The Road to Preserving Multi-Generational Wealth

By Anna McDonald

The path around my grandma’s garden was always bathed in a kettle of midwestern sunlight. The garden sat between rolling hills in a valley filled with bright sun and very few trees. It was here, amongst butterflies, bees, and more pesky creatures, she left me her legacy.

As a kid, I spent hours with her in the garden, picking green beans, tomatoes, and ears of corn. Looking back now, I am not exactly sure why I was even there helping her. No one dropped me off or told me I had to go and help her, and she certainly would never ask for help. We lived within walking distance to my grandma and I would just wander over to her house whenever I wanted. Upon arriving, she would hand me the white galvanized bucket my great-grandma used in her garden, and we would make our way together to pick fresh vegetables.

The “garden” was her legacy – and only later in life did I realize this meant more than just the plants, vegetables, and farming tips she passed down to all of us. The garden was the perfect conduit for my grandma, allowing her to engage and help family members understand her values so they could be passed along to the next generation. She used those quiet, long summer days as we worked side by side and talked about anything and everything to help her kids and grandkids develop their self-worth and work ethic.

The days of simple acts like picking vegetables in the garden with my grandma occur much less frequently among families today. For ultra-affluent families, the burden of preserving generational wealth is more challenging and complex than ever. It will be difficult for a family to preserve its wealth for future generations if all family members do not understand they must contribute to the family enterprise’s critical components: human, intellectual and financial capital. This involvement does not mean all family members must work in the family business or take the same path in life as their grandparents or parents chose.

However, everyone should identify their own unique “garden”, just like my grandma did, and utilize it to add value to the larger family enterprise.

How do you preserve multigenerational wealth?

Families must maximize the critical components of family wealth if they are going to achieve continued success over generations. Maintaining the status quo where a family is merely reaping the benefits provided by previous generations and not always nurturing and contributing to the family enterprise will most likely expedite eroding the family wealth.

But how can families do this in today’s increasingly complex world? Like the time I spent with my grandma, there may be a glimpse of this past for families who vacation together. Time spent on the ranch, beach home, or vineyard together invokes attachment without all the outside pressures of everyday life – in essence, acting as the “garden” or outlet to pass family values from one generation to the next. While annual family vacations can help, these alone generally are not enough to create opportunities to impart family values and learn how to protect wealth.

 

The key to preserving multigenerational wealth is to remember it is a never-ending journey, not a destination.

Preserving family wealth often requires a lifetime of effective communication, ongoing learning and the establishment of intentional family goals. This is not an easy road to travel. But, take heart, the goal is to ensure every family member is an empowered leader who has the skills, confidence, and values to be happy and thrive independently of the family wealth itself. While it might seem like an overwhelming task, there are several tools every family can utilize to instill a lifelong process for achieving multigenerational success.

Communication creates clarity.

When it comes to family wealth, each generation has its questions regarding the role everyone has. Typically, the leadership (may also be the founding) generation has questions relating to the rising generation. Examples may include:

1. What role does the next generation want to play in the family enterprise?
2. How do they want to get involved?
3. How do I engage my family members in the process of learning?
4. How can I allow them to be whom they are while also expecting them to add to the family enterprise?

The rising generation, in turn, has its own set of questions for the leadership generation. Examples may include:

1. My grandfather created this company; how can I live up to his success?
2. What is expected of me?
3. How do I move into a meaningful role where my skills fit best?
4. How do I work with my cousins while also considering various family dynamics?

Given the two very different perspectives, a key to a successful outcome is for the leadership generation to listen to the rising generation and actually communicate. Children, teenagers, and young adults will fill in their own blanks for items not discussed. They sense and feel expectations, so unless open communication occurs, unwanted messages (with unintended consequences) may unknowingly be sent to the both the rising generation and the leadership generation.

Avoiding communication with the rising generation also leaves them feeling unclear about expectations. Telling them platitudes and generalizations to find whatever they want to do or follow their dreams seems encouraging. However, it is not helpful when the expectations of the family enterprise are not clearly articulated.

The best way to communicate is by using a mixture of intentional and organic conversations.

For intentional conversations with the rising generation, consider planning family meetings. Include ways for everyone to communicate in the meeting and to provide feedback. Making a list of roles available to the next generation is also a way to open communication with family members.

Organic conversations can be more difficult since they tend to be more random. The key is to always be on the lookout for natural opportunities to talk to the rising generation. Maybe it is over dinner, or on a walk, or while watching a ballgame. These conversations can allow for more in-depth discussions and great opportunities for “teaching” moments.

Most importantly, never stop telling your family story. Any chance you have, tell your story. Successful families often have stories of perseverance and hard work, of grandparents and parents working together, discipline and patience, and overcoming fears.

Talk about the steps you have taken on your journey; the most difficult routes generally either prove to be the most rewarding or teach the best lessons – sometimes they are both. Your story is the foundation of your family; talk about it every chance you have. These discussions will provide transparency and allow the rising generation to invoke both introspective and outward questions about how they want their path to look.

Lifelong learning programs tailored for each family member can be the successful roadmap for preserving multigenerational wealth.

A successful business would never ignore useful assets. The same should be true within a family. Failure to educate and include all family members to contribute to the family enterprise does not make fair use of the family’s assets. Each family member must understand they are unique and special while also adding substantial value to the family enterprise if they wish to reap the benefits of it.

