New Year Newsletter - 01/26/2021

As we begin 2021, I think it is imperative to reflect on the difficulties of the past year and how we have persevered through some exceedingly difficult challenges for our families, friends and certainly each other. Coved-19 arrived with a vengeance infecting Americans of all ages, resulting in sickness and the deaths of over 400,000 people in our country alone. As a nation, we were not prepared for anything of this magnitude so we became diligent in our efforts to mobilize the pharmaceutical industry to press ahead to develop a vaccine in such a short period of time. Ironically, two of the three companies in play (Pfizer and AstraZeneca) have been long term holdings in our portfolio and should benefit greatly as their vaccines are distributed worldwide.

Domestically, the past two weeks have seen mostly negative headlines with regards to political, social, and economic developments. Yet, the markets have remained orderly and continue to advance, hitting all-time highs. The money flow continues to impress the institutional and retail investors who anticipate a domestic and worldwide recovery of significant proportions. This global growth along with expanding corporate profits could set the pace for a significant advance. However, the need for caution is significantly a part of our strategy at DDIMG, we are deeply rooted in preservation of principal and value management.

In May 2020, we chose to move 50% of the value of all portfolios away from the stock and corporate bond markets, and into government guaranteed U.S. Treasury 90-day bills for your protection. With the ongoing degree of uncertainty, we commenced a subsequent purchase of Treasuries in the end of September for another round of 90-day bills, but at 25% of account balances rather than 50%. The objective here was not only to protect your principal, but to have cash available for future purchases at much lower prices if a correction/selloff were to happen.

We continue to have concerns with the growing US deficit of $28 trillion, and the level of government spending expected to increase dramatically with the next round of economic stimulus. US GDP (gross domestic product) is currently just over $21 trillion. This makes the federal deficit relative to GDP the highest since World War II. However, economists expect real GDP to grow 4% in 2021 (Q4 over Q4). This forecast factors in consumption, business investment, home building, government spending, trade and inventory. Beyond COVID-19, the domestic and international markets are poised to make a solid recovery, already pricing themselves with this recent market advance. We will continue to be moderately conservative in our approach to risk management and maintain an allocation of 59% dividend equities, 10% US Treasuries, 30% investment grade corporate bonds and 1% cash.

In closing, we wish you all health, happiness, and prosperity in 2021. We will get through this together. Please do not hesitate to call us with any questions or concerns.

Stock Market Resilience - 2021

If we had to explain the stock market in one word, it would be resilience. Every selloff we’ve recently seen (including March), we’ve watched equities recoil back into shape leaving sellers baffled. With the market seeming so highly valued, any bad news sensationalized by the media creates a retail investor selling frenzy. Usually an overreaction. You really can’t blame them, can you? They want to protect their nest egg like everybody else; but it’s a move based on emotion, not logic. That is one of the many reasons to seek quality financial advice. The right portfolio manager will make tactical moves; not emotional ones. He/she would understand the economy has both headwinds and tailwinds, and position portfolios accordingly.

We have low interest rates, record stimulus, increasing productivity, vaccines rolling out, a major infrastructure package, a widening yield curve and higher GDP estimates. All these “tailwinds” combined (and many more) keep the stock market advancing to new highs. At DDIMG, we believe the stock market is efficient – It’s a discounting mechanism that prices in anticipated economic conditions based on current factors. It's not really concerned with the now, it's concerned with the future, and it prices itself accordingly. Sure, things could happen now that would change the outlook; and when/if that happens, we either see a stock market correction or rally. Judging by the recent rally, this market clearly sees a cheese at the end of the tunnel. Better yet, a charcuterie board.

We also have headwinds; a record deficit, high government spending, an overvalued dollar, social unrest, paranoid investors and not mention record cases of COVID-19. Any of these could come to fruition at any time and the market would probably correct - but every correction/selloff in history has been followed by another rip-roaring bull market. Maybe not as much of a recoil market as we have now, but the market does eventually advance to new highs. Obviously, this doesn’t mean with 100% certainty this will continue to be the case, but it does provide a pattern. Past performance doesn’t indicate future performance, but it does indicate ability. Ability for the country, economy, and consumers to bounce back, fight and adapt because nobody wants a bad economy. Everybody wants better days, and this is a fundamental concept of America, persistence.

Persistence is the reason we are sitting here today, it’s the reason so many investors retired well with the resources to do so. Persistence is getting us through this terrible pandemic, and it will get us through whatever the future brings. Persistence brings resilience, and investors who understand this concept should continue to prosper.

2020 Year End Update - Economic Insights

Two weeks left of December means 2020 is finally coming to an end. It’s been a tough year for all of us. Some more than others and some less, but we are all in it together and we’re going to get through it together. Vaccines are being widely distributed now and into 2021, and I for one am looking forward to the day where I can put the mask/hand sanitizer down and see my family and friends without worry. The stock market is looking forward to this as well. The Fed is using it’s “full range of tools” to keep the economic expansion continuing, and the economy is already showing signs of life. Aside from record COVID cases in America just consider this dynamic; Vaccines on the way, divided government (positive), consumer is healthy, artificially low interest rates, high productivity and higher than expected GDP. Us, along with many of Wall Street’s top strategists see solid growth for the foreseeable future. This doesn’t mean there aren’t headwinds though.

