Should your Portfolio Include Structured Notes?
We have seen markets go down in the first half of this year. While there are near term concerns, there is also opportunity. Can we manage risk while taking advantage? How? Traditional portfolio diversification uses different assets classes that have historically have not moved together, or been correlated, to smooth out market movements. Example is bond-type holdings have improved in price while stocks have gone down in past recessions. Inflation and interest rate increases mean this balance may not work as well now. Structured notes are hybrid securities that offer payouts from multiple components. They are generally debt obligations of the issuer bank with defined outcome from underlying options or hedges inside the note. Investors need to pay attention to both the creditworthiness of the issuer behind the debt instrument, as well as the risk and potential reward of the options. How are structured notes used in portfolios? How structured notes may be used in a portfolio will vary with both the particular note and each investor. A common way these instruments are used is a part of the allocation to alternative assets. If this component is tied to a stock market index like the S&P 500 this presents a different risk and correlation profile for the note as opposed to a note tied to a commodity futures contract. Pros and cons of structured notes Pros: By coupling the option with a bond, the investor may be in a better position to take a risk with the option knowing that they will receive the payout from the bond component. For example, if the note is issued by a financially stable bond issuer, it’s easier to take a chance with an option that looks toward significant increases in market values. Structured notes may offer investors a chance to look for investments offering a wide range of payouts and risk combinations that may not be available elsewhere. Cons: Investors must perform their due diligence on the note issuer as well as on the underlying option strategy. Back in 2008 Lehman Brother issued a number of structured notes and investors holding them after the fall of Lehman may have seen reduced values related to concerns over the issuer. Structured notes often lack the liquidity of a regular bond. Investors considering structured notes should do their homework on this key issue before investing. Structured notes have historically been subject to higher levels of default risk than a similar note or option sold separately. Are structured notes right for your portfolio? Structured notes can have a place in your portfolio as long as you understand the potential risks as well as the potential rewards. Be sure to work with your financial advisor to perform a proper level of due diligence on any structured note you might be considering. Buffered notes Buffered notes are similar in many respects to structured notes, except that a buffered note will offer a degree of downside protection. Typically, this is a percentage of the potential loss, often in the 10% – 30% range. In other words, an investor would be shielded from a potential of the total loss possible but not the entire potential loss. In exchange for this downside protection or buffer, the amount of upside participation from the underlying option component might be limited as well. When looking at a buffered note, some things to consider: While your downside risk is partially limited, so is the upside participation in the note’s return. Buffered notes are generally designed to be held until maturity and often lack liquidity. An investor considering investing in one of these notes must take this into consideration in light of their own possible liquidity needs. As with structured notes, the creditworthiness of the issuer is a crucial consideration. Investors should fully understand how their returns will be calculated in terms of the buffer amount, the cap on their upside and the method used to make the return calculation. Are these notes right for you? Whether structured notes or buffered notes, it pays to discuss these options with a financial advisor who fully understands them, as well as your own unique investing needs. It’s especially important to work with an advisor who will objectively explain both the potential upsides and downsides of both types of notes. Timothy Canty, Vice President – Investment in Wedbush Securities San Diego office, observes, “We’ve found notes complementing our core holdings help manage overall risk in the portfolio. We can express our conviction, while getting some downside protection and income in ways that traditional portfolio “balancers” are not delivering today.” If these types of notes are of interest to you, we suggest you contact your Wedbush financial advisor. Looking to build a financial plan based on your goals while considering market trends and risk factors? Click here to check out our approach to Wealth Management. Disclosure 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 presented is not intended to constitute an investment recommendation for, or advice to, any specific person. 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. The information in these materials may change at any time and without notice.
How to Protect Your Retirement During Inflation
Many retirees are on fixed or semi-fixed incomes and a major increase in the cost of goods and services they purchase can put a squeeze on their monthly budget. For those nearing retirement, high inflation can impact their ability to maximize their retirement savings in their 401(k) or an IRA. How inflation and market volatility are impacting retirement savings A recent survey of investors nearing and in retirement highlighted several concerns: The impact of inflation lessening the value of their retirement assets was cited as a concern by 65% of the respondents. Inflation leading to higher than expected healthcare costs was cited by 64% of those responding. A major market downturn that would erode the value of their retirement savings was cited as a major retirement concern by 53% of the respondents. Retirement plans like 401(k)s and IRAs can be impacted by inflation. Depending how your money is invested, your investments may be more or less susceptible to the impact of inflation based on how your account is allocated. Inflation may hinder the ability of some participants to contribute as much as they would like to their plan. If a retirement plan sponsor offers an annuity as a distribution option from a 401(k) or other defined contribution plan, they should be sure to educate participants about the fact that the annuity payments will not be increased with a cost of living adjustment like Social Security or some public pension plans. The same applies to defined benefit plans. With the exception of some pensions from public and governmental employers, payments from annuitizing a pension generally do not increase over time due to inflation. This can serve to erode the value of these pension payments over time. This might be a reason for some employees to consider a lump-sum payout if offered by the plan. How can I protect my retirement money from inflation? There are a number of ways that investors can help shield their retirement savings from the impact of inflation. Here are a few suggestions. Consider delaying claiming Social Security. Not only does the amount of your benefit increase for every year that you wait after age 62 up to as long as age 70, but the cost of living increase for 2023 is expected to be one of the largest in history. This is on the heels of a hefty increase for 2022. Invest in stocks. While some companies will