Markets are hesitant, but large-cap tech has been resilient. Learn why large-cap technology with an income strategy can help investors now.
By James Learmonth, Senior Portfolio Manager, Harvest ETFs
(Sponsor Content)
After recovering from some of their 2022 shocks early this year, markets have been trepidatious through most of 2023. That recovery and volatility story, on paper, looks broad based. Between January and mid-May, the S&P 500 is up around 8-9%. The S&P 500 Information Technology index, however, is up over 25% in the same rough time period. That outperformance skews even higher when we isolate some of the largest names in the technology sector.
So while overall market performance this year has been steady, turning choppier since the US banking crisis began in March, large-cap tech leaders are doing what they tend to do: lead.
In a macro environment of market uncertainty, high inflation and tech outperformance, one strategy can give investors exposure to large-cap technology companies, while providing income and ballast against volatility.
Why Large-cap Tech has been a leader
To understand how a tech income strategy can help investors, it’s worthwhile to unpack what has made technology a leading sector so far in 2023.
Q1 earnings season for tech shed some light on the sector’s outperformance. Part of that performance is due to a more broadly positive market sentiment in 2023, compared to 2022, in addition to some recovery following the sector’s struggles last year. Notable, however, is the positive reception large-cap companies have received for their artificial intelligence (AI) strategies.
AI has been the hot new topic this year, and large-cap tech companies have been quick to capitalize on the rapid pace of innovation in this space. Whether they are innovating their own AI tech, or applying AI to new areas these companies are creating serious value for shareholders with this technology.
It’s worth emphasizing the dominance of large-caps in this moment, companies like Meta, Apple, and Microsoft. In recent history, major tech leaps have been associated with ‘disruption’ of traditional larger players. So far in the rise of AI we’ve seen the largest companies leading, demonstrating their value as innovators and appliers of innovation.
Why Volatility is persisting in the broader market
Despite all the positivity in large-cap technology, broad markets have been choppy this year. Most of their recovery took place in the first months of 2023, and since the onset of a US banking crisis in March market performance has been choppy up and down, aggregating out flat.
Macro forces are largely to blame. The banking crisis highlighted the ongoing impacts of rapid rate hikes by central bankers starting last year. Even as that hiking period seems to be ending, the consequences of those raised rates will be felt over the next several months. More recently, fears about the US debt ceiling have troubled markets while geopolitics continues to impact sentiment. Continue Reading…
In his role as head of research at Merrill Lynch, Bob Farrell established a reputation as one of the leading market analysts on Wall Street. In his famous “10 Market Rules to Remember,” Farrell summarized his insights on market tendencies.
One of Farrell’s rules states, “When all the experts and forecasts agree — something else is going to happen,” which embodies the essence of contrarianism.
In this month’s missive, I explore the roots and causal factors underlying Farrell’s warning, drawing on historical examples. I also illustrate the potential benefits and pitfalls of going against the crowd. Additionally, I demonstrate that market sentiment is currently approaching levels that have historically preceded broad market declines. Lastly, I suggest that there are specific areas where investors should consider trimming exposure, realizing gains, and paying the taxman.
There is no shortage of historical examples of “sure things” ending badly. In the late 1990s, following two decades of above-average returns, both institutional investors and consultants broadly embraced the dangerous consensus that future stock market returns would be about 11%. Dissenters and naysayers were few and far between.
The basis for these forecasts was the extrapolation of recent results. Stocks had been delivering average annualized returns of 11%, therefore it was assumed they would do so going forward – simple. Few investors contemplated the possibility that the past 15 years were anomalous from a longer-term perspective. More importantly, there was little concern that an extended period of above-average returns might have been borrowed from future returns by pushing up valuations to unsustainable levels.
The sad ending to this ebullience was the first three-year decline in equities since 1930. For the seven years ending March 31, 2007, following the market’s peak in early 2000, the annualized return of the S&P 500 was 0.9%. Importantly, these subpar returns encompassed a bitter and painful peak-trough loss of about 50%.