Pfizers vaccine is already being widely distributed in America to the people that need it most. Modernas vaccine is next and what follows that is some sort of control over this virus. By the summer of 2021 we might just have this under full control. When that day comes, I see the American consumer being exhausted of sitting in their houses for the past year and half. What will they do? They will go out and spend money, facilitate the circulation of capital, travel and live a normal life. By “normal life” I mean operating in their world without worry of catching COVID. I do think there will be somewhat of a new normal, but I don’t think life will be drastically different. I see companies adopting a hybrid work from home atmosphere where employees work in the office part time and at home other times. This will allow companies to cycle employees on specific days to keep operating expenses low and not need as much office space. How is that for efficiency? It’s just an idea of mine but we will see what happens when the time comes.

At this week’s FOMC (federal open market committee) meeting the fed announced they will not change anything regarding monetary policy. They’re keeping rates where they are and have no plans to change rates until 2023, and that came as a surprise to nobody. They also provided their economic outlook and although it remains “extraordinarily uncertain”, they revised their GDP higher and unemployment rate forecasts lower. That is great news. The economy has recovered from the self-induced recession stronger than the Federal Reserve thought possible, and I believe it will continue to surprise. People want to get their lives back, and the lives people were living prior to COVID create a recipe for strong economic growth.

If inflation surges higher than the Fed predicted, they will be forced to raise rates to keep the inflation in check. The markets will then see this as a negative and probably correct. But think about the last time the Fed raised rates in December 2018 (Christmas Eve), the S&P 500 corrected around 12%. The next year (2019) the S&P 500 rose 28% and so far in 2020 it’s up around 14%. Did that 2018 correction even matter? To those that sold it most certainly did. We don’t think there’s an immediate worry here. If the Fed says they won’t change rates until 2023, they obviously think inflation won’t get out of hand. In the meantime, with COVID-19 approaching the final stages, a divided government, healthy consumer, artificially low rates, high productivity and higher than expected GDP; the economic expansion can continue for the foreseeable future.  

Active vs. Passive Investing

Wall Street professionals and retail investors have argued over the pros and cons of both active and passive investing for years. Both seem to work well over the long term, and both have helped investors achieve their financial goals. What it really comes down to is suitability. Some people need passive management, some people need active - and the specific style should be recommended by your financial advisor.

What is active investment management? It’s when a manager actively manages your portfolio using individual stocks and bonds, who’s proactive instead of reactive, and allocates portfolios based on the future economic/market outlook. The main goal of active investing is to outperform an equivalent benchmark index. For some funds, outperformance isn’t always the case so proper due diligence is needed to choose the right manager. With active investing the costs tend to be a little bit higher, and this is due to the tedious nature of the investing style along with the possibility of outperformance. At DDIMG, we prefer active investing because our clients are coming to us for a reason. They not only want to outperform their benchmark, they want us to mitigate their risk and want us to be proactive to protect/grow their nest egg. An example of this is when we added precious metal exposure to the portfolios in early summer of 2020. We anticipated the dollar weakening and quickly hedged to capture a healthy return for our clients. We then vacated the position when we didn’t see the dollar index getting lower in order to protect the gain. We can easily justify a client paying us fee for this reason, among others. We cannot justify charging a management fee to outsource the investing to an external party, or solely use index funds. Especially when the client also pays a fee to the external party, usually in the form of a 12 b-1 expense ratio or a separate management fee. That’s double dipping and in our opinion highly unethical.

Now, what is passive investment management? This is when a manager/investor passively manages a portfolio by using index ETF’s & funds designed to track an index such as the S&P 500, Dow Jones or NASDAQ. This strategy is widely used by retail investors we like to call “do it yourselfers”. Unlike active investing, passive investing is more of a “set it and forget it” strategy and is not nearly as tedious. The passive investor will just ride with the index he or she chooses and not really have to focus on anything else. There isn’t any outperforming the market, and there’s no hedging or complex strategies used to protect/grow assets in tricky times. Some financial advisors choose to use index funds/ETF’s exclusively and somehow justify charging their client a management fee when they aren’t even managing the money. The justification usually comes from offering a financial plan - Don’t get me wrong financial planning is highly valuable; but not nearly as valuable as active management combined with the financial planning (in our opinion).

As I said two paragraphs above, DDIMG LLC prefers active investing over passive. We are passionate about combining both active investment management and financial planning to help our clients achieve their long- and short-term goals. We want every single client to achieve financial freedom; we want every single client to not only know when work becomes optional, but what needs to be done ensure they don’t outlive their assets and/or transfer wealth to the next generation. It’s a long-term game and those who understand this should continue to prosper.