Rising generations want options but also guidance, this is where a family learning program can help. Many multigenerational wealthy families report frustration when the senior generations do not recognize a need to transition or have a succession plan in place. The family learning program can develop a long-term strategy based on each generation, leadership and financial concepts.

The learning program for the family should have the flexibility to meet each family member where they are in life. It should include both technical competencies, such as investments, estate planning, taxes and the structures that hold the wealth, and qualitative competencies, such as intrapersonal life skills, governance skills, and philanthropy.

The key to success with a family learning program is to start with a foundation of complete honesty and transparency and to continue working together year after year with openness and respect. The final installment of our Legacy Planning series will be focused on providing more information on how families can work with someone to develop their own unique learning program.

Intentional family goals help to preserve the family’s wealth successfully. 

Long-term wealth preservation will not happen if siblings and cousins do not learn how to respect and value each other, as well as understand how to work together. Most families with success in working well across multiple generations have a written mission statement or family charter.

It is crucial to have a roadmap for your family. The family mission statement provides this. After all, how will you advance as a family if you do not know where to go or how to get there? How can you measure success if there is no standard set ahead of time?

A family mission statement gives you and your family the power to shape your legacy and further your goals for the future.

This shared vision will help everyone work together toward a common goal, allow input from the family, and let everyone know what is expected of each individual. When a family’s wealth is given both purpose and direction, it is set up to last for generations.

What do you do now?  The final reason why your legacy is important.

Preserving family wealth over many generations takes tremendous work and intentionality. Given the different personalities and dynamics unique to each family, the conversations can be challenging at times. However, the consequences of not having a legacy plan can be significant.

The good news is, just like my grandma was intentional and spent time engaging and teaching me, families today have a variety of resources and tools at their disposal to assist in this effort. My grandma did not have to stop what she was doing every time I came over to her house in the summer and take me to her garden, but she did because, above all else, she valued our time together which helped instill our family’s values in me.

Your greatest asset is embracing and finding out who you are as a family. The remainder of legacy planning involves a process of designing a well thought out roadmap for happiness and success that is unique to each family’s situation. Successful navigation of this roadmap will provide your family with the greatest chance of success in ultimately preserving wealth for future generations.

—

Compardo, Wienstroer, Conrad & Janes has significant experience guiding multi-generational families through successful wealth transfers. Our staff of diverse professionals stays informed to help you make better financial decisions. We serve Family Office, Professional Athletes and Family CFO clients. You can visit our website here.

Compardo, Wienstroer, Conrad & Janes presents The Importance of Legacy Planning Series. The Road To Preserving Multigenerational Wealth is the first article in our five-part series.

1. The Road to Preserving Multi-Generational Wealth
2. The Family Mission Statement
3. Succession Planning for the Family Vacation home.
4. How A Succession Plan Can Help Preserve Family Wealth
5. Family Learning Programs

For media inquiries contact us here.

Anna McDonald educates and writes about the issues ultra-high net worth families’ face as they engage and prepare the rising generation for the wealth, roles and responsibilities they may inherit. Her education in child and family development and her prior work experience, where she developed learning programs for families, enable her to address the complex personal and family dynamics those with significant wealth face.

Anna joined Compardo, Wienstroer, Conrad & Janes at Moneta after spending almost six years as an ESPN reporter. She now serves a dual role utilizing both her sports background and education background. She helps orchestrate the day-to-day financial needs our professional athlete clients have while also developing family learning strategies for ultra-high net worth families.

© 2021 Moneta Group Investment Advisors, LLC. All rights reserved. These materials were prepared for informational purposes only based on materials deemed reliable, but the accuracy of which has not been verified; trademarks and copyrights of materials linked herein are the property of their respective owners. This is not an offer to sell or buy securities, nor does it represent any specific recommendation. You should consult with an appropriately credentialed professional before making any financial, investment, tax or legal decision. Past performance is not indicative of future returns. These materials do not take into consideration your personal circumstances, financial or otherwise.

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Ask the CFP: Should I open a HELOC?

Hello everyone and welcome to this month’s Ask the CFP segment. This month’s question is, “Should I open a HELOC?” For those of you unfamiliar with this term, a HELOC is a Home Equity Line of Credit. I’m generally a fan of HELOCs for tax and cost reasons, but let’s cover the basics first.

Let’s say you have a home worth $800,000 and a mortgage worth $400,000. You obviously have a loan-to-value of 50% with $400,000 of equity in your home. With a traditional fixed-rate mortgage, your principal and interest payments are the same every month for the life of the loan and you can’t take more equity out of your home through that mortgage unless you refinance. However, with a HELOC, you may be able to quickly access the equity in your home for various reasons.

Generally, a bank or credit union will let you borrow up to 80-90% of the value of your home, even if you have a mortgage.  Using our home example, 90% of $800,000 is $720,000. Since a mortgage of $400,000 is already in place, that means a bank might approve a HELOC loan up to $320,000. So why would someone do this? What I like about HELOCs are their flexibility. Once open, you can quickly borrow on the HELOC to update your home or make large purchases. You can make minimum payments on the loan or you can pay it back right away lump-sum. In a low-interest rate environment, the cost of a HELOC is attractive too. Sometimes our clients call us in November and need lump-sums of cash for various reasons. If their investments are at a large gain, we might have to realize those taxable gains and pay Uncle Sam. However, using the HELOC instead may mean we can defer those taxable gains into the next tax year or beyond. This is one example of how they can be used for tax planning.

