January 2023 Letter

Matthew Costa, CPA, CFP®, MAcc

Valued Clients & Friends, Happy New Year! Every year at this time, we like to look back and review the past year.

Valued Clients & Friends,

Happy New Year!  Every year at this time, we like to look back and review the past year.  This year, I am glad 2022 is behind us.  2022 was probably the hardest year I have experienced in the 11 years I have been a financial professional and advisor.  Forty trillion dollars in stock and bond value vaporized in 2022.  We have not had a year in recent history where both stock market and bond market returns were negative, much less significantly negative.

Illustrated below by the red dot, 2022 is among a select few years which have had negative returns on bonds and stocks.  And that is over a 150-year period!

Source: Financial Times, Robert J Shiller; TS Lombard; FT Calculations

Though, zooming out is important.  If you were born in 1972, the broader US stock market has been cut in half three different times in your lifetime.

  • 1973-1974
  • 2000-2002
  • 2007-2009

That sounds scary at first, but, when you zoom out, you notice that the market is still up 37x (3700%) from an S&P500 price of 107 to approximately 3900 today.

The Foundation Wealth team wakes up every day focused on helping our clients financially plan, solve problems, allocate capital, and win the long-term tax game, i.e., positive outcomes for our clients.  Small and large companies all over the world are also striving for positive outcomes for their clients in their domains.  Whether the company is involved in technology, consumer goods, healthcare, or any other industry, they are looking to succeed.

Once these current economic troubles are over, we believe the future is still bright.  You are not investing in what is happening in Washington D.C., nor today’s headlines; you are investing in great companies driving positive outcomes to their customers and their markets.  If you haven’t already, I encourage you to check out my blog post from last October where I outline why I am optimistic:


The resilience of the US Economy is astonishing when you zoom out.  People who invest like optimists and save like pessimists will benefit from other investors’ erratic behaviors.

This brings me to the main point of this letter:  What are the primary determining factors of a financially successful family?

Research shows the primary factors, in order, are: (1) savings; (2) financial planning; and (3) investor behavior.  Most people assume it’s investment selection, but it’s not.  Asset selection or timing the market are not the most important; it is time in the market which is important.

To touch on each of these items briefly:

  • Savings

Spending less than you earn is surprisingly difficult in today’s world.  Ingraining the habit of stashing away for later is critical to getting to retirement.   The compound effect of stashing away $1,000 a month for 40 years at 6.1% return is $2,000,000.  Saving is the simplest financial investment in your future and hardest thing for most to do.

  • Financial Planning

This is where we come in.  It may not always be obvious what we are doing behind the scenes, so I’ll give you a peek…  I ask you so many questions in our meetings because I need to understand your goals and needs both for your spending of today and savings for later.  Then, I need to try and balance them in a way that fits your lifestyle.  Once I understand your goals and needs, I can then calculate the savings necessary and income we need your investments to generate to meet your goals in the years leading up to your desired retirement.  In your retirement years, I can tactically manage income, liquidity, and taxes.  Once I know your goals and needs, then, and only then, can the Foundation team design a portfolio, which at long-term historical rates of return, will get you where you want to go.

  • Investor Behavior

For some people, the savings and financial planning is the easy part before the real work begins.  Once the Foundation team, including our portfolio managers, have created a portfolio of high-quality investments which are suited to your long-term goals, we become, in a sense, your behavioral coach.  My job is to help you continue to make good decisions and avoid making unwise decisions about your portfolio assets, business and personal assets, insurance, estate planning, and more in the decades to come.

Extensive research has shown that if you have a diversified portfolio, a whopping 88% of your volatility and returns can be traced back to asset allocation.  This means that specific investment selection of certain stocks or bonds is not the driving force of success.  Instead, it is asset allocation and diversification.  You don’t have to pick the individual winners – you just need to be invested across a broad range of investments for a long enough period to get the results you need.

If you give the financial plan we implement enough time and enough savings, we should achieve, with a high probability, all the goals we agree upon.  Of course, we can never know for certain that it will be enough money, but we can make great educated estimates based on historical data.  And, if for some reason you are not given sufficient time and savings to the plan, insurance could mostly carry the plan the rest of the way.  Some thoughts on insurance below.

Insurance Thoughts for 2023

Before I dive in, I wanted to give a caveat.  As you may be aware, insurance agents who sell you insurance as a financial product earn a commission on their sale (e.g., life insurance).  This commission obviously introduces an incentive to sell you that product.  I believe this sales incentive can create a conflict of interest if the agent earning a commission is also your financial advisor.  I do not sell these products (nor do I plan to) because I fundamentally disagree with the idea that I can provide you with impartial and sound fiduciary advice if I have a commission to be earned by selling you such a product.

