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Balancing Stocks & Bonds in One Fund

Maintaining an appropriate balance of stocks and bonds is one of the most fundamental concepts in constructing an investment portfolio. Stocks provide greater growth potential with higher risk and relatively low income; bonds tend to be more stable, with modest potential for growth and higher income. Together, they may result in a less volatile portfolio that might not grow as fast as a stock-only portfolio during a rising market, but may not lose as much during a market downturn.

Three Objectives 

Balanced mutual funds attempt to follow a similar strategy. The fund manager typically strives for a specific mix, such as 60% stocks and 40% bonds, but the balance might vary within limits spelled out in the prospectus. These funds generally have three objectives: conserve principal, provide income, and pursue long-term growth. Of course, there is no guarantee that a fund will meet its objectives. When investing in a balanced fund, you should consider the fund’s asset mix, objectives, and the rebalancing guidelines as the asset mix changes due to market performance. The fund manager may rebalance to keep a balanced fund on track, but this could create a taxable event for investors if the fund is not held in a tax-deferred account. 

Core Holding

Unlike “funds of funds,” which hold a variety of broad-based funds and are often meant to be an investor’s only holding, balanced funds typically include individual stocks and bonds. They are generally not intended to be the only investment in a portfolio, because they might not be sufficiently diversified. Instead, a balanced fund could be a core holding that enables you to pursue diversification and other goals through a wider range of investments. You may want to invest in other asset classes, hold a wider variety of individual securities, and/or add funds that focus on different types of stocks or bonds than those in the balanced fund. And you might want to pursue an asset allocation strategy that differs from the allocation in the fund. For example, holding 60% stocks and 40% bonds in a portfolio might be too conservative for a younger investor and too aggressive for a retired investor, but a balanced fund with that allocation could play an important role in the portfolio of either investor.

Heavier on Stocks or Bonds?

Balanced funds typically hold a larger percentage of stocks than bonds, but some take a more conservative approach and hold a larger percentage of bonds. Depending on your situation and risk tolerance, you might consider holding more than one balanced fund, one tilted toward stocks and the other tilted toward bonds. This could be helpful in tweaking your overall asset allocation. For example, you may invest more heavily in a stock-focused balanced fund while you are working and shift more assets to a bond-focused fund as you approach retirement.

Lower Highs, Higher Lows

During the 20-year period ending in October 2022, balanced funds were less volatile than stock funds, while producing higher returns than bond funds.

Source: Refinitiv, 2022, for the period 10/31/2002 to 10/31/2022. Equity funds are represented by the Thomson US: All Equity – MF Index, balanced funds by the Thomson US: Balanced – Domestic – MF Index, and bond funds by the Thomson US: All Gen Bond – MF Index. The performance of an unmanaged index is not indicative of the performance of any particular investment. Individuals cannot invest directly in an index. The results do not include the effects of fees, expenses, and taxes. Rates of return will vary over time, particularly for long-term investments. Past performance is not a guarantee of future results. Actual results will vary. Investments seeking to achieve higher yields also involve a higher degree of risk. Keep in mind that as you change the asset allocation and diversification of your portfolio, you may also be changing the level of risk. Asset allocation and diversification are methods used to help manage investment risk; they do not guarantee a profit or protect against investment loss. The return and principal value of all investments fluctuate with changes in market conditions. Shares, when sold, may be worth more or less than their original cost. Bond funds, including balanced funds, are subject to the same inflation, interest-rate, and credit risks associated with their underlying bonds. As interest rates rise, bond prices typically fall, which can adversely affect a bond fund’s performance. Mutual funds are sold by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained from your financial professional. You should read the prospectus carefully before investing. 

IMPORTANT DISCLOSURES

The information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable—we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice. Securities and investment advice offered through Investment Planners, Inc. (Member FINRA/SIPC) and IPI Wealth Management, Inc., 226 W. Eldorado Street, Decatur, IL 62522. 217-425-6340.

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Federal Tax Filing Season Has Started

The IRS announced that the starting date for when it would accept and process 2022 tax-year returns was Monday, January 23, 2023.