A similar occurrence of widespread adulation ending badly occurred only a half-decade later in 2005, when everyone “knew” residential real estate was a “surefire” way to amass wealth. Zealots justified unsustainable values with oft-cited mantras such as “They’re not making any more land,” “You can live in it,” etc. This blind optimism pushed real estate prices to unsustainable levels which all but guaranteed the subsequent collapse and some painful experiences for the “it can only go up” crowd.
Sorry, Beatles – All You Need is NOT Love
More often than not, what is obvious to the masses is wrong. There are valid explanations, both financial and behavioral, that cause the things which everyone believes to be true to turn out to be untrue.
In July 1967, the Beatles released their famous single All You Need Is Love. With all due respect to John, Paul, George, and Ringo, nothing could be further from the truth in the world of investing. Specifically, the more popular a particular investment becomes, the less its profit potential, if for no other reason than if everyone likes something, such adulation is likely to be reflected in its price.
In what is referred to as the bandwagon effect, investors often become enthusiastic about a particular investment or asset class after it has already produced strong returns. Believing that past outperformance is a sign of strong future returns, the herd then hops en masse on the proverbial bandwagon. This widespread fervor then causes prices to overshoot any rational approximation of value, thereby setting the stage for inevitable disappointment.
In the world of investing, “everyone knows” should come with a “buyer beware” warning. Investments that are heralded as sure things are bound to be fairly priced at best and often become dangerously overvalued. Great opportunities lead to great prices, which by definition means their greatness has been paid for in full, stripping them of their greatness. Conversely, it’s only when people disagree that opportunities to achieve above-average returns exist.
Risk: Reality vs. Perception
Managing risk is at least as important as (and inextricable from) achieving decent returns. Not only do irrational sentiment and expectations result in poor returns, but also give rise to elevated risk. Risk evolves in the same paradoxical manner as returns. As an asset follows the journey from normal to over-owned and overpriced, not only does its potential return deteriorate, but its risk increases.
When everybody becomes convinced that something will produce spectacular returns, then by extension they also believe that it involves little or no risk. This perception often leads investors to bid it up to the point where it becomes excessively risky. In contrast, when broadly negative opinion drives all the optimism out of an asset’s price, its risk profile becomes relatively small. Put another way, investment risk tends to reside most where it is least perceived, and vice versa.
In the world of investments, Bob Farrell trumps the Fab Four. Good investments are generally associated with skepticism, indifference, and even neglect, which sets the stage for high returns with lower risk. Inversely, widespread acceptance and adulation sow the seeds of high-risk and poor returns.
No Good Deed shall go Unpunished
As is the case with many aspects of markets, both timing and patience play an important role in contrarian investing.
Investment trends regularly go to extremes. It is this very tendency that results in calamities and opportunities. Unfortunately, life for managers is not as simple as buying cheap assets and selling their overvalued counterparts. As John Maynard Keynes stated, “The market can remain irrational longer than you can remain solvent.”
Not only can overvalued assets remain stubbornly so for extended periods of time but can become even more overvalued before they ultimately come back down to earth. By the same token, undervalued assets can remain cheap and become even cheaper before any payoff materializes. Sentiment can be a self-fulfilling prophecy for an indeterminable amount of time before reversing, turning previously favored investments into assets non grata, and the subjects of yesterday’s scorn into tomorrow’s darlings. Continue Reading…
The full report includes three other graphs focused on the gap between retirees and pre-retirees, each of which includes some important discoveries. For brevity, the main findings for each topic are summarized below:
Things That People Miss About Their Career
A surprisingly large 62% of retirees miss the Social Interaction from work, whereas only 29% of pre-retirees expect that to be an issue. With a 33% gap, this was one of the largest retirement blind spots discovered by the survey.