The idea of relying on debt to make financial decisions may seem counter to someone’s goals, but if you remove the emotions and look at it as a business decision, you can see how HELOCs may play an important role in complex financial planning. Once established, a HELOC is also convenient to use since you can generally access the loan within minutes right from your smart phone. A HELOC may not be for everyone, but it’s a unique planning tool that should be considered.

If you have a question about this topic or have a question for next month’s video, please send it to dtroyer@monetagroup.com. Thanks for watching and we’ll see you next month.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Please speak with a qualified tax or legal professional before making any changes to your personal situation.

© 2021 Moneta Group Investment Advisors, LLC. All rights reserved. These materials were prepared for informational purposes only based on materials deemed reliable, but the accuracy of which has not been verified. You should consult with an appropriately credentialed professional before making any financial, investment, tax or legal decision. Past performance is not indicative of future returns. These materials do not take into consideration your personal circumstances, financial or otherwise.

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Moneta Merges In Massachusetts Firm as $23.7 Billion RIA Expands Into Northeast

Boston-Area Firm The Berry Group Brings $625 Million to Growing Partnership

ST. LOUIS — February 18, 2021 — Moneta, a 100% partner-owned registered investment advisor (RIA) firm headquartered in Missouri, announces a significant expansion to its geographic footprint with a deal to merge in the principals and clients of The Berry Group of Worcester, Massachusetts. This addition is expected to bring $625 million in assets under management and represents the firm’s first presence in the Northeast.

While geographic expansion is part of Moneta’s larger plan, the culmination of the deal speaks more to the match in philosophies between the two firms. The Berry Group Principals Sarah Berry and Michael Machnowski, CFP^®, join Moneta’s decision-making partnership group as part of the move.

“As a firm that has been owned exclusively by our partners and professional staff from the start, we are in the unique position to grow without private equity,” asserts Managing Partner and Chairman Eric Kittner. “Sarah and Mike are very much aligned with our emphasis on having true shared equity in growing the business. Our model supports the independent mindset in allowing advisors to remain owners of their businesses and, at the same time, leverage our network and resources to grow in ways they couldn’t have on their own.”

Machnowski, who joined The Berry Group as part of a longer-term succession strategy with Sarah Berry, sees the consolidation into Moneta as a catalyst for his team’s further growth as well as a natural progression of the professionalization of financial advice.

“Moneta offers an incredible platform to help us run our business and brings the stature of being a Top 10 independently owned RIA,” explains Machnowski. “It would take us years to build what they already have. By joining forces, we can focus even greater attention on our clients.”

Moneta’s office footprint now includes Denver, Kansas City and the greater Boston area, in addition to St. Louis. The firm expects to grow methodically into other markets, where like-minded advisors who appreciate the concept of shared equity in a member-owned RIA express interest in joining.

“In aligning with Moneta, we wanted to be part of something that matched the experience our clients had when we went independent two years ago,” explains Berry. “At the same time, we wanted to protect our clients’ interests for the long term. By obtaining the resources and capabilities of Moneta, we’re very confident in our ability to meet both of those objectives.”

Moneta President and COO Keith Bowles adds, “We are thrilled to onboard The Berry Machnowski Team and their clients. They are culturally aligned and share the same entrepreneurial spirit that we built Moneta upon. While we have grown strictly organically for much of the firm’s history, we know that growing inorganically brings new talents, markets and further enhances our ‘best of breed’ practices to serve clients best.”

ABOUT MONETA

Moneta Group Investment Advisors, LLC is a registered investment advisor with nearly $24 billion in assets under management, headquartered in the Midwest. Barron’s ranked Moneta among the nation’s Top 10 Independent RIAs in 2018, 2019 and 2020 for its combination of quality and scale. InvestmentNews ranked Moneta as the nation’s second-largest fee-only RIA, with more than $20 billion in AUM in 2019 and 2020.

The firm consistently earns praise for the way it invests in and takes care of employees. In 2019, InvestmentNews ranked Moneta among the nation’s “Best Places to Work for Financial Advisers” for the second-straight year. In 2020, the St. Louis Post-Dispatch ranked Moneta among its “Top Workplaces” for the seventh-straight year and the St. Louis Business Journal named Moneta as one of its “Best Places to Work” for a sixth-straight year.

ABOUT THE BERRY GROUP

Managing Principals Sarah Berry and Michael Machnowski of The Berry Group now join Moneta as partners and together with their staff become “The Berry Machnowski Team” at Moneta. They bring with them nearly 450 clients and $625 million in AUM. Their offices will remain at One Mercantile St. #750, Worcester, MA.

Sarah Berry has been an advisor for 35-plus years, first with A.G. Edwards and Sons, and then its successor firms, Wachovia and Wells Fargo Advisors. At Wells Fargo, she and Michael Machnowski worked together for 10-plus years. In 2019, Berry and Machnowski partnered to create The Berry Group, an independent, fee-only registered investment advisor.

CONTACT

Gregory FCA for Moneta
Jen Diehl, 610-228-2124
moneta@gregoryfca.com

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Substantially Equal Periodic Payment (SEPP) Plans

By Ryan Martin and Lauren Hunt

Substantially Equal Periodic Payment Plans… that is a “mouthful” of a strategy, but the details of such planning don’t have to be complicated.

