When it comes to your investment strategy, building your portfolio the right way is half the battle. An advisor can help you create a custom-tailored plan to manage our portfolio and when put it into practice. If you have questions bout staying on track, rebalancing, getting through market turbulence, or minimizing your tax bill, we're here for you.
Educational resources on investment management.
The Basics: Asset Allocation
To put it simply, asset allocation is the process of apportioning a portfolio into different asset categories in order to balance risk and reward. Markets go up and down over time, and, as a result, so will the value of your investment portfolio. Therefore, it’s important to include a blend of investments in your portfolio, such as stocks, bonds, and cash, to ensure an optimal balancing of risk and reward.
While some investments, such as publicly-traded bonds, offer more stability, other investments, such as stocks, carry more risk. However, they also offer more opportunity for growth.
With that said, how do you decide how much of your assets to allocate to stocks, bonds or cash? The appropriate asset allocation is unique to each investor and is based on your answers to the following questions:
1. What is your risk tolerance?
If stock volatility makes you anxious, you may consider investing more heavily in stable, fixed-income types of investments such as bonds. In contrast, if you are willing to take on more risk for the potential of higher reward, you may consider allocating more heavily in growth assets such as publicly traded stocks. The following graph shows a spectrum of asset allocation options and their related risk level.
2. What are your objectives?
If your goal is primarily income, you may decide to more heavily weight bonds in the asset allocation. In contrast, if the primary goal is the accumulation of wealth, you may choose to more heavily weight stocks in the allocation.
3. What is your time horizon?
Once you have determined and implemented an appropriate asset allocation you should review the decisions that led to the allocation at least annually. It is important to think about whether or not your life circumstances have changed in the past year, and, if so, whether or not your risk tolerance, investment objectives, or constraints have changed. If they have, it may be time to adjust your asset allocation.
You can’t predict the market
Investing In Causes Rather Than Companies
Are you looking for a way to use your extra funds to make a difference in the world while also creating financial value? Investing in a cause – also known as impact investing – might be an option to consider. It’s the socially responsible way to invest, and if, as a global citizen, you feel you have an obligation to social responsibility, this type of investing can help you make a positive impact on the world.
Impact investing is an increasingly popular way for investors around the world to use the power of capital to further initiatives they care about, whether they’re faith-based, environment-based or focused on a number of other social issues.
How do I find a good cause to invest in?
Whatever cause you believe in, there’s likely a company that’s committed to it, and investing in that company is an opportunity to share in the effort to make a difference.
The next step is researching companies that are publicly committed to the cause you care about. Some companies, such as General Electric, Nestle and TOMS have based entire business and marketing models on committing to specific causes, a concept called creating shared value (CSV).
CSV is a common and typically successful way for companies to both make a difference and boost profits. For example, when General Electric announced it would push for a reduction in electrical and fuel costs and carbon emissions, it drove incredible sales growth. Nestle incorporated CSV by investing in local infrastructure to improve economic development in areas they operate, and TOMS Shoes is known for its commitment to alleviating poverty by donating a pair of shoes for every pair purchased.
While there are many companies that are well-known for their impact investing approach, there are many others that contribute to causes on a smaller scale. There are many tools available online to match investors to companies with aligning interests. Consult with your investment advisor on which investment opportunities are the right fit for you.
It’s about more than just the bottom line
How to Start Investing
A common misconception is that you must have a lot of money or be established in your career to begin investing. In reality, it is best to begin investing as early as possible, and you do not need to begin with a substantial amount of money. Investing a small amount is better than not investing at all, and the younger you are, the more you stand to gain from investing due to compounding interest. Here’s how you can get started.
Understand your purpose
First, you need to determine your purpose for investing. Are you investing for retirement purposes (referred to as “qualified” dollars due to their potential tax deferral benefits)? Or for nonretirement purposes (“nonqualified” dollars)?
Determining if you’re investing for retirement or nonretirement purposes will help you determine which type of account to open. Please be sure to consult with a tax professional to ensure you are eligible for a qualified retirement plan. Nonqualified investing is a great alternative and/or complement to a retirement savings account, such as a 401(k) or IRA.
Determine the right form of investment
If you are actively employed, one simple way to start investing is to explore whether your company offers any retirement plans, such as a 401(k), and if you are eligible to contribute.
401(k)s and IRAs for retirement investing
A 401(k) is a retirement savings plan sponsored by an employer that allows employees to save and invest a portion of their paycheck. Often, the employer will also offer to match a percentage of the employee’s contribution and/or make a contribution on behalf of the employee. The plan may offer traditional pre-tax contributions or Roth after-tax contributions. Learn more about the differences between a 401(k) and Roth 401(k).