Tips for making filing easier

To speed refunds and help with tax filing, the IRS suggests the following:

  • Make sure you have received Form W-2 and other earnings information, such as Form 1099, from employers and payers. The dates for furnishing such information to recipients vary by form, but they are generally not required before February 1, 2023. You may need to allow additional time for mail delivery.
  • Go to irs.gov to find the federal individual income tax returns, Form 1040 and Form 1040-SR (available for seniors born before January 2, 1958), and their instructions.
  • File electronically and use direct deposit.
  • Check irs.gov for the latest tax information.

Key filing dates

Here are several important dates to keep in mind:

  • January 13. IRS Free File opened. Free File allows you to file your federal income tax return for free [if your adjusted gross income (AGI) is $73,000 or less] using tax preparation and filing software. You can use Free File Fillable Forms even if your AGI exceeds $73,000 (these forms were not available until January 23). You could file with an IRS Free File partner (tax returns could not be transmitted to the IRS before January 23). Tax software companies may have accepted tax filings in advance.
  • January 23. IRS began accepting and processing individual tax returns.
  • April 18. Deadline for filing 2022 tax returns (or requesting an extension) for most taxpayers.
  • October 16. Deadline to file for those who requested an extension on their 2022 tax returns.

Awaiting processing of previous tax return?

The IRS is attempting to reduce the inventory of prior-year income tax returns that have not been fully processed due to pandemic-related delays. Taxpayers do not need to wait for their 2021 return to be fully processed to file their 2022 return.

Tax refunds

The IRS encourages taxpayers seeking a tax refund to file their tax return as soon as possible. The IRS anticipates most tax refunds being issued within 21 days of the IRS receiving a tax return if the return is filed electronically, any tax refund is delivered through direct deposit, and there are no issues with the tax return. To avoid delays in processing, the IRS encourages people to avoid paper tax returns whenever possible. 

IMPORTANT DISCLOSURESThe information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable—we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.Securities and investment advice offered through Investment Planners, Inc. (Member FINRA/SIPC) and IPI Wealth Management, Inc., 226 W. Eldorado Street, Decatur, IL 62522. 217-425-6340. 

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IPI Market Update- January 13th, 2023

Last week we saw the beginning of the 4Q earnings season, a highly anticipated CPI report, and some risk on market sentiment countered by a ‘not so fast’ narrative on the part of the Fed. Markets latched onto the former with hopes of a soft landing driven by disinflation traction, firm labor markets, a healthy consumer, and strong corporate balance sheets. U.S. equity markets turned in their strongest week in two months, with large caps up 2.6% and small caps up 5.25%. Non-U.S. markets were even stronger with developed (+3.5%) and emerging markets (+3%) both benefiting from a notably weaker USD (-1.6%). Interest rates edged slightly lower last week with the 10yr UST closing back below 3.5%. Bullish talking points revolved around a dovish policy pivot, depressed sentiment and positioning, China reopening momentum/related policy support, and Europe potentially avoiding a winter energy crisis.

Market Anecdotes

  • Prevailing bullish talking points including disinflation trends/softening monetary policy, China reopening/policy support, depressed sentiment, Europe potentially avoiding a winter energy crisis, and a resilient U.S. economy are being countered by tight monetary policy and slowing economic growth indications translating to a cautiously optimistic nearterm outlook.
  • Fear of demand driven inflation seems to be a key motivation for persistent Fed hawkishness in the face of slowing economic growth and objectively tight financial conditions.
  • Bianco Research made note that historically, when the 2yr yield is above the fed funds rate, it historically marks the end of a Fed tightening cycle. Regardless, markets are pricing in a high likelihood of 25bps hikes for both the February (93%) and March (81%) meetings.
  • With wage growth being a primary driver of ex-shelter core services inflation, it’s worth noting the Atlanta Fed Wage Growth Tracker fell from 6.4% to 6.1% on a 3-month moving average basis, and a wage measure based on the average of regional Fed surveys all point to further easing.
  • Fourth quarter earnings season kicks off this week with consensus earnings and revenue of -2.2% and +4.1% respectively alongside a 2023 EPS estimate of approximately $230.
  • AAII sentiment has ticked higher with bullish sentiment rising from 20.5% to 25% last week and for the first time in two months and only the 11th in the past year, bearish sentiment came in below 40%.
  • Is the equity market overvalued? The long standing “Rule of 20” makes the case that the sum of inflation rate and the S&P 500 P/E multiple (TTM) averages about 20 over time. With a current multiple around 18x, either the PE or inflation need to decline to get us back to the “Rule.”
  • Encouraging GDP data out of Germany and the U.K. last week increased the possibility of a European soft landing with strong consumption/service sector data and easing energy prices leading the way.