The other two big blind spots related to what you’ll miss from your career include missingMental Stimulation (38% retirees vs. 21% pre-retirees) and a Sense of Identity (31% vs. 22%)
FRITZ: I’ve written extensively on the many non-financial benefits we receive from work, and yet it’s something that most pre-retirees continue to underestimate. The most successful retirees discover ways to replace the non-financial benefits they once received from work, such as social interaction, mental stimulation, and a sense of identity highlighted by this study.
ERIC: I see this all the time among my clients who are still working. At this stage in their lives, they primarily associate their jobs with a paycheck and bonus. Their eyes are focused on the prize money at the finish line. They fail to see the psychological income that does not show up on their paystubs in the form of intellectual stimulation, purpose and meaning, and the most ignored component of all, social interaction. I can’t put a number on how much of your work paycheck comes from psychological income, but in my experience it’s a significant amount that until you retire you are probably seriously under-estimating. Most people assume that the primary challenge of retirement planning is financial when, for most people, the real challenge is replacing the psychological benefits from their work days with new activities that provide meaning and purpose as well as social interaction.
Challenges of The Retirement Transition
The highest response rate for transition challenges was finding the right Balance of Structure, with 39% of retirees citing that as a challenge. Fortunately, it appears that many pre-retirees also recognize this will be a challenge, with 45% citing it as a concern.
In other areas, pre-retirees are also more concerned with the challenges than appear to be warranted by the actual experience of retirees. In particular, pre-retirees responded with a higher % of concern than retirees for each of the following categories:
Anxiety Over Future (30% pre- vs. 23% post-retirement)
Meaning/Purpose (33% pre- vs. 23% post-retirement
Outdated Identity (27% pre- vs. 20% post-retirement
Mental Stimulation (30% pre- vs. 18% post-retirement
Finding Happiness (23% pre- vs. 18% post-retirement
The Retirement Transition Isn’t As Smooth As Expected
A concerning 52% of pre-retirees “mostly agree” that the retirement transition will be smooth, whereas only 32% of retirees feel the same. This 20% gap is a warning to all pre-retirees and is further strengthened by the 26% of retirees who responded “mostly or strongly disagree” (vs. only 5% of pre-retirees). The reality is that transitioning into retirement is more challenging than most folks expect. A good takeaway for pre-retirees is to expect some turbulence during the transition. Ignore this retirement blind spot at your own risk.
FRITZ: It’s interesting to study the above results. While retirees tend to have better scores than pre-retirees on specific challenges, a much higher percentage of retirees report some difficulty in the transition compared to the expectation of pre-retirees. In fact, only 51% of retirees Agree/Strongly Agree that the transition was smooth, compared to 70% of pre-retirees who expect it will go smoothly.
ERIC: I think that most people in the planning phase only think of the positives of life in retirement. They seriously underestimate how big of a transition retirement can be. In fact, other industry surveys show this disconnect between expectations and reality. The greatest source of disconnect usually happens after the “honeymoon” period wears out. That typically happens within the first two years of retirement. I call this the “messy middle”. Many people associate retirement with a new beginning without ever acknowledging the ending of our prior stage in life or recognizing that all transitions in life usually involve a period of introspection and uncertainty before finding the necessary clarity and direction to move forward. Only a few of us skip out on the “messy middle.” I think it’s best when we plan for some turbulence ahead so that when we are shaken out of our comfort zone we’re neither surprised nor paralyzed from making the required adjustments. I like to remind my clients that a plan is just a guide meant to be revised as new data comes in. Keep iterating forward!
V. Which Components Lead To A Good Life in Retirement?
The final section of the survey was, in hindsight, a bit of “Motherhood and Apple Pie.” What does it take to lead a good life? Ask anyone, and you’ll likely see similar responses to what was revealed in the survey. In the survey, you’ll see we asked both pre- and post-retirees to rank these components. Results were similar between both groups, so for this summary, we’ll simply rank the components identified by those already retired, in descending order:
Components Rated as Very Important
Healthy Living (77%)
Time Management (68%)
Financial Plan (53%)
Relationships (52%)
Purpose/Meaning (41%)
Self-Identity (27%)
VI. Conclusion
We thank the 1,734 of you who participated in this joint study and hope all of you have found the results to be useful. We trust the findings on retirement blind spots will be helpful for those who are planning their retirements in the coming years. To reiterate the key blind spots, below is the conclusion of the key points from the Full Study write-up:
Major Retirement Blind Spots
You’ll miss more than just the paycheck when you retire. You’ll miss the mental
stimulation and social interaction associated with work. Start now cultivating new social
connections and finding new sources of mental stimulation to replace the psychological
benefits of work.
