Behavioral Finance

Is Gold a Good Inflation Hedge?

August 10, 2023 by Hans Blake, CFA, CPA

Reading Time: 2 minutes In this episode of Intelligent Money Minute, I had the pleasure of interviewing Larry Swedroe, head of Financial and Economic Research at Buckingham Strategic Wealth, on the topic of whether gold is truly a good inflation hedge.

Evaluating Gold’s Track Record

Gold and Bitcoin have often been promoted as potential shields against inflation. However, to make an informed decision, we turn to empirical evidence. Let’s explore whether history validates gold’s reputation as a reliable inflation hedge. When scrutinizing gold’s performance in the face of inflation, we find surprising results. Take, for instance, the period from 2020 to 2022, a time marked by significant inflation. Curiously, gold ended this phase down by about 4%, while inflation surged by approximately 14%. In essence, gold’s value slipped by 18% in real terms, negating its purported role as an inflation hedge. An even more striking example stretches over two decades, from 1980 to 2002, a period characterized by high inflation. During these 22 years, gold lost over 85% of its real value. These historical data points prompt a reevaluation of gold’s effectiveness as an inflation hedge.

Alternative Perspective

Interestingly, gold’s claim to being an inflation hedge stands on firmer ground when we extend our horizon to a century or more. Across this extended span, an ounce of gold has maintained its purchasing power, reflecting its role as a long-term inflation hedge. However, this century-long hedge comes at the cost of a lack of real returns. As Intelligent Investing, we believe in providing our high-net-worth clients with well-informed financial guidance. Gold’s questionable track record as a short-term inflation hedge underscores the importance of considering other strategies to preserve wealth and manage risks. Schedule a short discovery call or meeting We’ll be interviewing Larry on several podcasts regarding markets, passive investing, and diversification, so be sure to subscribe to our Intelligent Money Minute podcasts. Larry was among the first authors to publish a book that explained the science of investing in layman’s terms, “The Only Guide to a Winning Investment Strategy You’ll Ever Need.” He has since authored seven more books.

Larry Swedroe Bio

Since joining Buckingham Strategic Wealth in 1996, Chief Research Officer Larry Swedroe has spent his time and energy educating investors on the benefits of evidence-based investing. In his role as chief research officer and as a member of the firm’s Investment Policy Committee and Board of Directors, Larry regularly reviews the findings published in dozens of peer-reviewed financial journals, evaluates the outcomes and uses the result to inform the firm’s formal investment strategy recommendations. Larry’s dedication to helping others has made him a sought-after national speaker. He has made appearances on national television shows airing on NBC, CNBC, CNN and Bloomberg Personal Finance. Larry is a prolific writer, contributing regularly to multiple outlets, including Advisor Perspectives and ETF.com. Before joining Buckingham, Larry was vice chairman of Prudential Home Mortgage and senior vice president at Citicorp. Larry holds an MBA in finance and investment from NYU and a bachelor’s degree in finance from Baruch College. Credits: This blog was written in part by ChatGPT, an AI language model developed by OpenAI. The content of this blog reflects the knowledge and opinions of ChatGPT, may or may not reflect the knowledge and opinions of Intelligent Investing, and is protected by copyright laws. Please do not reproduce or distribute without giving proper credit to ChatGPT and OpenAI.

How Intelligent Investors Should Respond to Volatility

July 13, 2023 by Hans Blake, CFA, CPA

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Reading Time: 3 minutes In this episode of Intelligent Money Minute, I had the pleasure of interviewing Larry Swedroe, head of Financial and Economic Research at Buckingham Strategic Wealth, on the topic of how intelligent investors should respond to volatility. As a CFA and CPA, I understand the importance of navigating market volatility and its impact on investment strategies. In this blog, I will summarize the insightful discussion with Larry, providing key takeaways on the causes of volatility and how intelligent investors can respond to market uncertainties.

Causes of Volatility

Larry Swedroe begins by explaining that volatility is primarily caused by unexpected events. Since these events are unforecastable, investors should expect and prepare for periods of high volatility. Intelligent investors should incorporate this certainty into their investment plans and avoid taking more risks than necessary. Swedroe suggests assessing one’s ability, willingness, and need to take risks, ensuring that the investment portfolio aligns with these factors. He also highlights recent trends that have contributed to increased volatility, such as the shift from active to passive strategies like indexing. The rise of passive investing has led to lower turnover and reduced liquidity, resulting in greater volatility in pricing. Additionally, changes in trading rules and the Volcker Rule have further limited liquidity in the markets, amplifying volatility.