Strategas noted the unusual turmoil for the House Speaker position is likely just a precursor to an inevitable battle over the U.S. debt ceiling debate later in 2023.

Economic Release Highlights

  • CPI in December eased from 7.1% (0.1% MoM) in November to 6.5% (-0.1% MoM) in December. Core also moderated from 6.0% (0.2% MoM) to 5.7% (0.3% MoM).
  • January’s UofM Consumer Sentiment survey registered 64.6, above the consensus estimate of 60.0 and high end of the range of estimates.
  • The NFIB Small Business Optimism Index for December registered 89.8 versus the consensus call for 91.3.

Atlanta Fed Business Inflation Expectations survey for expected 1yr inflation level came in at 3%, a slight downtick from the 3.1% level in December.

The Numbers

IMPORTANT DISCLOSURE

The information in this report was prepared by Taiber Kosmala & Associates, LLC. Opinions represent TKS’ and IPIS’ opinion as of the date of this report and are for general information purposes only and are not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally. IPI does not undertake to advise you of any change in its opinions or the information contained in this report. The information contained herein constitutes general information and is not directed to, designed for, or individually tailored to, any particular investor or potential investor.

This report is not intended to be a client-specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon. This communication is provided for informational purposes only and is not an offer, recommendation or solicitation to buy or sell any security or other investment. This communication does not constitute, nor should it be regarded as, investment research or a research report, a securities or investment recommendation, nor does it provide information reasonably sufficient upon which to base an investment decision. Additional analysis of your or your client’s specific parameters would be required to make an investment decision. This communication is not based on the investment objectives, strategies, goals, financial circumstances, needs or risk tolerance of any client or portfolio and is not presented as suitable to any other particular client or portfolio.  Securities and investment advice offered through Investment Planners, Inc. (Member FINRA/SIPC) and IPI Wealth Management, Inc., 226 W. Eldorado Street, Decatur, IL 62522. 217-425-6340.

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The Inflation Experience is Painful and Personal

Inflation is a sustained increase in prices that reduces the purchasing power of your money over time. According to the Consumer Price Index (CPI), inflation peaked at an annual rate of 9.1% in June 2022, the fastest pace since 1981, before ticking down to 7.7% in October.1
 
The CPI tracks changes in the cost of a market basket of goods and services purchased by consumers. Items are sorted into more than 200 categories and weighted according to their “relative importance,” a ratio that represents how consumers divide up their spending, on average. Basic needs such as shelter (33%), food (14%), energy (8%), transportation (8%), and medical care (7%) account for about two-thirds of consumer expenditures. Because the CPI is a comprehensive measure of prices across the U.S. economy, the index also contains many items that an individual consumer may purchase infrequently, or not at all. 
 
Wide variations in spending patterns help explain why some consumers feel the sting of inflation more than others. This means that the extent to which you experience inflation depends a lot on where you live, as well as your age, health, income, family size, and lifestyle. In effect, your personal inflation rate could be significantly higher or lower than the average headline inflation rate captured in the CPI. Consider the following examples.
 
In October 2022, the 12-month increase in the cost of shelter was 6.9%.2 Shelter carries the most weight of any category in the CPI, which made fast-rising home prices and rents a top driver of inflation over the previous year. A first-time homebuyer, or a renter who signs a new lease, is likely to feel the full impact of these hefty price increases. However, a homeowner with a fixed-rate mortgage is generally insulated from these rising costs and might even benefit financially from home-equity gains.
Gasoline surged 17.5% during the 12 months ended in October 2022.3 Individuals who rarely drive, possibly because they are retired or work remotely, might have been able to shrug off the price spike. But for drivers with long commutes, filling up the gas tank regularly might have put a sizable dent in their households’ finances, in some cases forcing them to cut back on other purchases.
Food and beverage prices rose 10.9% over the same 12-month period, a trend that clearly affects everyone.4 But rising food costs tend to put more pressure on the budgets of lower-income households because they spend a greater share of their income on necessities and typically have smaller financial cushions. Plus, shoppers can’t easily switch to lower-cost options if they are already relying on them.5
 