If you do not have access to an employer-sponsored plan, an IRA or Roth IRA may be a good alternative. Like a 401(k), an IRA account is meant for retirement investing purposes. It grows on a tax deferred basis, and in some cases, they offer tax benefits.
Mutual funds as supplemental investing
Aside from investing for retirement, you may decide to make supplemental investments. Mutual funds are often a good option for new investors as some mutual fund companies allow you to begin with a contribution as small as $50 per month. Your investment can be automatically drafted from a checking account. This automated aspect is appealing for new investors because it doesn’t require frequent action by the investor.
Start investing today
The first step to becoming an investor is doing exactly what you’re doing right now: reading, researching and learning about your options. Understand your purpose and which investment option best helps you reach your goals. Determine how much you are able to invest on a monthly or annual basis, and get started with a 401(k), IRA, mutual fund, or other account.
When you’re ready to begin, speak to a trusted financial professional who can help guide you in the right direction by evaluating your overall financial picture, income, expenses, time horizon, and risk tolerance. And remember, it’s important to begin investing as early as possible. The earlier you start investing, the greater potential for investment earnings!
Investing In U.S. Savings Bonds
What are U.S. Savings Bonds and how do they work?
Savings bonds are securities issued by the U.S. Treasury Department. When you purchase a savings bond, you lend money to the U.S. government, and as the bond matures, you earn interest. Savings bonds are considered a low-risk, low-return investment option, and they are backed by the “full faith and credit” of the U.S. government.
You may choose from two different savings bonds options: Series EE or Series I Bonds. Series EE Bonds are more common. They are purchased at a fixed interest rate and take 20 years to mature. Series I Bonds are purchased at an interest rate calculated by current fixed interest rates as well as the rate of inflation. Series I Bonds take 30 years to mature. If inflation is expected to be high for the next 30 years, investors tend to gravitate towards Series I Bonds.
Where can I purchase savings bonds?
You can purchase savings bonds electronically through TreasuryDirect, a secure web-based system which allows investors to establish accounts to purchase, hold, and conduct transactions online. This applies to Series EE and I Savings Bonds, Treasury Bills, Notes, and Treasury Inflation-Protected Securities (TIPS).
You can purchase U.S. Savings Bonds in any denomination from $25 to $10,000. Keep in mind, there’s a $10,000 annual limit per savings bond series per person.
How do I redeem a savings bond?
You can cash your electronic savings bond on the U.S. Treasury’s website. While paper savings bonds are no longer available for purchase as of January 2012, existing paper savings bonds issued before then can be redeemed at a bank or credit union.
If you’re ready to cash in your U.S. Savings Bond, here are a few things to keep in mind:
What is the tax implication of cashing a savings bond?
Unless you elected to pay taxes on the interest annually, you must pay federal income tax on the bonds at maturity, even if you do not cash them in. There’s no state or local income tax on U.S. Savings Bonds.
Keep in mind, cashing several bonds or one large bond in the same year could result in enough interest income to put you in a higher tax bracket or push seniors into paying more for Medicare Part B. Also, for bonds purchased after 1989 in parents’ names, there may be some tax advantages if the proceeds are used to pay college costs, depending on total family income and other requirements. Always consult your tax advisor for more detail.
When it comes to investing, there are many options. While some investors – especially those with a longer time horizon – prefer a more aggressive, high-risk and high-return approach, those with a shorter time horizon may find options like savings bonds more suitable.
Wall Street vs. Main Street: Why One Does Not Reflect the Other
When did the divergence between Wall Street and Main Street begin?
From late February through March, the S&P 500 dropped nearly 35 percent as the COVID-19 pandemic slowed the U.S. economy. As the virus spread, the Federal Reserve acted quickly to lower the Federal Funds Rate within a few weeks from more than 1.25 percent to 0-0.25 percent. In addition, Congress quickly passed a stimulus bill designed to support small businesses and consumers. Soon after, record numbers of unemployment claims were reported and it became apparent the economic contraction would break long-standing records.
Economic data, which reflects the health of “Main Street,” has improved modestly in recent months. However, unemployment remains near 8.5 percent and gross domestic product (GDP) is reported to have contracted nearly 32 percent in the second quarter.
In sharp contrast, the S&P 500 Index (one measure of “Wall Street” health) began rising in early April and had fully recovered from the decline by mid-August. As of September 2, the Index was up more than 12 percent for the year and closed at an all-time high.
Why did the divergence between Wall Street and Main Street occur?