Tax-deferred accounts such as IRAs provide an excellent opportunity to accumulate funds for retirement. However, in certain circumstances when it might become necessary or desirable to utilize these qualified retirement plan accounts before age 59½, it is important to be aware of the consequences and opportunities for making early withdrawals. To discourage investors from prematurely accessing funds saved for retirement, the IRS generally imposes a 10% penalty on early withdrawals from 401(k) plans, 403(b) plans and individual retirement arrangements (IRAs) for any person who has yet to reach age 59 ½.

Provided that certain guidelines are followed, the IRS provides for a tax-advantaged, penalty-free option for those that find themselves needing distributions from these accounts before the prescribed retirement age. Under Internal Revenue Code Section 72(t), a person younger than age 59½ can take substantially equal periodic payments (SEPP) from qualified plans and IRAs without the imposition of the 10% penalty tax.

What is a substantially equal periodic payment (SEPP) plan and how does it work?

Under this exception, the participant effectively annuitizes his or her account using one of three methods provided by the IRS for calculating the annual withdrawal amount. Payments can be fixed or they can vary from year to year based on certain formulas. In addition, the following rules also apply:

• Payments must be made at least annually.
• Payments must be substantially equal.
• Payments must last for at least five full years or until the participant turns 59½, whichever period is longer.
• Payments cannot be modified before the participant reaches age 59½ or within five years of the date of the first payment, whichever period is longer.
• In the case of a qualified plan (but not an IRA), payments must begin after the participant separates from service.

What are the drawbacks of a SEPP?

While SEPP payments provide early access to retirement funds, that flexibility comes with the requirement of following the SEPP guidelines. Because you must continue with the same distribution schedule for five years or until you reach age 59 ½, whichever period is longer, you’ll want to think about this plan with longer-term perspective (versus a short-term fix). If you terminate or substantially modify your SEPP within the given time restrictions, you will have to pay the early withdrawal penalty that you previously avoided, plus interest on deferred penalties from prior tax years. The IRS allows an exception to this rule for deceased taxpayers or those who become permanently disabled. After the end of the required withdrawal period, however, you may change or stop the withdrawals altogether.

Final Thoughts

There are many items to consider when entertaining whether a SEPP is right for you. While the details and planning considerations extend beyond this summary, the strategy can prove very advantageous in the right situation.

As always, we recommend consulting with an appropriately credentialed professional before making any financial or tax-planning related decision.

© 2021 Moneta Group Investment Advisors, LLC. All rights reserved. These materials were prepared for informational purposes only. You should consult with an appropriately credentialed professional before making any financial, investment, tax or legal decision. Past performance is not indicative of future returns. These materials do not take into consideration your personal circumstances, financial or otherwise.

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REFLECTING ON 2020: BE CAREFUL WHAT YOU FEAR

By Luke Ferraro, Director of Investment Research

 

Many factors influence market returns: the economy, interest rates, business decisions, technology, worker productivity, sentiment and population growth – just to name a few. It is unfathomable to accurately predict all these factors with consistency, yet many market prognosticators will try again and again.

If anything is learned from 2020, one would hope a little humbleness has been accepted by investors. Early predictions for 2020 market returns would likely have centered around wholesale market carnage if one had known about the impending global pandemic, government-induced recession, swiftest equity market drawdown, increased social divisions and unending political strife. However, now given the benefit of hindsight, we can see predictions based on fears do not make for a robust investment regimen as fears do not always correlate to market returns.

As one looks at the last 12 months of market performance, the pace and depth of the market decline are clear. What is also obvious is the amazing recovery that took hold.

For a while, the market leaders tended to be those that would benefit from a post-COVID world, such as ones with growth prospects (technology companies and online consumer services). Others with a more uncertain outlook, such as small businesses and energy, faced a slower recovery of valuations as the market contended with fears over COVID, lockdowns and the upcoming US elections. Yet, as noted, fear-based investing can lead one astray from a long-term plan.

As the early November election wrapped up and vaccines for COVID received approvals, the market’s optimism turned on a dime. Suddenly, the outlook grew brighter and those sectors that had meandered along through the market recovery took the lead. Year-end then became something much less feared and returns finished on a high note, helping to dissipate the concerns that once overwhelmed 2020 market predictions.

As we enter 2021, a new set of fears arrive: the logistics and execution of the vaccine rollout, stimulus from monetary and fiscal policies and their lasting impact on the national debt and continued political and social fragmentation – to name a few.

As investors, we must guard against overreaction to fears. Willfully seeking to avoid one particular risk can inadvertently introduce risks we never intended. For example, concern over equity valuations may force one into the safety of fixed income, but now the risk of outliving one’s assets increases.

In the end, staying diversified with your financial assets remains the best way to protect against a variety of risks, especially the ones informed only by fear.

Look Ahead: Investment Themes for 2021

For all the continued fears one may perceive in 2021, we see market conditions and economic growth primed for growth and further recovery given the continued monetary support, expected fiscal impulse and improvement in vaccine distribution. As we highlight below, we are encouraged by the increasing breadth of asset class returns witnessed in the fourth quarter of 2020; this may suggest a start to a broader and more sustained increase in global economic growth.

