NWP Monthly Digest | January 2024
As we bid farewell to the memorable moments of 2023 and step into the promising year of 2024, we at Noble Wealth Partners extend our heartfelt gratitude to all our clients who have been the keystones in the fulfilling journey to serve. We’d also like to express a special thank you to those who voted and crowned us as the Best Wealth Management Company in the Denver Metro area by the Colorado Sun. This award not only humbles us but also fuels our commitment to enrich your financial journeys.
Welcome to 2024! It's a new year that brings new opportunities and risks investors should acknowledge after an incredible year in 2023. The year got off to a great start as stocks and bonds snapped back from one of the worst calendar years on record for those asset classes. Despite headwinds such as a banking crisis in the early spring and ongoing inflation and interest rate concerns, the U.S. stock market rose more than 24% for the year. After this run, the S&P 500 isn't cheap at 19 times next year's expected earnings, and the timing and pace of rate cuts are uncertain, but stocks look poised for another strong year. The stock market rally in 2023 was narrow in scope and only included a few stocks. In 2024, we expect the scope of the rally to expand to allow more stocks to participate.
It will likely be a volatile year, with markets buffeted by shifting expectations for the economy and interest rates, geopolitical surprises, and the political surprises of a presidential election season. But important debates about the trajectory of inflation and rates will presumably be resolved by year-end, leaving investors to look forward to more good news in 2025.
We highlighted some of Charlie Munger’s principles in our newsletter last month, and those principles resonate deeply with those in the wealth management profession. Today marks what would have been Charlie Munger's 100th birthday. His passing last month leaves a void, yet his legacy endures, inspiring us across various professions. We’d encourage our clients to embrace these invaluable lessons: prioritize humility, appreciate what you have, avoid the potential downfalls caused by greed, and align your values with your clients' values. In many ways, these principles not only reflect the market movements this past year but also act as a guide for investors for the upcoming years.
Prioritize Humility
Heading into 2023, many braced for the worst. Yet, the stock market rallied, inflation cooled, economic growth has been resilient, and the ensuing recession, so widely anticipated even rap artist Cardi B was calling for it, has yet to surface. Economists and professional investors alike have been humbled by the events that have transpired this year. Not only did almost all economists incorrectly predict the inevitable recession, but money managers significantly underweighted the “Magnificent Seven” stocks that were responsible for almost all of the returns in the U.S. stock market, leading to underperforming portfolios for active managers. Now, the collective weight of these seven stocks in global equity indices surpasses the total weight of all stocks in the U.K., China, France, and Japan.
In 2022, both stocks and bonds experienced a decline, leading many investors to sit on the sidelines and keep their assets in cash. Though interest rates rose to attractive levels, allowing some cash alternatives to earn over 5%, these individuals have missed out as stocks rebounded this year. It may be time for a humility check. Those still sitting with too much cash may want to ask if this aligns with their long-term goals. We believe that the peak of cash yields has likely passed. Instead of waiting and watching the yield on their uninvested assets decline, investors can explore bonds with higher interest rates and diversification benefits. This becomes particularly important if the Fed cuts rates as expected next year.
Despite the significant rise in stock prices, it wouldn't be surprising to witness the stock market reach new highs driven by declining interest rates, lower inflation, robust economic growth exceeding expectations, and the continuous advancement of AI propelling the market forward. Additionally, stocks serve as an effective hedge against inflation.
Appreciate What You Have
“The secret to happiness is to lower your expectations....that is what you compare your experience with. If your expectations and standards are very high and only allow yourself to be happy when things are exquisite, you'll never be happy and grateful. There will always be some flaws. But compare your experience with lower expectations, especially something not as good, and you'll find much in your experience of the world to love, cherish and enjoy, every single moment.” - Charlie Munger. 2021 Daily Journal Annual Meeting.
Charlie Munger's words may sound pessimistic, and would I ever tell my sons to lower their expectations to be happy? Probably not. Most parents may use a line like, "Shoot for the moon, and even if you miss, you will end up with the stars." While that line of thought may lead many to successful futures, those who become successful may never be happy if they always compare themselves with others who are more successful. Through this lens, I respect Munger's thought as it recognizes the importance of life utility. Time is your greatest asset, and would anyone want to waste it being unhappy? Luckily for Munger, he was both successful and happy because he never felt he needed more and never forgot how grateful he was.
Mr. Munger was the antithesis of a greedy investor and individual, and the same can be said about Warren Buffett. Both lived relatively meager lifestyles, remaining in the same house for most of their adult lives. They could have easily fallen victim to lifestyle creep with the amount of money they amassed. Instead, they chose to focus on what was in front of them and value what they had rather than aspiring for more.