Intelligent Investor’s Response to Volatility

In response to market volatility, intelligent investors should adopt a well-structured investment plan. Swedroe emphasizes the need for a diversified portfolio and advises against taking excessive risks. He recommends keeping equity exposure within a range of 25-30% for those with enough wealth. Building a portfolio with more diversified assets can help mitigate risk without sacrificing returns. Additionally, Swedroe emphasizes the importance of sticking to the plan and not succumbing to panic-driven selling. By setting realistic expectations and aligning risk tolerance with portfolio composition, intelligent investors can navigate market volatility more effectively.

The Price of Admission

Volatility is often referred to as the price of admission for higher expected returns. Intelligent investors understand that market fluctuations are an inherent part of investing and should be prepared to weather these storms. By accepting the uncertainty and having a well-defined investment plan, investors can focus on long-term goals and avoid making impulsive decisions driven by short-term market fluctuations. Swedroe and I agree that risk should be carefully evaluated based on an investor’s financial situation, willingness to take risks, and specific investment goals. Volatility is an unavoidable aspect of investing, but intelligent investors can respond effectively by incorporating it into their investment plans. By understanding the causes of volatility, such as unexpected events and shifts in market dynamics, investors can adjust their strategies accordingly. Building diversified portfolios, aligning risk tolerance with portfolio composition, and maintaining a long-term perspective are key elements of intelligent investing in the face of market volatility. Remember, a well-structured investment plan and disciplined approach can help you weather market uncertainties and maximize your investment potential. Schedule a short discovery call or meeting We’ll be interviewing Larry on several podcasts regarding markets, passive investing, and diversification, so be sure to subscribe to our Intelligent Money Minute podcasts. Larry was among the first authors to publish a book that explained the science of investing in layman’s terms, “The Only Guide to a Winning Investment Strategy You’ll Ever Need.” He has since authored seven more books.

Larry Swedroe Bio

Lessons We can Learn from SVB’s Failure

March 29, 2023 by Hans Blake, CFA, CPA

I personally am not a big fan of what is happening with banks and the recent Silicon Valley Bank headlines.

First of all, I don’t believe anyone should “manipulate” markets, especially governments. When they do….there are always unintended consequences. Let’s take a brief stroll down memory lane.

When COVID-19 hit, the government rushed in “shut down the economy.” Remember, “Only two weeks to flatten the curve”? Then two weeks became three, then four, and so on. Well, you can’t keep a country going when no one is working. So, the government decided to “stabilize” the economy and give big PPP loans to businesses and large tax credits to taxpayers.

All of this “free money” was given at a time when most of us were not able to travel and didn’t know what to do with it. Therefore, there was a building up of demand, with no supply.

This led to people staying home and play “day trader” at home by investing their excess cash into “high quality stocks” (tongue in cheek) meme stocks like Robinhood and driving up GameStop stock to hurt institutional investors.

This also led to people depositing excess cash back into the banking system…what else were they going to do with it?

As money flowed into banks during the pandemic, the bank’s deposits rose. The banks then have options on what to do with the fresh deposits? One of their options is to buy short-term Treasurys or other “safe” assets or keep the money in cash. Instead, this bank opted to buy riskier assets likely due to greed or an unprofessional lack of knowledge on how interest rates and risk management work.

But first, let’s review how bonds work…

Bond Education 101:

When interest rates rise, bond prices fall (and vice-versa), with long-maturity bonds most sensitive to rate changes. This is because longer-term bonds have a greater duration than short-term bonds that are closer to maturity and have fewer coupon payments remaining.

So, instead of buying shorter duration bonds and money market types of investments, which would have partially insulated Silicon Valley Bank and others from the risk of rising interest rates. They instead opted to buy longer-term U.S. Treasurys and government-backed mortgage securities.

The Federal Reserve

Now, let’s turn our attention briefly to the Fed.

The Fed has two primary mandates: maximum employment and stable prices.

Because of inflation getting out of control, the Fed has stepped in and has raised interest rates, which is one major tool to lower inflation. The idea is that by raising the cost of borrowing money it deters people from investing or buying things and curbs the demand for goods and services.

So, back to SVB…they took the deposits (many of which were from COVID government handouts) and invested the deposits into risky assets that get hurt more when interest rates rise. As a result, their portfolio of risky assets has gotten hammered by all the interest rate hikes.

So, when the people come back to the bank for their deposits because times are tough and inflation continues to skyrocket, the bank has to sell their portfolio at a loss. If more and more people come to the bank looking to take back their deposits…..as a bank, you have a real problem, and could have a bank run, as we saw.