certainly see their earnings impacted by inflation, overall stocks are traditionally a good hedge against inflation over time. Certainly, stock selection is important here when individual stocks are used along with or instead of equity mutual funds and ETFs. Fixed income investments are getting hit not only with inflation but also with higher interest rates as the Fed raises rates to help combat inflation. Investors should consider using TIPS which adjust their interest rate along with inflation. At a smaller level, I-Bonds are offering a very high rate of interest, however the amount that can be purchased from the Treasury each year is quite low. Real estate has traditionally been a hedge against inflation over the long-term. While the hot real estate market has shown some signs of cooling off in some parts of the country of late. Investment real estate, such as a rental unit can offer the benefits of real estate in fighting inflation and a stream of income from the rental payments. Hard assets such as gold and precious metals have also been a traditional hedge against inflation. Owning gold as a metal has its challenges such as ensuring that you have a safe arrangement for storage and that the metal is purchased through a reputable dealer. In today’s market there are gold ETFs and other options that investors can consider. Note that non-traditional assets such as gold and real estate can be held in self-directed retirement plans at some custodians. For those who are working and have access to one, a health savings account (HSA) can be a great way to save for the high cost of healthcare in retirement. HSAs allow pre-tax contributions and tax-free withdrawals to cover qualified medical expenses. This can include Medicare premiums and other costs in retirement. Money contributed to an HSA can be carried over from year-to-year if not needed to cover current year expenses. Many HSAs offer an investment component as well. Contact your Wedbush financial advisor to discuss options to help protect your retirement savings from the impact of inflation whether you are still approaching retirement or are retired. There are a number of planning and investment options to consider and your advisor can help you determine the best moves to make right now. Looking to build a financial plan based on your goals while considering market trends and risk factors? Click here to check out our approach to Wealth Management. Disclosure 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 presented is not intended to constitute an investment recommendation for, or advice to, any specific person. 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. The information in these materials may change at any time and without notice.
State of the Housing Market
The past year or so has seen one of the hottest housing markets in recent memory in many parts of the country. A combination of strong demand for housing that started during the pandemic and that has continued into 2022, coupled with a limited supply in some markets has been a perfect storm for housing price inflation. There have been many stories in the news about home sellers receiving multiple offers over their asking price within a few days of listing their home. However, the Fed’s recent moves to raise interest rates to combat inflation have put a damper on the housing market. Current State of the Housing Market in 2022 According to the National Association of Realtors as of May 2022: The median national home sales price exceeded $400,000 for the first time ever, ending the month at $407,000. Sales in three of the four regions tracked by the group fell month-over-month in May, year-over-year sales fell in all four regions. Largely due to higher mortgage rates arising from the Fed’s rate increases, mortgage applications fell 5% in May compared to a year earlier. They also fell 4% from April of this year according to the Mortgage Bankers Association (MBA). According to Jay McCanless SVP, Equity Research for Wedbush Securities, “We believe the housing market catalysts of millennial household formation and a lack of supply in for sale and for rent housing have not changed.” He adds, “Demand appears to have slowed, at least temporarily, due to a 300bp increase in the 30-year mortgage rate from Dec. 2021 to mid-June 2022. Builders are adapting to the current situation using a mix of price cuts, mortgage rate buy downs and other incentives to stimulate demand and maintain affordability.” How has the rise of interest rates impacted the housing market? Clearly the increase in interest rates has put a damper on new home sales as mentioned in the MBA’s statistics on new mortgage applications above. According to Freddie Mac, the rate on a fixed-rate 30-year mortgage in May was 5.23%. This is up from 3.45% in January of this year, an increase of almost 52%. Rates on other types of mortgages have exhibited similar levels of increase as well. According to a tweet from Freddie Mac economist Len Kiefer as quoted in Business Insider, “The U.S. housing market is at the beginning stages of the most significant contraction in activity since 2006. It hasn’t shown up in many data series yet, but mortgage applications are pointing to a large decline over summer. Purchase apps down 40% from seasonally adjusted peak.” Will the housing bubble burst? While rising mortgage interest rates have put a damper on demand for new housing in some areas, overall, the demand for housing remains strong. Experts have varying opinions, but many still feel that the housing market will remain strong in most areas of the country over the summer months. Are soaring U.S. property prices here to stay? Again, opinions vary among experts here. Some, like Freddie Mac’s Len Kiefer think that rising mortgage interest rates spell the end to high home prices as soon as this summer. Others concur that rising mortgage rates will put a damper on housing demand, but that this could take as long as a couple of years to come to fruition. For now, in many parts of the country, inventories of homes for sale remain exceptionally low. In many instances, sellers can pick and choose their buyers based on their offer. Cash is king in many cases. Buyers are often forced to pay over the listing price of the home and often need to waive typical contingencies like having the home pass an inspection. Outlook for the end of 2022 – 23 McCanless says, “We do not produce our own macroeconomic forecasts, but the forecasters we watch are divided along two tracks. The first track assumes we are headed for a recession which could drive housing starts lower year over year in 2023. The second track assumes moderate, low single digit percentage growth for housing starts year over year in 2023. Our thinking for 2023 is aligned with the second track because the speculative excesses of the great financial crisis, lax mortgage underwriting and rampant overbuilding, have not occurred in any noticeable measure during the current cycle.” If you are looking to buy or sell a home, contact your Wedbush financial advisor to discuss options to help you ensure that the transaction is done in the most beneficial way for your overall financial situation. Looking to build a financial plan based on your goals while considering market trends and risk factors? Click here to check out our approach to Wealth Management. Disclosure 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 presented is not intended to constitute an investment recommendation for, or advice to, any specific person. 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. The information in these materials may change at any time and without notice.