At Members’ Wealth, our investment approach is one that is critically analytical, fundamentally driven, and value conscientious. So, the market environment we have seen for more than ten years, which has consisted of historically low interest rates, persistent low volatility, skyrocketing asset prices, and a general disregard for fundamental based investing has not been our cup of tea.

It is often said that good things come to those who wait. We patiently waited, and are now seeing, what we feel, is a seismic shift in the investing landscape. This shift brings a return to an environment that requires professional, diligent oversight in the management of portfolios. While 2022 was marked by a selloff across both the stock and bond markets, we feel that this has created some remarkable opportunities while also exposing some risks that have always existed but are now increasingly apparent.

So, for us, there has never been a better time to embark on the Members’ Wealth journey. Although our company may be new, our team consists of seasoned investment professionals and we feel that we are well positioned to help investors develop, implement, and execute custom planning and investment strategies. These strategies are strongly rooted in science and law, but enhanced with behavioral analysis, and then fine-tuned to the needs of each individual, family or business. 

So, as we enter a new year, it is a time to move forward, remain cautiously optimistic and position investors to capitalize on the opportunities that lie ahead!

Investment Opportunities and Risk by Major Asset Class

Cash: Far from Trash

Over the past decade, as we monitored money market rates daily, it seemed about as exciting as watching paint dry. Nothing ever happened. Rates remained relatively unchanged. Then BOOM, the Federal Reserve shakes things up and cash money market yields seemed to change every day in 2022.

Today, with cash yields hovering at nearly 4%, investors can consider lower risk cash investments as an alternative to higher risk asset classes. While current rates are certainly attractive, we must still consider inflation and its deleterious effects on cash over time as well as the reinvestment risk for cash proceeds, meaning that you may be unable to reinvest the cash at a rate comparable to your current rate of return. But hey, at least the risk of losing your money is lowered. Long live yield on cash!

Magical Yields – High Quality Bonds

Just as yields on cash have neared 4%, we have seen a commensurate pick up in yields in other investments; Treasuries, High Quality Corporate Bonds and Municipal Bonds, just to name a few. We cannot claim that these yields have magical powers, but for those that love the magic of compounding[i], they are a welcome relief from the stagnant low yield environment of the last decade.

Magical Yields (part 2) – High Yield Bonds

Like that of their higher quality bond brethren, High Yield bonds, also known as “junk” bonds, faced some pricing pressure in 2022 as rates rose. In addition to the pressure created by rising rates, high yield bonds can also face pricing pressure (credit spread widens and prices fall), as buyers change the yield they are willing to accept in exchange for the risk of the lower quality investment. While this type of repricing did occur in 2022, it paled in comparison to other credit sell offs such as that of 2008 (See Graph 1) where credit spreads literally went off the chart.

Source: Bloomberg

Thus, although opportunities in this space look more attractive than one year ago, we caution investors to tread lightly as lower quality issuers are now facing higher costs of capital and potentially deteriorating fundamentals. Therefore, where it makes sense for some investors to have exposure to this asset class, we currently think a defensive, active approach here is appropriate. Buying a higher yielding, lower quality bond should be left to those that have a sound investment plan, due diligence process, and the financial ability to weather the potential losses of such a purchase.

The Return of Alternatives

With the selloff in equity and bond markets globally, investor interest in finding alternatives to these major asset classes increased over the course of 2022. Alternative strategies that seek to offset volatility in the equity and bond markets, while offering other sources of return, have tended to work well, at least relatively speaking, in 2022 with Commodities being the top performer (See Table – Morningstar Alternative Categories – courtesy of Calamos Investments period ending Dec 19, 2022). However, complexities within this asset class warrant additional analysis and thus are generally not appropriate for most investors. Therefore, we caution investors about chasing returns, especially in such highly volatile asset classes. We recommend speaking to your Members’ Wealth team if you would like more information on alternative investments.

Equal Opportunity Equities NO MORE

Since the Great Financial Crisis of 2008, with abundant liquidity, Fear of Missing Out, aka. FOMO from investors, and a highly stimulative Federal Reserve, it seemed as if the dual policy mandates of the Fed also included an Equal Opportunity Mandate for Stock Prices, THEY MUST ALL GO UP.

Well, discrimination is back in the stock market, and we welcome the return of some rationality. In our opinion, quality, fundamentals, and price discrimination should be the backbone of a truly functioning capital market.

From 2009 to 2021, investing in low-cost passive index equity strategies dominated the investment environment. With the shifting investment landscape, we maintain that a balance between active and passive investing should be considered throughout all environments. Now may be the time for investors, with the guidance of a financial professional, to consider a reassessment to ensure that current portfolios are aligned with current goals.

Private Placement Investments ⁱⁱ

Private Placement Investments hold allure, but the allure can obscure the risk. There are also specific income and net worth requirements to purchase private investments. Illiquidity is one of the driving risk factors and commensurate return enhancements of private investments. All else being equal, you should expect to earn more on an illiquid investment than you would on a liquid investment, otherwise, there would be no benefit to giving up your liquidity.

The obfuscation of risk also applies to pricing. Private investments do not have a real time pricing component to them; therefore, we recommend approaching these investments with caution.

Tax and Social Security Changes

Finally, the passing of the Secure 2.0 Act has brought about significant changes relating to: retirement savings, social security, and tax/estate. The table below outlines some of the significant changes. Your advisor will be able to discuss which changes impact you.

In conclusion, we feel that 2022 was a year of a seismic shift. While this shift may seem unsettling in real time, we believe it will be beneficial to investors that focus on taking advantage of the new opportunities being presented while remaining cautious of the risks that remain.

May 2023 be a happy, healthy, and prosperous year for all!

Thank you for your continued support and we look forward to seeing you at your next review meeting.

Thank you,

Your Members’ Wealth Team

Alternative investments, including hedge funds, involve risks that may not be suitable for all investors. These risks include (but are not limited to), the possibility that the investment may not be liquid, speculative investment practices may increase the risk of investment loss and higher fees may offset any potential gains. Investors should consider the tax consequences, costs and fees associated with these products before investing.

CS Planning Corp., doing business as, Members’ Wealth LLC provides investment advisory, wealth management, and other services to individuals, families, and institutional clients. Advisory services are offered through CS Planning Corp., an SEC registered investment advisor. Members’ Wealth does not provide legal, accounting or tax advice. Please consult your tax or legal advisors before taking any action that may have tax consequences.

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ⁱ https://www.dol.gov/agencies/ebsa/about-ebsa/our-activities/resource-center/publications/the-magic-of-compounding

ⁱⁱ An accredited investor is an individual with a net worth or joint net worth with a spouse or spousal equivalent of at least $1 million, not including the value of his or her primary residence, or an individual with income exceeding $200,000 in each of the two most recent calendar years, or joint income with a spouse or spousal equivalent exceeding $300,000 for those years, and a reasonable expectation of the same income level in the current year.