A few themes we believe will impact markets are:

1. The Pandemic’s Wake

COVID-19 vaccine development and distribution efforts, once they fully take hold, boost the likelihood of harmonized economic growth normalization in 2021. Importantly, there is ample historical evidence that as the economy gains its footing and generates momentum, this positively impacts a broader set of asset classes. As highlighted below, activity in the markets in the fourth quarter of 2020 may offer a first hint for this potential moving forward.

Small cap and value-orientated equities produced substantial returns in the fourth quarter, improving market breadth heading into 2021.

2. Navigating a Low-Interest Rate Environment

Monetary support across the globe continues to be extremely accommodative and warranted given the magnitude of the impact of COVID-19 on economic activity and functionality of the global financial markets. However, given monetary policy support typically leans on low interest rates, we now face a diminished return expectation across fixed income asset classes.

Low-interest rates and tight credit spreads portend lower forward-looking returns in traditional fixed income.

Historically low interest rates, uneven global economic recovery and the potential for modest inflation volatility require attention to one’s fixed income allocation as 2021 begins. Investors may want to consider adding or increasing their exposure to high-yield funds in addition to maintaining a bond ladder with maturities in the 7- to 10-year range. While difficult, we recommend resisting the urge to stay ultra-short where the Fed has pledged to keep yields at or near zero until 2023.

3. International Equity Exposure

Lockdowns to slow the spread of COVID-19 introduced an unexpected catalyst for increased demand for productivity and entertainment solutions. The domestic technology sector subsequently benefited immensely with significant earnings growth and returns in 2020.

However, as we look into 2021 and see the potential for economic growth and broader asset class participation, companies hit hardest by the pandemic could experience dramatic earnings growth in 2021, which could drive higher returns for equity sectors and investment styles that lagged in 2020. One only has to look at how small cap and value equities performed in November and December last year to see this theme in effect. The same can be said for international and emerging equity markets, which produced advantageous returns as 2020 ended.

Relatively more attractive international valuations and the prospects of further U.S. dollar weakness support the prospects of international and emerging market equities.

A global economic recovery, prospects for further weakness in the U.S. dollar and stability within the commodity prices provide additional reasonings for improved prospects for international developed and emerging market equities. As highlighted above, relative valuation advantages persist across wide swaths of equity markets overseas, and the underlying composition of many of these markets sets them up to benefit in a prolonged global economic recovery.

Outlook Summary

As 2020 ended, the prospects for a broader economic reopening foreshadowed the benefits of portfolio diversification. Economic sectors and equity styles that lagged earlier in the recovery, such as small cap, value and international stocks, produced substantial returns in the last two months of the calendar year. The foundation for a continuation of this trend appears to be in place, although the path will be riddled with volatility as economic activity improves. As usual, portfolio diversification will still be key to helping portfolios achieve their investment objectives.

©2021, Moneta Group Investment Advisors, LLC. These materials have been prepared for informational purposes only based on materials deemed reliable, but the accuracy of which has not been verified. Past performance is not indicative of future returns. You cannot invest directly in an index. These materials do not constitute an offer or recommendation to buy or sell securities, and do not take into consideration your circumstances, financial or otherwise. You should consult with an appropriately credentialed investment professional before making any investment decision.

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Where Does This GameStop Story Go Next?

Last week we saw small investors flex their collective muscle, starting 2021 with its own set of unprecedented story lines. Last week’s moves in a select set of heavily shorted stocks caused a stir on Wall Street, got the attention of the Securities and Exchange Commission (SEC) and left investors asking some questions.

What Happened?

GameStop Corp., a brick-and-mortar retail store that specializes in video game sales, grabbed most of the media attention. Their share price surged 400% last week, bringing the stock’s year-to-date total return to 1,625%¹. Other examples of large upward price adjustments were in shares of AMC Entertainment and KOSS Corp. AMC’s stock gained 277% last week while Koss’s gain was 1,816%².

It is difficult to suggest that these sudden price moves were warranted with these stocks. Efficient Market Hypothesis (EMH) would assume that stocks always trade at their fair value. GameStop’s naming of Ryan Cohen to the board in early January and his expected impact to move the retailer online started what appears to be their process of moving toward true price discovery; however, subsequent events are what raised eyebrows.

GameStop Stock Growth 2021

How Did It Happen?

Social media and online chat groups empower people to connect quickly with others to mobilize action. Last week, users of the Reddit forum r/WallStreetBets attempted to beat hedge fund managers at their own game. GameStop is a stock that some hedge fund managers heavily betted upon losing value, known in the financial industry as “shorting a stock” – where hedge fund managers provide collateral to borrow shares of that stock, sell the borrowed shares for cash and wait for the price to fall so they can buy them back at a lower price. If a hedge fund manager’s borrowed shares increase in value instead of declining, they have to find more collateral to satisfy the lender. If they run out of collateral, or the lender runs out of patience, the fund must buy back those shares at the higher value and take a loss.

In this instance, the r/WallStreetBets-inspired buyers purchased GameStop stock en masse via the RobinHood investment app, hoping for one of two things to occur: either the actual fundamental value of these securities is realized to be at these new and higher levels, or the flow of demand from other new buyers behind them would continue to increase the stock’s value to their benefit.

This rise in GameStop’s value created a rush among hedge fund managers to buy back shares to limit their losses. Yet, this collective scramble to buy increased the upward pressure on the stock’s price – referred to as a “short squeeze.” Similar to turning up the flow of water through a garden hose and seeing the water shoot out further, the volume of buying in shorted stocks can overwhelm the diameter of the hose, shooting the water extremely high. This is what happened with GameStop, leading to collateral damage to Robinhood, which required a multi-billion dollar injection of cash, and direct damage to hedge funds caught on the wrong side of the short squeeze.

