Quarterly Insights – October 2023

by Christopher Sidoni October 24th, 2023

The third quarter of this year marked the 15th anniversary of the collapse of Lehman Brothers, the investment bank failure at the epicenter of the Global Financial Crisis of 2008. The occasion got me thinking about how much has changed in our clients’ lives since that period. We have had the good fortune of helping our clients with lots of home purchases, college tuition payments, gifts to grandchildren, and philanthropic donations.  

It stands to reason that as our life circumstances change, we must reconsider some of the key inputs to our investment strategy. Consider how you thought about your investment objectives 15 years ago versus how you think about them today. Have they changed? 

My observation is that investment objectives don’t tend to change dramatically but it is possible to refine them. A common investment objective for our clients is a twofold goal that sounds something like this: I want to maintain my current lifestyle in retirement while preserving assets for my family or a charity. As time goes by, one of these objectives can become paramount.

I had a client tell me recently that he was far less concerned than he once was about money for his heirs. Events in his childhood caused him to constantly worry about not having enough money, so while the client has significant investment resources today, the same worry remains. 

Sometimes we use hypotheticals to explore investment objectives. For instance, what would you do differently in your life if your net worth was double what it is today? If you ponder that question and determine your life wouldn’t change all that much, the answer might shape how much investment risk you choose to accept.

One interesting feature of today’s market environment is that we can explore some investment objective questions without using hypotheticals. Over the past 15 years, it wasn’t possible to earn much of a return over and above inflation without taking on stock market risk. That dynamic has changed. The market for interest-generating investments, such as bonds, now offers a meaningful expected rate of return above inflation.  

I raise this point not to suggest investors should load up on investments in bonds but because this investment possibility can help refine your thinking about investment objectives. Suppose you have an opportunity to take less risk and still have a similar probability of meeting your objectives. Would you do that?  

Several years ago, with bond yields so low, stock investments had to do all the heavy lifting to drive long-term portfolio returns. Now bonds can help carry the load. In other words, a portfolio that features a higher allocation to bonds today might have a similar long-term expected return as a portfolio allocation from several years ago that had a more significant allocation to stocks.  

The classic risk-return tradeoff with stocks and bonds still exists. We have higher long-term return expectations for stocks versus bonds. But now, a lower-risk option for meeting investment objectives is back on the table for the first time in over a decade. Therefore, now may be an ideal time to potentially refine your objectives. If this topic interests you, I encourage you to bring it up with your advisor. These conversations are important, and we want to take every opportunity to more closely align your investment strategy with your objectives.  

Most asset classes produced negative total returns in the third quarter. Investment asset prices now reflect an expectation that interest rates will remain elevated for a longer period of time than what markets expected just a few months ago. This “higher for longer” expectation has dragged down returns for traditional asset classes like stocks, bonds, and real estate. Insurance-linked securities were a bright spot during the quarter as their pattern of returns is mostly unrelated to returns for traditional asset classes.  

Over the year, U.S. stocks, non-U.S. stocks, and insurance-linked securities have provided positive contributions to performance, while real estate securities have lagged.  

As always, we look forward to our next conversation and want to express our gratitude for the opportunity to work with you.

As Chief Investment Officer, Chris leads our investment research agenda as well as our portfolio management philosophy and client service initiatives. He is continuing our legacy of innovations to convey complex advisory concepts to clients and professional audiences alike. Chris has professional experience ranging from high-net-worth portfolio management to comprehensive financial planning. As an investment advisor, Chris manages all aspects of client relationships.

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