1-4) U.S. Bureau of Labor Statistics, 2022
5) Federal Reserve, 2022
 
 
IMPORTANT DISCLOSURES
The information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable—we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.
Securities and investment advice offered through Investment Planners, Inc. (Member FINRA/SIPC) and IPI Wealth Management, Inc., 226 W. Eldorado Street, Decatur, IL 62522. 217-425-6340.
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IPI Market Update- January 6th, 2023

Markets started off the new year with a dose of optimism fueled primarily by the economic calendar, Chinese mobility/policy support, and related monetary policy implications. The jobs report on Friday sent equity markets sharply higher and bond yields lower on the back of a friendly mix of robust job creation and moderating wage growth. U.S. equity markets closed up 1.5% for the week while developed international and emerging markets were up 2.7% and 4.3%, respectively. Bond yields fell sharply taking the 10yr UST to 3.55% while the curve steepened as well. Commodities fell nearly 6% thanks to an 8% decline in crude oil.

Market Anecdotes

  • 2022 left the S&P down 18%, due primarily to multiple compression, closing with a P/E multiple of 16.7x, a valuation almost exactly at the 25-year average.
  • A painful look back at 2022 shows the Barclays Aggregate Index down 13%, the worst return on record by a factor of 4x, a significant contributing factor to the third worst outcome for a 60/40 portfolio since 1950.
  • A strong consumer underpins most bullish/constructive views looking into 2023 – a view bolstered by consumer balance sheets, savings, debt service, and the healthy job market.
  • Real personal disposable income grew in the back half of 2022 after declining for five consecutive quarters – a strong potential bullish tailwind for 2023.
  • With ISM Services and Manufacturing Indexes both falling below 50 for November, a reminder of the predictive nature and efficacy warrants consideration.
  • Freight indices and global PMI survey responses on delivery times and input/output prices continue to illustrate healing supply chains and relaxed pricing pressures. Regardless, Fed officials hit the speaking circuit last week and clearly maintained the higher for longer narrative.
  • A look at high yield and bank loan maturities show relatively light refinancing needs over the next two years but a considerably higher level in 2025 and 2026.
  • BCA suggested most Chinese tier-1 cities have passed peak Covid infections with the remaining areas tick higher and an expectation of return to normalcy sometime later this spring (March).

Declines in global trade data of small open economies, (Singapore -14%, Taiwan -23.4%) a bellwether for global trade and manufacturing activity, are flashing caution with China reopening, normalizing consumption patterns, and slowing global growth are all contributing.

Economic Release Highlights

  • The December jobs report came in stronger than consensus with higher job creation (223,000 vs 200,000) and lower headline unemployment (3.5% vs 3.7%). Labor force participation ticked higher from 62.2% to 62.3%.
  • Average hourly earnings growth in December came in below consensus for both MoM (0.3% vs 0.4%) and YoY (4.6% vs 5.0%) readings.
  • The November JOLT survey registered 10.458mm job openings, higher than the consensus spot forecast of 10.1mm and above the high end of estimate range of 10.00mm-10.33mm.
  • The November ISM Manufacturing Index came in at 48.4, a second consecutive decline but slightly higher than consensus forecast of 48.1 and within the estimated range of 47.5 – 49.0.
  • November ISM Services Index surprisingly came in well below consensus estimate (49.6 vs 55.0) and dipped into contraction territory.

November’s J.P. Morgan Global Manufacturing PMI registered 48.6, down slightly from the prior month reading of 48.8.

The Numbers

Disclosures

The information in this report was prepared by Taiber Kosmala & Associates, LLC. Opinions represent TKS’ and IPIS’ opinion as of the date of this report and are for general information purposes only and are not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally. IPI does not undertake to advise you of any change in its opinions or the information contained in this report. The information contained herein constitutes general information and is not directed to, designed for, or individually tailored to, any particular investor or potential investor.

This report is not intended to be a client-specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon. This communication is provided for informational purposes only and is not an offer, recommendation or solicitation to buy or sell any security or other investment. This communication does not constitute, nor should it be regarded as, investment research or a research report, a securities or investment recommendation, nor does it provide information reasonably sufficient upon which to base an investment decision. Additional analysis of your or your client’s specific parameters would be required to make an investment decision. This communication is not based on the investment objectives, strategies, goals, financial circumstances, needs or risk tolerance of any client or portfolio and is not presented as suitable to any other particular client or portfolio.  Securities and investment advice offered through Investment Planners, Inc. (Member FINRA/SIPC) and IPI Wealth Management, Inc., 226 W. Eldorado Street, Decatur, IL 62522. 217-425-6340

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Key Numbers Projected for 2023

Even though the official numbers have not yet been published by the IRS, we’ve projected many of the key tax figures for 2023.