How Does It Impact Moneta Clients?

While not a major market driver, there could be side effects for the overall market in the short-term. Moneta Director of Investment Research, Luke Ferraro, CFA, said, “The forced buyers [the hedge funds] in these securities may need to raise cash elsewhere to fund their purchases. Some say this explains why the overall market traded lower last week. If leveraged buyers were forced to cover their bearish bets, they may have had to sell some of their more well-known stocks.”

Liquidity driven moves in the market could work in long-term investors’ favor. We witnessed last March how an overwhelming amount of sell orders can drive securities down in a short period of time. For an individual who is cash short and needs to transact in such a market, finding liquidity can be a struggle and costly as they are forced to sell at disadvantaged prices. One needs only to think about the individuals who are forced to buy GameStop at these levels. But for the long-term investor, who provides liquidity in the market, the dramatic moves in the market may present the opportunity to rebalance their portfolios at more advantageous prices.

Can it Happen Again?

Moneta Investment Consultant, Chris Kamykowski, CFA, said, “Short squeezes happen and will continue to, but I would not expect it to occur again in the same way. Ultimately, the market is largely efficient and will course correct.”

While we expect periods of elevated volatility such as this in 2021, we continue to have a positive outlook for the economy and believe our portfolios continue to be well-positioned to balance risk and return while navigating the continued economic recovery from the pandemic.

What’s Next?

The funny thing is that even as dramatically and rapidly as the stock and story took off, we are already seeing an unwinding as GameStop and other stocks caught in the recent upward vortex, now fall from their commanding heights from only a short few days ago.

What is certain to linger are many unanswered questions about who, what, why and how all this happened, which will certainly be around longer than the lifetime of this event (though the lingering effects of the event may be seen for quite some time).

It’s too soon to know the long-term impact for sure. There is a high probability that litigation will follow, demands for accountability and regulatory changes will arise, and a few investment firms may close shop.

Kamykowski said, “At the end of the day, fundamentals matter. While the market’s response to this event is evolving, the events have limited, if any, impact on the fundamental drivers of the economy. We still have more vaccines on the way; improving distribution and administering of said vaccines; a successful transfer of power complete; continued monetary policy support; and additional economic stimulus likely on the way.

We’re still moving along a solid trajectory and getting back to a new ‘normal.’ None of that has changed because of the drama seen over the last couple weeks between retail investors and professional investors. Remaining diversified in your investments, aligning your portfolio to your objectives, and focusing on the long-term still remain key considerations even as events like this catch the attention of markets.”

Your Moneta investment team will continue to closely monitor the events and their impact. Please speak with your Advisor about your specific portfolio.

[1] https://www.bloomberg.com/news/articles/2021-01-29/historic-week-for-gamestop-ends-with-400-rally-as-shorts-yield

[2] https://www.marketwatch.com/story/dow-futures-rise-250-points-as-the-stock-market-tries-to-shake-gamestop-angst-11612182450

©2021, Moneta Group Investment Advisors, LLC. These materials have been prepared for informational purposes only based on materials deemed reliable, but the accuracy of which has not been verified. Given the dynamic nature of the subject matter and the environment in which these materials were prepared, they are subject to change as additional information comes forth.  Past performance is not indicative of future returns. You cannot invest directly in an index. These materials do not constitute an offer or recommendation to buy or sell securities, and do not take into consideration your circumstances, financial or otherwise. You should consult with an appropriately credentialed professional before making any financial, investment, tax or legal decision.

The post Where Does This GameStop Story Go Next? first appeared on Moneta | Fee Only Financial Planning | Investment Advisors | Clients Nationwide.

source https://monetagroup.com/cwcj-where-does-this-gamestop-story-go-next-2/

Where Does This GameStop Story Go Next?

Last week we saw small investors flex their collective muscle, starting 2021 with its own set of unprecedented story lines. Last week’s moves in a select set of heavily shorted stocks caused a stir on Wall Street, got the attention of the Securities and Exchange Commission (SEC) and left investors asking some questions.

What Happened?

GameStop Corp., a brick-and-mortar retail store that specializes in video game sales, grabbed most of the media attention. Their share price surged 400% last week, bringing the stock’s year-to-date total return to 1,625%¹. Other examples of large upward price adjustments were in shares of AMC Entertainment and KOSS Corp. AMC’s stock gained 277% last week while Koss’s gain was 1,816%².

It is difficult to suggest that these sudden price moves were warranted with these stocks. Efficient Market Hypothesis (EMH) would assume that stocks always trade at their fair value. GameStop’s naming of Ryan Cohen to the board in early January and his expected impact to move the retailer online started what appears to be their process of moving toward true price discovery; however, subsequent events are what raised eyebrows.

GameStop Stock Growth 2021

How Did It Happen?

Social media and online chat groups empower people to connect quickly with others to mobilize action. Last week, users of the Reddit forum r/WallStreetBets attempted to beat hedge fund managers at their own game. GameStop is a stock that some hedge fund managers heavily betted upon losing value, known in the financial industry as “shorting a stock” – where hedge fund managers provide collateral to borrow shares of that stock, sell the borrowed shares for cash and wait for the price to fall so they can buy them back at a lower price. If a hedge fund manager’s borrowed shares increase in value instead of declining, they have to find more collateral to satisfy the lender. If they run out of collateral, or the lender runs out of patience, the fund must buy back those shares at the higher value and take a loss.