Nevertheless, insurance is an important tool of financial planning.  In 2023, I want to prioritize insurance analysis for all my clients.  Although I do not sell it, I know many good people who do sell insurance that I can recommend.  As I am not incentivized on the sale, I can then sit down with you and impartially weigh the pros and cons of any products they may recommend to you.

Life insurance, disability insurance, or long-term care insurance can all be analyzed qualitatively and quantitatively.  A financial plan is not a great plan if it sinks from hitting an iceberg mid-plan.  If we choose to not insure, we should know the whole picture and agree we want to take that risk.  Let’s plan to spend more time than usual on this topic in our spring/summer meetings.

Thoughts on the Federal Reserve

For those of you who have worked with me before or during 2020, you may remember my February 2020 letter where I repeated an interesting point I learned through my unending quest to learn more about financial markets.  The Federal Reserve has a “Hotel California” dilemma.  The Fed’s loose monetary policies in the wake of the 2008 Global Financial Crisis created a low interest rate situation where “they can never leave.”  Borrowers get used to low rates and bad investment grows with an artificially low cost of capital.  In my mind, low rates are a drug, and low rates for too long are akin to a drug addiction. Withdrawal from a drug addiction is painful.

We have all seen how painful 2022 was with the Fed raising interest rates to combat inflation.  However, I suspect that raising interest rate policy will reverse in the coming few years.  In a high debt world, raising rates increases borrowing costs.  Creditors struggle to afford their debt and subsequently enter a debt spiral.  A debt spiral refers to a situation where a country, or firm or individual, sees ever-increasing levels of debt.  This increasing level of debt and debt interest become unsustainable, eventually leading to a debt default or restructuring.  I believe the Fed cannot afford for that to happen.  More likely than not, the Fed will therefore lower rates and buy bonds in the coming year to 18 months.  If this plays out, this will be a bullish scenario for asset prices, but bearish long-term for the dollar.  In no way can we time this type of event, but it’s interesting to keep in the back of our minds as we look at the macroeconomic trends of the next few years.  Recently, inflation has come down from its peak which may support the Fed starting to cut ahead of their current 2024 projections.

Final Point – An Appreciation for Bear Markets

As with all things, bear markets are temporary.  Provided we keep communicating, managing your liquidity, and planning appropriately as we get closer to the time you need to start drawing on your portfolio, bear markets are storms which can be weathered.

One of my favorite books is about behavioral investing.  The author, Nick Murray, called a bear market “… a period of time during which stocks are returned to their rightful owners.”  In other words, stocks which were bid away from good investors by bad investors during euphoric times are sold back to the wisest and deserving investors at fire-sale prices when the market declines.  To illustrate the point, here is a chart of bear markets from World War II through 2019:

Reviewing the chart, you will see randomness that is utterly unpredictable.  The market has retreated an average 30% 13 times in the 73-year timeframe,  or approximately one year in every 5.5 years.  Peak to trough, the average decline went on for about 15 months.  At some points in those bear markets, America suffered economic and other disasters which seemed to risk the destruction of the American system, or the world (i.e., the Cuban Missile Crisis).  The point is, we will never be without problems.  And sometimes we will have extremely serious problems.  But this chart cries out to us a major point: there’s an endless chain of permanent advance punctuated by temporary decline.  “We bend, but never break.”

While we do not know how much longer tough times in capital markets may continue, history has shown staying the course can be rewarded.  Over the last 100 years, the US stock market has averaged positive returns over one-year, three-year, and five-year periods after entering a bear market (losing 20% from the most recent high).  This is shown in the chart below.

Dimensional Fund Advisors LP

Yes, I am an optimist, but moreover, I am your advisor trying to communicate data into words and give you some sighs of relief.  I will not pretend to have the expertise to predict any economic or market outcome, and indeed cannot.  My position is that all previous crises, even those more dire than this, have been successfully resolved and the American economy and its capital markets have resumed their upward march.

In summary and agreement with Mr.  Nick Murray, there are four things you must know about bear markets.

  1. Bear markets are temporary interruptions of a permanent uptrend of productivity, technology, and standard of living.
  2. Bear markets are common, and on average one occurs every five to six years.
  3. Bear markets are an essential, organic element of a never-ending cycle. As long as humans run the show, the economy will inevitably overshoot and then undershoot the long-term trendline;  markets can only follow.
  4. Bear markets are the reason for equities’ premium return…. because of volatility!

In conclusion, there are only two ways to process the lousy experience of the 2022 market.  We can be victims or we can be opportunists.  I choose the latter.  If you’ve got things on your mind, we are here for you.  If it’s a week I’m not in an office near you, a virtual meeting is always available.

Happy New Year, and here’s to a healthy and prosperous 2023!

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