1Basic exclusion amount

2Deceased spousal unused exclusion amount

IMPORTANT DISCLOSURES

The information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable—we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice. Securities and investment advice offered through Investment Planners, Inc. (Member FINRA/SIPC) and IPI Wealth Management, Inc., 226 W. Eldorado Street, Decatur, IL 62522. 217-425-6340.

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Sectors: Overweight, Underweight, or Just Right?

The U.S. stock market had a banner year in 2021, with the S&P 500 index up almost 27%. Unfortunately, stocks turned downward on the second trading day of 2022 and kept sliding into a bear market. 1
Stocks in the S&P 500 are classified by 11 different business sectors, each of which responds differently to economic conditions. For example, the information technology sector was very strong in 2021, rising by 33.4%. But it turned south in 2022 and dropped by 22.6% through August. On the other hand, the energy sector, driven by high oil prices, was up during both periods (see chart).

Index Weighting
Many broad-based indexes, including the S&P 500, are weighted based on market capitalization — the total value of a company’s outstanding stocks. Sectors have different sizes and weighting to begin with, but the weight can change significantly due to performance. The information technology sector, which includes some of America’s largest companies, rose from about 20% of S&P 500 capitalization at the end of 2018 to 29% at the end of 2021, increasing its impact on the index when the sector turned downward. The financials sector dropped from 13.3% to 10.7% over the same period, decreasing its impact on the index.2
 
Varied Weight and Performance
Sector gain or loss, with percentage of S&P 500 market capitalization
 

Source: S&P Dow Jones Indices, 2022 (data as of August 31). The S&P 500 is an unmanaged group of securities considered representative of the U.S. stock market in general. The performance of an unmanaged index is not indicative of the performance of any specific investment. Individuals cannot invest directly in an index. Past performance is not a guarantee of future results. Actual results will vary.

This means that even if you invest primarily in broad-based funds, you may be more heavily invested (overweight) or less invested (underweight) in a given sector than you realize. If you own more specific funds or individual stocks, your portfolio could be even more overweighted or underweighted.

Some market sectors — such as health care, consumer staples, and utilities — are considered “defensive” and may be good to hold through a bear market or economic recession because businesses in these sectors tend to remain strong regardless of economic conditions. Others — such as information technology and consumer discretionary — may have more growth potential but are more sensitive to economic conditions. Whether it’s appropriate to shift sector allocations in the middle of an economic cycle depends on your individual circumstances and long-term goals.

Sector Funds

One way to shift sector weight in your portfolio is by adding one or more sector funds — mutual funds or exchange-traded funds (ETFs) that focus on stocks of companies in a particular industry or sector of the economy. Because these funds are less diversified, they typically carry a higher level of volatility and risk than broad-based funds and should be considered as a complement to a core portfolio of diversified funds rather than a replacement. 

Although sector funds offer flexibility in fine-tuning your portfolio, it’s important to resist the temptation to chase performance and move assets into “hot” sectors without a more comprehensive strategy. Sector performance is cyclical, and last year’s hot sector can easily turn cold, as can be seen in the ups and downs of technology stocks. Also keep in mind that every business cycle is different, and unexpected events can disrupt regular trends. 

The return and principal value of all investments, including sector funds, fluctuate with changes in market conditions. Shares, when sold, may be worth more or less than their original cost. Asset allocation and diversification are methods used to help manage investment risk; they do not guarantee a profit or protect against investment loss.

Mutual funds and ETFs are sold by prospectus. Please consider the investment objectives, risks, charges, and expenses carefully before investing. The prospectus, which contains this and other information about the investment company, can be obtained from your financial professional. Be sure to read the prospectus carefully before deciding whether to invest. 

1) S&P Dow Jones Indices, 2022

2) Siblis Research, 2022

IMPORTANT DISCLOSURES

The information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances. These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable—we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.

Securities and investment advice offered through Investment Planners, Inc. (Member FINRA/SIPC) and IPI Wealth Management, Inc., 226 W. Eldorado Street, Decatur, IL 62522. 217-425-6340.