In this instance, the r/WallStreetBets-inspired buyers purchased GameStop stock en masse via the RobinHood investment app, hoping for one of two things to occur: either the actual fundamental value of these securities is realized to be at these new and higher levels, or the flow of demand from other new buyers behind them would continue to increase the stock’s value to their benefit.

This rise in GameStop’s value created a rush among hedge fund managers to buy back shares to limit their losses. Yet, this collective scramble to buy increased the upward pressure on the stock’s price – referred to as a “short squeeze.” Similar to turning up the flow of water through a garden hose and seeing the water shoot out further, the volume of buying in shorted stocks can overwhelm the diameter of the hose, shooting the water extremely high. This is what happened with GameStop, leading to collateral damage to Robinhood, which required a multi-billion dollar injection of cash, and direct damage to hedge funds caught on the wrong side of the short squeeze.

How Does It Impact Moneta Clients?

While not a major market driver, there could be side effects for the overall market in the short-term. Moneta Director of Investment Research, Luke Ferraro, CFA, said, “The forced buyers [the hedge funds] in these securities may need to raise cash elsewhere to fund their purchases. Some say this explains why the overall market traded lower last week. If leveraged buyers were forced to cover their bearish bets, they may have had to sell some of their more well-known stocks.”

Liquidity driven moves in the market could work in long-term investors’ favor. We witnessed last March how an overwhelming amount of sell orders can drive securities down in a short period of time. For an individual who is cash short and needs to transact in such a market, finding liquidity can be a struggle and costly as they are forced to sell at disadvantaged prices. One needs only to think about the individuals who are forced to buy GameStop at these levels. But for the long-term investor, who provides liquidity in the market, the dramatic moves in the market may present the opportunity to rebalance their portfolios at more advantageous prices.

Can it Happen Again?

Kamykowski said, “Short squeezes happen and will continue to, but I would not expect it to occur again in the same way. Ultimately, the market is largely efficient and will course correct.”

While we expect periods of elevated volatility such as this in 2021, we continue to have a positive outlook for the economy and believe our portfolios continue to be well-positioned to balance risk and return while navigating the continued economic recovery from the pandemic.

What’s Next?

The funny thing is that even as dramatically and rapidly as the stock and story took off, we are already seeing an unwinding as GameStop and other stocks caught in the recent upward vortex, now fall from their commanding heights from only a short few days ago.

What is certain to linger are many unanswered questions about who, what, why and how all this happened, which will certainly be around longer than the lifetime of this event (though the lingering effects of the event may be seen for quite some time).

It’s too soon to know the long-term impact for sure. There is a high probability that litigation will follow, demands for accountability and regulatory changes will arise, and a few investment firms may close shop.

Moneta Investment Consultant, Chris Kamykowski, CFA, said, “At the end of the day, fundamentals matter. While the market’s response to this event is evolving, the events have limited, if any, impact on the fundamental drivers of the economy. We still have more vaccines on the way; improving distribution and administering of said vaccines; a successful transfer of power complete; continued monetary policy support; and additional economic stimulus likely on the way. We’re still moving along a solid trajectory and getting back to a new ‘normal.’ None of that has changed because of the drama seen over the last couple weeks between retail investors and professional investors. Remaining diversified in your investments, aligning your portfolio to your objectives, and focusing on the long-term still remain key considerations even as events like this catch the attention of markets.”

Your Moneta investment team will continue to closely monitor the events and their impact. Please speak with your Advisor about your specific portfolio.

[1] https://www.bloomberg.com/news/articles/2021-01-29/historic-week-for-gamestop-ends-with-400-rally-as-shorts-yield

[2] https://www.marketwatch.com/story/dow-futures-rise-250-points-as-the-stock-market-tries-to-shake-gamestop-angst-11612182450

©2021, Moneta Group Investment Advisors, LLC. These materials have been prepared for informational purposes only based on materials deemed reliable, but the accuracy of which has not been verified. Given the dynamic nature of the subject matter and the environment in which these materials were prepared, they are subject to change as additional information comes forth.  Past performance is not indicative of future returns. You cannot invest directly in an index. These materials do not constitute an offer or recommendation to buy or sell securities, and do not take into consideration your circumstances, financial or otherwise. You should consult with an appropriately credentialed professional before making any financial, investment, tax or legal decision.

The post Where Does This GameStop Story Go Next? first appeared on Moneta | Fee Only Financial Planning | Investment Advisors | Clients Nationwide.

source https://monetagroup.com/where-does-this-gamestop-story-go-next/

REFLECTING ON 2020: BE CAREFUL WHAT YOU’RE FEARFUL OF

By Luke Ferraro, Director of Investment Research

Many factors influence market returns: the economy, interest rates, business decisions, technology, worker productivity, sentiment and population growth – just to name a few. It is unfathomable to accurately predict all these factors with consistency, yet many market prognosticators will try again and again.

If anything is learned from 2020, one would hope a little humbleness has been accepted by investors. Early predictions for 2020 market returns would likely have centered around wholesale market carnage if one had known about the impending global pandemic, governmentinduced recession, swiftest equity market drawdown, increased social divisions and unending political strife. However, now given the benefit of hindsight, we can see predictions based on fears do not make for a robust investment regimen as fears do not always correlate to market returns.