The strong rebound in the equity market was fueled by several factors. For example, the Federal Reserve pledged to keep the Fed Funds Rate low well into the future to support the economy as it reopens. This action tends to keep interest rates low, making stocks more attractive compared to bonds and driving stock prices higher. In addition, economic stimulus programs launched by Congress have helped sustain consumer spending even though unemployment remains high. But these drivers are only part of the story.
The equity market is often called a “leading indicator,” meaning it tends to appreciate months in advance of expected economic improvement. In contrast, economic data for categories such as employment, housing and GDP are frequently called “lagging indicators” because they are reported weeks or months after the period to which they pertain. This difference in perspective – forward versus backward looking – means that Wall Street and Main Street sentiment are not typically in sync.
Another factor driving the divergence is the rapid change in consumer spending. As workers quickly shifted from working at the office to working from home, sales of a wide variety of technology products and services increased dramatically. For example, Zoom Video Communications, a global provider of virtual meeting services, reported a 355 percent increase in revenue in the second quarter (year-over-year) due to growth in the number of subscribers as well as the expansion of services across its existing customer base.
In addition, there has been a steep increase in the sale of grocery and other consumable products, driven by consumers spending more time at home. This trend has greatly benefited “big-box” retailers such as Target Corporation, which reported second quarter comparable sales growth of more than 24 percent, the strongest quarterly growth the company has ever reported.
Certain stock market sectors have benefitted more than others from the shift in consumer spending. As of early September, the share price of the stocks in the Information Technology sector of the S&P 500 Index have appreciated nearly 30 percent on average so far this year. The Consumer Discretionary stocks in the Index posted a return of more than 18 percent on average over the same period. The Healthcare stocks in the Index are up nearly 5 percent on average for the year. Most other sectors of the Index still have negative returns for the year.
Although the pandemic has benefitted only a few of the eleven economic sectors, the benefit has been enough to propel the stock market higher well ahead of meaningful improvement in the broader economy.
What does the divergence mean for the stock market?
The disconnect between “Main Street” and “Wall Street” has left many investors wondering if the stock market has gone too far too fast and is now set up for another decline. The direction of the market from here is dependent on how the reopening of the economy proceeds, whether Congress continues economic programs to support consumer spending, and if the development and distribution of a vaccine occurs soon, as expected. All three are likely to proceed in fits and starts, leading to market volatility. Nevertheless, the economy and market will converge over time, as they have done through many economic cycles in the past.
The Great Shutdown: What Happened and What's Next
What has been the economic impact of the Great Shutdown?
Employment statistics were especially stark with new claims for unemployment benefits registering in the millions every week starting with the report on March 26. Domestic GDP also reflects the weakening of the U.S. economy with first quarter GDP estimated to have declined five percent while second quarter GDP is currently estimated to register an annualized decline of approximately 40 percent.
How have the markets responded?
In terms of the U.S. equity markets as measured by the Standard & Poor’s 500 Index, they have done very well as this bellwether index has increased 36.6 percent since hitting its low for the year on March 23. International equity markets have also rebounded, but their recovery has not been as strong as the move in U.S. equities. As economic weakness started to become a reality, fixed income markets also performed well as declines in interest rates have driven broad measures of bond returns to levels exceeding five percent year to date.
Why have markets performed better than expected?
The significant performance generated by financial assets over the past couple of months has confounded many investors given the backdrop of an economy that was experiencing precipitous declines across numerous measures of activity. The primary driver of this phenomenon is quite simple and straightforward. It is the extremely powerful combination of massive stimulus provided by an aggressive easing of monetary policy along with numerous programs on the fiscal policy side.
Specific steps taken in terms of monetary policy include:
The positive outcome of governmental and monetary authorities’ efforts to revive the economy, and their continued commitment to additional efforts, have led investors to drive stock prices higher. Markets tend to be forward-looking, and it is this mechanism that has led markets higher in the face of overwhelmingly dismal economic data. We are starting to see a shift in some economic data with several signs of improvement in the economy. For example, rail car traffic, hotel occupancy and gasoline purchases have moved off their lowest levels. Air travel is also recovering, as the number of passengers passing through TSA checkpoints is increasing.
The most important variable for maintaining positive economic momentum will be improvements on the employment front, and the May 2020 employment report indicated a rise in employment, which may be an early sign the labor market is on the mend following state and business reopenings.
For now, investors are expressing confidence that improvements will occur particularly when taking into consideration the commitment from government and monetary officials to take whatever steps necessary to ensure recovery.
|Tracy Baughman, AIF®, CIMA®
Vice President and Investment Services Manager
|Paul Wannemacher, CPA, PFS, CFP®
Vice President and Trust Officer
|Monika Lovewell, J.D., CTFA
Senior Vice President and Trust Officer
Croghan Loan Payment Portal
Pay your Croghan Loan from any Financial Institution.