99% of my clients are grateful for the wealth they have built and do not take it for granted. While I know they will achieve their financial objectives, and most have significant flexibility to ratchet up their spending, they remain grounded, and a lifetime of prudent money management habits are ingrained in their behaviors with their wealth. They aren't looking at how much they can grow their nest egg; almost all prioritize reducing risks so they don't become poor.
Being grateful for what you have not only lays down a roadmap for clients to achieve their financial goals but also sets the foundation to avoid behavioral biases that can lead to greed and potential downfalls.
Avoid Potential Downfalls Caused by Greed
“There are only three ways a smart man can go broke: liquor, ladies, and leverage.” – Charlie Munger.
Mr. Munger later admitted he added the first two ways smart people could go broke because they started with the letter “L”. And while he recognizes many of his investments would have been far more lucrative with leverage, it was never worth the risk to him. Mr. Munger's attitude toward leverage embodies who he was as an investor and the vital importance of avoiding large losses, which are usually caused by greed.
After a year where the S&P 500 returned over 20%, greedy investors have demonstrated a FOMO (fear of missing out), herd-like behavior, piling into risky stocks, driving the market near its all-time high, and that may propel the next leg of any cycle, which is the euphoric melt-up. If the euphoric melt-up occurs, the ending usually isn’t pretty. Every cycle is different, but investor behavior follows similar patterns on average. And though our base case is that the market will deliver modestly positive results in 2024, Mr. Munger would want us to recognize how fortunate these returns have been, especially in a year where investors expected very little. Therefore, it's wise not to put your portfolio in a position where you stand to lose a large amount of wealth if financial conditions deteriorate. I'm not telling you to avoid risk altogether, but don't get caught too far over your ski tips.
2024 is a good year for investors to hit singles – look for small winners, take advantage of any low-hanging fruit, and focus on your long-term goals. 10-year Treasury Bonds have experienced the longest and deepest drops in the past century. This historic increase in interest rates makes bonds a more competitive solution than stocks for investors who may be more risk-averse or seek to lock in higher yields. The prospect of higher risk-adjusted returns from bonds should make these assets a compelling option in 2024.
Align Your Values With Your Client’s Values
At Noble Wealth Partners, we strive to align the interests of our clients with our own, and this alignment helps us implement Charlie Munger’s tenets and help our clients avoid many of the common pitfalls investors encounter. Through our aligned interests, when our clients make money, so do we, and when our clients lose money, so do we. If they lose enough, we will probably discover we've also lost a client. For that reason, we have every incentive to protect the portfolios we manage and mitigate risk.
It's not uncommon for investors to become captured by the allure of investments promising outrageous returns or become swallowed by greed. However, our firm’s partnership with each client allows us to apply prudent wealth management principles and choose investments with measured risks to keep our clients on track to reach their financial goals. And your success is our success!
For more on our investment synopsis as we start the new year, click here.
Noble Wealth Pro Tip of the Month
Get Your Financial House in Order
It's the start of a new year, an ideal time for many to dedicate a few hours to review their financial plans and progress toward their goals. As we begin 2024, perhaps you can ask yourself:
Have you evaluated the progress made towards your financial goals last year? Are there new goals for this year, or any life events or major changes to consider?
Is it time to look over your cash flows? If you're working, check your 401(k) contribution choices. And if you have earned income, you might still be able to contribute to an IRA before the tax deadline.
Should you reassess your emergency fund or liquidity requirements?
Could you benefit from reevaluating your investment risk tolerance?
Have you safeguarded your wealth? It might be wise to review your insurance coverage.
There’s no time like the present to get started!
Underpayment Penalties May Finally Hurt
The U.S. operates on a pay-as-you-go income tax system, meaning Americans need to pay at least 90% of their current tax liability or 100% to 110% of the previous year's liability to avoid penalties. When interest rates were low, penalties for underpayments weren't as concerning. However, with the Federal Reserve's recent rate hikes, the annual rate for underpayments has jumped to 8%, which is quite significant. For those who haven't met the safe harbor tax withholding requirement, it's advisable to make an estimated payment before January 15th. This action can help prevent the accumulation of hefty underpayment penalties.
Whatever Your Career Make It Intentional
Three more of Charlie Munger’s principles for your career from The Tao of Charlie Munger:
Don’t sell anything you wouldn’t buy yourself
Everyone has their own line of work and career. However, when it comes to our business of wealth management, we can relate to Mr. Munger's wise words. When we founded Noble Wealth Partners, our goal was to create a company that provides wealth management solutions that we ourselves would want to use if we were clients.
Don’t work for anyone you don’t respect and admire
Every client we work with is somebody we respect and admire, bringing purpose and joy to everything we do. With unique experiences and knowledge we learn amazing and invaluable things from each one of them that truly fascinate us.
Work only with people you enjoy.