As one looks at the last 12 months of market performance, the pace and depth of the market decline are clear. What is also obvious is the amazing recovery that took hold.

For a while, the market leaders tended to be those that would benefit from a post-COVID world, such as ones with growth prospects (technology companies and online consumer services). Others with a more uncertain outlook, such as small businesses and energy, faced a slower recovery of valuations as the market contended with fears over COVID, lockdowns and the upcoming US elections. Yet, as noted, fear-based investing can lead one astray from a long-term plan.

As the early November election wrapped up and vaccines for COVID received approvals, the market’s optimism turned on a dime. Suddenly, the outlook grew brighter and those sectors that had meandered along through the market recovery took the lead. Year-end then became something much less feared and returns finished on a high note, helping to dissipate the concerns that once overwhelmed 2020 market predictions.

As we enter 2021, a new set of fears arrive: the logistics and execution of the vaccine rollout, stimulus from monetary and fiscal policies and their lasting impact on the national debt and continued political and social fragmentation – to name a few.

As investors, we must guard against overreaction to fears. Willfully seeking to avoid one particular risk can inadvertently introduce risks we never intended. For example, concern over equity valuations may force one into the safety of fixed income, but now the risk of outliving one’s assets increases.

In the end, staying diversified with your financial assets remains the best way to protect against a variety of risks, especially the ones informed only by fear.

Look Ahead: Investment Themes for 2021

For all the continued fears one may perceive in 2021, we see market conditions and economic growth primed for growth and further recovery given the continued monetary support, expected fiscal impulse and improvement in vaccine distribution. As we highlight below, we are encouraged by the increasing breadth of asset class returns witnessed in the fourth quarter of 2020; this may suggest a start to a broader and more sustained increase in global economic growth.

A few themes we believe will impact markets are:

1. The Pandemic’s Wake

COVID-19 vaccine development and distribution efforts, once they fully take hold, boost the likelihood of harmonized economic growth normalization in 2021. Importantly, there is ample historical evidence that as the economy gains its footing and generates momentum, this positively impacts a broader set of asset classes. As highlighted below, activity in the markets in the fourth quarter of 2020 may offer a first hint for this potential moving forward.

Small cap and value-orientated equities produced substantial returns in the fourth quarter, improving market breadth heading into 2021.

2. Navigating a Low-Interest Rate Environment

Monetary support across the globe continues to be extremely accommodative and warranted given the magnitude of the impact of COVID-19 on economic activity and functionality of the global financial markets. However, given monetary policy support typically leans on low interest rates, we now face a diminished return expectation across fixed income asset classes.

Low-interest rates and tight credit spreads portend lower forward-looking returns in traditional fixed income.

Historically low interest rates, uneven global economic recovery and the potential for modest inflation volatility require attention to one’s fixed income allocation as 2021 begins. Investors may want to consider adding or increasing their exposure to high-yield funds in addition to maintaining a bond ladder with maturities in the 7- to 10-year range. While difficult, we recommend resisting the urge to stay ultra-short where the Fed has pledged to keep yields at or near zero until 2023.

3. International Equity Exposure

Lockdowns to slow the spread of COVID-19 introduced an unexpected catalyst for increased demand for productivity and entertainment solutions. The domestic technology sector subsequently benefited immensely with significant earnings growth and returns in 2020.

However, as we look into 2021 and see the potential for economic growth and broader asset class participation, companies hit hardest by the pandemic could experience dramatic earnings growth in 2021, which could drive higher returns for equity sectors and investment styles that lagged in 2020. One only has to look at how small cap and value equities performed in November and December last year to see this theme in effect. The same can be said for international and emerging equity markets, which produced advantageous returns as 2020 ended.

Relatively more attractive international valuations and the prospects of further U.S. dollar weakness support the prospects of international and emerging market equities.

A global economic recovery, prospects for further weakness in the U.S. dollar and stability within the commodity prices provide additional reasonings for improved prospects for international developed and emerging market equities. As highlighted above, relative valuation advantages persist across wide swaths of equity markets overseas, and the underlying composition of many of these markets sets them up to benefit in a prolonged global economic recovery.

Outlook Summary

As 2020 ended, the prospects for a broader economic reopening foreshadowed the benefits of portfolio diversification. Economic sectors and equity styles that lagged earlier in the recovery, such as small cap, value and international stocks, produced substantial returns in the last two months of the calendar year. The foundation for a continuation of this trend appears to be in place, although the path will be riddled with volatility as economic activity improves. As usual, portfolio diversification will still be key to helping portfolios achieve their investment objectives.

©2021, Moneta Group Investment Advisors, LLC. These materials have been prepared for informational purposes only based on materials deemed reliable, but the accuracy of which has not been verified. Past performance is not indicative of future returns. You cannot invest directly in an index. These materials do not constitute an offer or recommendation to buy or sell securities, and do not take into consideration your circumstances, financial or otherwise. You should consult with an appropriately credentialed investment professional before making any investment decision.

The post REFLECTING ON 2020: BE CAREFUL WHAT YOU’RE FEARFUL OF first appeared on Moneta | Fee Only Financial Planning | Investment Advisors | Clients Nationwide.

source https://monetagroup.com/reflecting-on-2020-be-careful-what-youre-fearful-of/