It will take you longer to shed your work identity than you expect. This will be primarily a
challenge in your early days in retirement. Don’t hang on to an outdated image of who
you were in the past. Retirement gives you the freedom to re-invent yourself.
The transition from full-time work to life in retirement won’t go as smoothly as you expect. You’ll struggle initially to come up with a new sense of purpose and meaning. Be
patient, but not complacent. Only you can figure out what’s important to you!
Finding the right balance of structure in your schedule will be a greater challenge than
you currently likely anticipate. Making time for activities that bring joy and fulfillment is
important. A schedule is not a bad thing if it reflects your values and aspirations.
Once you retire, you’ll worry less about money issues and more about your health and
that of your loved ones. As you plan your retirement think beyond just money issues. Take
a holistic approach that incorporates all the important areas of your life. Emphasize
balance.
In closing, it’s reassuring to see that the life satisfaction scores were highest among people who have been retired for more than two years. The future is bright.
Learn from those who are ahead of you on the retirement journey.
Your retirement will be better as a result.
Your Turn: If you’ve already retired, what was your biggest surprise about the transition? If you’ve not yet retired, what’s your biggest takeaway from this study, and are there any modifications you’ll make in your planning as a result? Let’s chat…
Fritz Gilbert is the Founder of The Retirement Manifesto, a Plutus Award winning blog dedicated to helping people Achieve A Great Retirement. After 30+ years in Corporate America, most recently as a Commodity Trader, Fritz retired as planned in June 2018 at Age 55. He and his wife are looking forward to extended travel and “giving back” to their community through charitable work in retirement. This blog was published on his website on May 18, 2023 and is republished here with his permission.
For those who are planning on retiring in the next few years, retirement blind spots can be dangerous.
Wouldn’t it be helpful…
…If we could get a list of our potential retirement blind spots, based on feedback from actual retirees?
…If we could utilize the experience of actual retirees to help shine the light on shortfalls in our planning?
…If someone would tell us what we should really be thinking about as we plan for retirement?
Today, we’re doing exactly that.
We’ve got a special post for you today, a post that has required hours of work by Eric Weigel, my partner on a special survey we conducted with the readers of this blog, among others. It’s the most comprehensive survey ever conducted by this blog, and you will be interested in the groundbreaking results.
After all, you are the subject!
If you’ve already retired, you told us about your actual experience.
If you’re planning on retiring, you’ve told us your expectations.
By comparing the responses of the two groups, we’ve compiled a list of potential blind spots that anyone planning for retirement should be aware of.
It’s time to put on your sunglasses.
Below, we’re shining the light on the retirement blind spots we discovered by analyzing your responses. This is one of the longest posts I’ve ever written, but the content is invaluable. If you don’t have time to read the entire post, skim through the charts and read the conclusion for the 5 most important retirement blind spots you helped to reveal.
On March 1, 2023 you received an e-mail from me with a link to a survey, which was titled “Retirement Attitudes & Perspectives.” In total, 1,734 people took the survey. Most were from this blog, but we also reached out on various channels focused on retirement planning, including Eric Weigel’s page (Retire With Possibilities), The Modern Elder Academy, The Retirement Coaches Association, and personal social media pages.
Eric Weigel, author of Reimaging Retirement, developed the survey and compiled the results (a special note of thanks for the hours he’s invested in this project). He has completed an impressive Final Report with all of the survey detail, which I encourage you to read. The title page is presented below, which is linked to the full report.