A couple of key takeaways:

The governments have been stepping back in to calm down investors. The Federal Deposit Insurance Corporation has stepped in to provide the insurance coverage for depositors. I think this is a good thing and the whole point of having the insurance in the first place.

However, what I don’t like seeing is the governments stepping in to bail out the banks themselves who were practicing foolishly. Remember earlier, I am not a big fan of government intervention. There are always unintended consequences. In my opinion, if an investment is bad, it needs to fail, and those who invested in it should experience the volatility. perhaps then more due diligence will be done before investing.

Investing can be risky, and sometimes businesses will fail. Others will succeed. By governments bailing out the investors of these banks, it sends a wrong signal to those who are trying to do right. Now the government is calling for more regulation for regional banks…banks who may be getting punished because of some “bad apples.”

You can’t have your cake (upside return) and eat it too (no downside—the government will bail you out).

What should an intelligent investor do?

In times of uncertainty, it is essential to stay focused on your long-term investment goals. It is important to remember that volatility is often the price we must pay for long-term results. We believe that the current situation is no exception, and history has shown that markets have always recovered from unexpected events. Bank collapses, unexpected events, and market downturns have all happened before, and they will likely happen again. While these short-term fluctuations can be unsettling, it is essential to remember that investing is a long-term game, and the stock market has consistently delivered positive returns for patient investors who remained invested through the ups and downs.

8 Key Takeaways from the SECURE 2.0 Act

January 19, 2023 by Hans Blake, CFA, CPA

Reading Time: 3 minutes

Do you have questions about SECURE 2.0 Act that passed in the final hours last year? You are not alone. I’ve been reading a lot about it and I too even have some questions for lawmakers.

As we wrapped up 2022, President Biden signed the SECURE 2.0 Act into law on December 29th.[1] The new act is being called SECURE 2.0 based on the name of its thematic predecessor, the Setting Every Community Up for Retirement Enhancement Act of 2019 (“SECURE Act”). This legislation makes notable changes to qualified retirement plans. These will increase the age for RMDs, make enrollment and escalation automatic for most new 401(k)s and 403(b)s, and increase tax credits for low-income retirement savers, among other changes. Here’s a summary of some notable changes that occurred.

The age for RMDs goes up to 73 for those who turn 72 in 2023 and 75 in 2033. This is great news for those who don’t need the funds from qualified accounts. We help our clients with Roth conversions, and this allows more years to do this.
Most of the new 401(k)s and 403(b)s will be required to enroll employees automatically and escalate contributions automatically after December 31, 2024. This is what we preach about–improving investor behavior. Check out our behavioral finance page to learn more.
RMDs are eliminated from Roth accounts in 401(k)s and 403(b)s for tax years after December 31, 2023. As a result of SECURE Act 2.0, plan Roth accounts and Roth IRAs will be on more of a level playing field. It won’t be quite so obvious to determine whether or not rolling over a plan Roth account to a Roth IRA is in your best interest going forward. (We can help you with the decision)
Catch-up contribution limits will go up for those age 60 and 63 after December 31, 2024 to the greater of two: either $10,000 or 150% of the regular catch-up amount for those 50 and older. (Keep in mind that high wage earners will be required to use Roth option for catch-up contributions.)
The bill decreases the penalty for missed RMDs (or distributing too little) from 50% to 25% of the shortfall, and if the mistake is corrected in a timely manner, the penalty is reduced to 10%. (If you are a client of Intelligent Investing–we handle this automatically for you.)
There are some great (and complicated) planning options around Roth accounts inside and outside your employer plans. The Act authorizes the creation of both SIMPLE Roth accounts, as well as SEP Roth IRAs, for 2023 and beyond. Previously, SIMPLE and SEP plans could only include pre-tax funds. We help business owners setup Simple IRAs and manage their wealth in a cohesive way. (Side note: do you know it typically makes sense to put your “efficient” assets in a Roth IRA and your “less-efficient” assets in qualified accounts. It’s called tax location and something we love doing for our clients to reduce their tax bills)
Transfers from 529 plans to Roth IRAs (max amount in individual’s lifetime is $35,000) may be an area for high-net-worth families to consider. Great planning opportunity for high-net-worth families who have been funding their 529 Plans for a long time.
Those who are charitably inclined can give from qualified accounts directly to charities via Qualified Charitable Contributions (QCDs) and they can still be taken at 70.5 before reaching the new RMD ages. (We currently do this for some clients and can help you with this)

This summary scratches the surface on what all is in the SECURE 2.0 Act. Taxpayers (and especially those approaching retirement) are all but guaranteed to continue to have an endless stream of questions with respect to this complicated area.