Financial Freedom 11/23/2020

What is financial freedom? It’s when your nest egg grows to the point when you can undoubtedly live off it for the rest of your life. It’s when work becomes optional and you’re free to do whatever you want with the means to do so. How do you achieve it? Through long term investing, ongoing financial planning and working with the right advisor.

Many people go through their career without a proper focus on their finances. Maybe they’re so busy at work, raising their kids, hobbies, social life etc. It could be many things. Maybe they don’t understand or were never taught how important it really is. Investing early on with a long-term time horizon is the absolute most important thing for your financial future. It raises your probability of financial freedom immediately. By investing I don’t mean lazily allocating money towards whatever looks good, you need to prudent. You need asset allocation, diversity, and patience. You need to actively manage your investments and be proactive instead of reactive. You cannot be emotional and let the corrupt media shake you out of your long-term strategy. This puts you at a distinct disadvantage. It’s impossible to time the market perfectly – and those that say they can beware! With a healthy balance between equities, fixed income, real estate, precious metals, and alternative investments you can set a long-term strategy that aligns with your long-term financial goals – and this is achieved through ongoing financial planning.

If you went to your doctor saying you’re having chest pains, and he/she immediately laid you down on the operating table and cut you open wouldn’t that be alarming? The doctor needs to perform tests, run an analysis, and decide on the best possible route to take for your health. The same thing goes with investing and financial planning. By running the tests (financial planning) and figuring out exactly what needs to be done for you to achieve your goals, the proper investments can be chosen that align with those goals. Without the testing it would be blind investing – but don’t do the testing just once. Update the plan annually or when something big happens that changes the picture. See how it affects your point of financial freedom and figure out what needs to be changed to get you there. If you have a good advisor, he/she should be doing this for you.

At DDIMG LLC, financial freedom is our mission for every client. We want every client to know exactly what needs to be done to have a stress-free retirement – Afterall, isn’t that the point of investing?  

Importance of Planning - 11/19/2020

With so much uncertainty in the stock market and economy I find it imperative to ensure all assets are properly allocated to align with you’re long and short term goals. What do I mean by “properly allocated”? I mean a healthy balance between stocks, bonds, precious metals, alternative investments and cash. This concept is essential in achieving both long term capital appreciation and downside protection. The question remains, what healthy balance is right for me?

 The only true way to answer this question is through complex financial planning. To get an understanding of where you’re at now and where you want to be in the future. Then running a Monte Carlo simulation using 1000 different trials to figure out exactly what needs to be done to get you there with the highest probability. This so called “Monte Carlo” simulation has tremendous value to clients who are concerned with whether or not they can retire when they want, if they will outlive their money, if they’re taking too much risk, spending too much or living inside their means with the ability to increase their quality of life. We understand life happens and things can change, so we can update the plan at any time to keep you on track.

 At DDIMG LLC we use modern enterprise technology and industry leading software to answer these questions for all of our clients. Is it time to start planning?

Tuesday Tidbits 11/17/2020

It is November 17th and so far this month the Dow Jones has rallied from $26,500 to $29,783 (where it closed today). This is significantly better than both the S&P 500 and NASDAQ. We call it the “cyclical recovery”. Meaning when the economy is looking better and there’s clarity on the horizon, the cyclical (economic sensitive) companies outperform. Many of which are currently in your portfolios. The reason behind it is this; Pfizer has a vaccine candidate with a 90% efficacy rate, Moderna has one with 95% efficacy, and Biden won the election with Republicans still controlling the senate. The market currently sees a divided government as a positive but it’s hard to say with full confidence. What I can say with confidence is regardless of a blue sweep, red sweep, Joe Biden or Donald Trump; America will prevail. With all the challenges we’ve faced in the past, our country has always emerged stronger. Just think about some of the obstacles our country has overcome and where we are today. That’s what we do. We learn, we adapt, and we learn to adapt. This year has been nothing but unprecedented. Come to think of it, isn’t every year?

 In March our country suffered a self-induced recession and everyone’s portfolio values were significantly impacted to the downside. Retail investors thought the world was ending and they fueled the massive selloff by dumping shares. As investors, we held our ground and grinded back to where we are today. Quite a feat isn’t it? The sellers in March and April are kicking themselves for letting the corrupt media impact their thinking. They’re now left behind and have a lot of work to do to catch up. I said in my March email this will be a “tremendous lesson” and that’s exactly what it was. Every single recession, bear market, correction and selloff in history has been followed by a rip-roaring bull market racing to new highs. I don’t see an overwhelming reason why this pattern can’t continue. If I do see a reason, we will make every effort to be proactive instead of reactive.

 Everybody wants growth and there are many ways to achieve it. There isn’t just one simple avenue to healthy long-term economic growth in a complex society like ours. By learning and adapting we will continue the path; and by remaining optimistic about the future you will be rewarded. Not in a straight line upwards but higher highs and higher lows will get us there. According to a FACSET study, third quarter earnings for 86% of S&P 500 companies have exceeded expectations. Productivity is up 4.1% from a year ago, revenues are impressive given the situation, and costs have been cut.