Click on the image to read the full report
The primary goal of the research was to compare retirement attitudes & perspectives between those on the cusp of retirement to those who have already retired. How do attitudes change pre- vs. post-retirement, and what can we learn to shed light on potential retirement blind spots for those who are approaching retirement?
To start, the following chart summarizes the demographics of respondents:
We were pleased that over 90% of the respondents fell in the “retirement sweet spot” (Ages 51+). We also had a perfect blend of pre- vs. post-retirees, with 54% classifying themselves as retired, 45% planning to retire (half of whom expect to retire within 2 years), and 1% who had no plans of retiring. 70% of the responders were male, and 86% of the respondents were married.
Below are the summarized results of the survey, which will be presented as follows:
Table Of Contents
Combined Results (Both Pre- And Post-Retirees)
“Retired Only” Responses
Discovering Blind Spots – Part I
Discovering Blind Spots – Part II
Which Components Lead To A Good Life In Retirement?
Conclusion – The Top 5 Retirement Blind Spots
I. Combined Results (Both Pre- and Post-Retirees)
In this section, we’ll present highlights from the entire population. In the next section, we’ll compare pre- vs. post-retiree responses, followed by a deep dive into the retirement blind spots revealed by comparing responses between the two groups. In each of the sections, Eric and I will provide our commentary.
Ability to Manage Finances
To start, it’s important to note that our sample population was a select subset of the population at large, drawing as it did upon readers of this blog. Our sample population is a more knowledgeable group, as demonstrated by the following chart that self-rates your “ability to manage finances.”
Question: How would you rate yourself in terms of your ability to manage your finances?
For all graphs, an “A” is the highest score, and an “E” is the lowest.
FRITZ: I like the fact that our sample was drawn from a more select group of the population. It allows you to compare yourself to a group that is more representative of your peers. That said, Eric and I have discussed the possibility of conducting this survey with a more representative group of the entire population, which would yield some interesting results when compared to this population of retirement blog readers. If we are able to execute that approach, we’ll provide the results in a post dedicated to those results, stay tuned.
ERIC: I agree with you, Fritz. Our survey respondents seem to be well prepared for life in retirement. Even respondents still working and planning their retirement seem to have taken responsibility for their own well-being. While the transition from full-time work to retirement is for most people a very significant life event with its own set of challenges, our respondents seem to be ready for the challenge and well-positioned to iron out any issues that might creep up.
Strong Scores On Lifestyle & Mindset Attributes
Perhaps this is another potential impact of our sample bias, as we had a high percentage of the survey participants scoring well on the lifestyle and mindset attributes that contribute to a good retirement.
In addition to the desire to learn new things (chart shown below), our respondents also rated high in many of the areas that contribute to a good retirement, summarized below for brevity (read the Final Report for details). Responses are sorted in descending order based on % of “A” responses:
Emotional Intelligence (A – 48%, B – 44%)
Life Satisfaction (A – 41%, B – 46%)
Desire to work on meaningful goals (A – 41%, B – 40%)
Healthy Lifestyle (A – 37%, B – 43%)
Quality of Relationships (A – 31%, B – 44%)
Suitability of Home & Environment (A – 31%, B – 44%)
Discipline in Allocating Time (A – 27%, B – 47%)
Positive Habits (A – 25%, B – 49%)
Having A Plan For Retirement (A – 20%, B – 47%)
Transferability of Vocational Skills (A – 20%, B – 35%)
FRITZ: There are various personality traits that foster a good retirement, and I’m pleased to see the high scores from the participants. All of us have to learn how to live our new lives in retirement, and embracing a desire to learn serves people well as they make the transition. The strong scores on the other attributes are good indicators that our respondents are (and will be) leading good lives in retirement. Each of the attributes included in the bullet list above are worth serious consideration as you finalize your plans for retirement.