Ask yourself: Do I have a trusted advisor who specializes in tax planning? Does my financial advisor have the right credentials (such as being a qualified CPA?) Is my advisor a true fiduciary? (i.e., do they put your interest AHEAD of their own at ALL times?)

Why don’t you make a new year’s resolution to get your “financial junk drawer” in order this year. We would love to help. We love serving our high-net-worth clients by minimizing financial stress and maximize their lives using our proprietary Intelligrations™.

You can start by subscribing to our Intelligent Money Minute podcasts or by subscribing to our Intelligent Insights blogs. Or if you are finally ready to get some professional help, please let us know.

If you want to collaborate or outsource this to qualified fiduciary professionals, please click here to reach out for a complimentary call or coffee.

Reference: Michael Kitces’ Perspective on the Secure Act 2.0

How Did Riskalyze Work During the COVID Pandemic Selloff

December 1, 2022 by Hans Blake, CFA, CPA

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Reading Time: < 1 minute

On today’s Intelligent Money Minute, we interview Aaron Klein on how Riskalyze worked during the Covid-19 pandemic selloff. During this episode, Aaron talks about the market “snap back” and how his company prepares for various scenarios. Aaron reflects on the early days of the pandemic and how Riskalyze helped intelligent investors weather the storm of uncertainty.

If you are looking for a financial advisor who can be your accountability partner who will help you with the emotional rollercoaster of financial markets. We believe in a data-driven approach to help minimize our human tendencies to sabotage our portfolios and improve the chances for success in sticking to a long-term plan.

Intelligent Investing is a boutique wealth management firm serving high-net-worth individuals and families. We’d be honored to take the first step with you by having a complimentary and confidential call or coffee.

If you are interested in becoming our next high-net-worth intelligent investor or want to learn more about our philosophy on risk management, click here. We’d be honored to have a brief confidential call or coffee with you to learn about your needs.

Aaron Klein Bio

Aaron Klein is co-founder and CEO at Riskalyze, the company that invented the Risk Number® and empowers the world to invest fearlessly. The company is headquartered in Auburn, California, and serves tens of thousands of financial advisors.

He is husband to Cacey Steward Klein, dad to Spencer (born in South Korea), and Emma and Teddy (born in Ethiopia). Aaron and Cacey cofounded Hope Takes Root, an initiative to use vocational training and life mentoring to change the future for orphans and at-risk kids in Ethiopia. He also sits on the board of Invest in Others.

How Riskalyze Helps Concentrated Portfolios

October 6, 2022 by Hans Blake, CFA, CPA

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Reading Time: 2 minutes

On today’s Intelligent Money Minute, we interview Aaron Klein on how Riskalyze helps concentrated portfolios. Riskalyze is an investment risk software that powers the world’s first risk alignment platform that is built on top of a Nobel-prize-winning academic framework.

You may be an executive with a concentrated stock position, or if you have a legacy stock holding with a low-cost basis that has appreciated over the years and you are afraid of selling it due to the tax ramifications. As Aaron and I mentioned, we have tools available that can help round out your portfolio and balance out the unintended tax consequences.

We’d be happy to show how we work with our high-net-worth clients and de-risk their portfolios that may have an unwanted concentrated position. As a CPA, I want to help you minimize your taxes and help build a portfolio that you will be able to stick with based on your risk tolerances.

At Intelligent Investing, we use Intelligrations™ or Intelligent Integrations to make sure that our clients’ goals-based financial plan is integrated with their portfolio and to integrate their portfolio with our clients’ risk tolerance. As Aaron mentioned, we want to transform fearful investors who make bad decisions into fearless investors who make great decisions, and over time improve their financial picture. To learn more about our philosophy, subscribe to our podcasts so you can stay informed.

Aaron Klein Bio

Why Are Intelligent Integrations So Important?

September 8, 2022 by Hans Blake, CFA, CPA

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Reading Time: < 1 minute

On today’s Intelligent Money Minute, we interview Aaron Klein on the importance of intelligent integrations. Riskalyze is an investment risk software that powers the world’s first risk alignment platform that is built on top of a Nobel-prize-winning academic framework.

Aaron Klein Bio

The Three Waves of Investing Advice

August 18, 2022 by Hans Blake, CFA, CPA

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Reading Time: 2 minutes

On today’s Intelligent Money Minute, we interview Aaron Klein on the three waves of investing advice. Riskalyze is an investment risk software that powers the world’s first risk alignment platform that is built on top of a Nobel-prize-winning academic framework. During this episode, Aaron mentions the three waves of investing advice over the past several decades. There is some merit in having a financial plan that is goals-based but is it enough to let investors stick to it without understanding their fears?