Every client we have is somebody who brightens our day with discussions. We're motivated knowing that the value we provide each one of them shapes their life and because we care immensely for each one of them. This motivates us to be better at our job and give 100% daily.
Fun Facts of the Month
November was a hot month:
November was the 16th time since the start of 1979 that the S&P 500, Nasdaq Composite and Russell 2000® all rallied at least 7.5% in the same month. The most recent occurrence was in July 2022, but following the 15 prior occurrences, the median returns over the next year were +13.2% for the S&P 500, +16.9% for the Nasdaq, and +13.1% for the Russell 2000® (Bloomberg).
The Bloomberg US Aggregate Bond Index is one of the broadest measures of the US bond market. With a total return of over 4% in November, the index had its best month since May 1985 and just its 12th monthly gain of 4% or more since 1976 (Bloomberg).
Through 11/29, a 60/40 portfolio of the S&P 500 and Bloomberg Aggregate Bond Index (rebalanced annually) was up 7.29% for the month. That’s the seventh-best month for the strategy since at least 1975, the best since April 2020, and the second-best in 32 years (Bespoke).
November was the sixth straight month that the Russell 2000® gained or lost 5%, which ties the six months ending April 2001 for the third longest streak in the index’s history. The only two streaks that were longer were the eight months ending in April 2009 and the seven months ending in September 2010 (Bespoke).
Let the good times roll: In the 24 prior years since 1945 when the S&P 500 was up 15% or more YTD through the end of November, its median gain in December was 1.96% with positive returns 75% of the time. In the ten most recent occurrences since 1995, the median gain has been 2.1%, with positive returns 90% of the time (Bespoke).
GOAT: Investing legend Charlie Munger passed away at the age of 99 on 11/28/23. Since he joined Berkshire Hathaway to become vice chair and Warren Buffett’s right-hand man in 1978, $100 invested in the S&P 500 has grown in value to $16,527, including dividends. That same $100 invested in Berkshire Hathaway stock grew in value to $396,282 (Bespoke).
Do something: If no action is taken, the retirement trust fund is expected to be depleted by 2033. After that, payroll taxes will only be enough to cover 77% of the scheduled benefits. This means that retirees will face a 23% reduction in pay unless Congress takes action to address the issue (Social Security Administration).
Tough times: 2.3 percent of plan participants took a so-called hardship withdrawal from their 401K plan, marking a 28 percent rise from last year. This is a cause for potential concern, suggesting that inflation is finally impacting consumers who have been remarkably resilient so far (Fidelity).
Hard times: According to Bank of America, the number of employees taking “hardship” withdrawals from their employer’s 401(k) plans increased 13% in the third quarter and is up 27% since the beginning of the year. While the number of withdrawals has increased, the average size of around $5,100 is similar in size to the amounts seen earlier this year (Fox Business).
Ominous signal: Newly delinquent credit card loans have risen rapidly since hitting multidecade lows in late 2021. In the latest Report on Household Debt and Credit from the New York Fed, the share of credit card loans that were newly delinquent crossed above 8% for the first time since Q3 2011, which is nearly double the 4.1% reading seen in Q4 2021 (Federal Reserve Bank of New York).
Social Security tax hike: In mid-October, the Social Security Administration (SSA) announced that the 2024 “wage base” — the maximum amount of earnings subject to Social Security tax - would increase by 5.2% to $168,600 after a 9.0% increase in 2023. The 14.7% two-year increase in the wage base will be the largest since 1984 (Social Security Administration).
What We’re Reading to Kick Off the New Year
Managing Your Habits for Success | Danny Zelaya
The book explores the impact of habits on professional and personal success. It emphasizes self-awareness and control over habitual behaviors, recognizing that some can be professionally damaging. The book guides readers through assessing their habits, analyzing their consequences, and replacing counterproductive habits with productive ones. It advocates for evaluating and modifying routines to align with one's larger objectives, underscoring the importance of aligning habits with values and goals for lasting change.
Unbreakable: Building and Leading Resilient Teams | Bradley Kirkman and Adam Stoverink
The authors focus on the importance of resilience in teams, particularly in the face of business upheavals and crises. It identifies four key pitfalls that lead to team failure: lack or excess of confidence, poor planning, inability to improvise, and lack of psychological safety. The book outlines four essential resources for resilient teams: confidence, a crisis roadmap, psychological safety, and the ability to improvise. It emphasizes regular debriefing for performance improvement and the use of a team charter to define roles and responsibilities.
The Good Life: Lessons from the World’s Longest Scientific Study of Happiness | Robert J. Waldinger
The Good Life challenges traditional views that wealth and fame are key to happiness. The authors question what makes a happy or fulfilling life by drawing on extensive data from a study spanning over eighty years and two generations within families. The book presents a simple but surprising answer: the strength and quality of our relationships are what truly matter for a fulfilling and meaningful life.