ERIC: I was pleasantly surprised to see high scores across all question categories. I think that when it comes to leading a happy and fulfilling life in retirement we already know what we have to do. Of course, we all define success in our own unique ways, but the trick always seems to involve taking some sort of action that moves us closer to our goals. In a sense what makes for a successful life in retirement is not a great mystery, but fulfilling our own vision requires a commitment to using our time, energy, and money in a way that creates true happiness and fulfillment.
II. “Retired-Only” Responses
This section of the survey was designed to determine the retirement attitudes determined to be important by folks who have already retired. In essence, it’s establishing the baseline used later in the study to compare what pre-retirees think will be important vs. what post-retirees think is important in retirement. The larger the gap between the two populations, the higher the odds that the issue is a retirement blind spot.
How Well did you Prepare for Retirement?
Many of the questions in this section focused on preparation for retirement, with a focus on both the financial and non-financial aspects of planning. In general, survey respondents did a good job in preparing. We’ll touch on the financial preparation first, then provide a summary of the non-financial responses. Continue Reading…
Evidence-Based Investing – Your Best Chance to Hit Your Long-Term Investment Goals
By Steve Lowrie, CFA
Special to Financial Independence Hub
If I could, I would grant amazing investment returns to every investor across every market. Unfortunately, that’s just not how it works. In real life, we must aim toward our financial ideals, knowing we won’t hit the bullseye every time.
That’s why I recommend evidence-based investing: or investing according to our best understanding of how markets have actually delivered available returns over time, versus how we wish they would. Our “best understanding” may still be imperfect, but it sure beats ignoring reality entirely.
Luck-Based Investing and Random Returns
Many investors try to pick and choose when and how to invest based on what they or others are predicting will happen next. All evidence suggests their success or failure will be driven far more by luck than skill. Worse, going down this path, there is a very high probability they’ll end up with worse results versus a properly structured “buy and hold” approach.
Some deliberately embrace this approach, hoping to “beat” the market. Others come to it accidentally, by reacting to financial behavioural biases such as panic-selling or spree-buying. Either way, these sorts of investment portfolios typically devolve into a disheartening assortment of holdings over time, offering little sense of where you stand in relation to your own goals or overall market performance. The odds stack steeply against your achieving any carefully planned outcome: provided you had one to begin with.
Evidence-Based Investing and Portfolio Planning
In contrast, evidence-based investors adhere to decades and volumes of time-tested, peer-reviewed analysis by academics and practitioners alike. In aggregate, we seek to answer an essential investment challenge:
How can an investor increase the probability they’ll capture the highest expected market returns, given the levels of investment risk they’re willing to accept?
The answers point to a two-step strategy:
1. Build It. Prepare your personal portfolio:
Allocate your investments between broad asset classes.
Widely diversify your bonds and equities to reduce the unnecessary risks inherent to individual bond or stock picks.
Tilt your overall portfolio toward factors with higher expected returns, according to your personal financial goals and risk tolerances.
2. Keep It. Sit tight with your carefully constructed portfolio for the long term, to ensure you capture the expected long-term growth from your various market allocations. So, stay invested through thick and thin and set aside enough cash reserves to cover upcoming spending needs.
At the risk of repeating ourselves (which is, after all, the theme of this “Play It Again, Steve” financial tips blog series), evidence-based investing translates into building and maintaining a portfolio that looks something like this:
Keeping It: The Hardest Thing
It’s one thing to build an ideal portfolio. It’s another to keep it in balance as intended. In fact, thanks to our behavioural biases, I would argue it’s the hardest part.
For example, what will you do after the stock market has been surging, and your 60%/40% stock/bond allocations end up being closer to 70%/ 30%.? You’ll probably want to let your overweight allocation to high-flying stocks ride, hoping to score even more. That’s because recency and other behavioural biases trick us into believing the party will never end. However, the more prudent, evidence-based move is to sell some of your equity allocations (selling high) and use the proceeds to buy more humdrum fixed income (buying low), until you’re back to your original 60%/40% mix. Continue Reading…
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