healthy relationship is gratitude.
If you’re looking for a solid financial foundation, build one with MJB Asset Management! I am grateful to you for your time, for the confidence and trust you have placed in me and for the opportunity to serve you as your advisor.
Disclosure: Financial instruments discussed here may not be suitable for all investors. Before investing in any investment portfolio, Client and Financial Advisor should carefully consider the client’s investment objectives, time horizon, risk tolerance, and fees. The opinions expressed here are as of the date reflected and are subject to change. Diversification may not protect against market risk. There are risks involved in investing, including possible loss of principal. Past performance does not guarantee future results.