January 5, 2021

New Year Predictions

Looking ahead is a valuable tool for successful investors, but it is dangerous to look farther ahead than one can reasonably see. While it is good to keep an eye out for a curve while driving, it does no good trying to see around that curve, and trying can distract you from the real task at hand which is keeping your car on the road.

Likewise, having your investments aligned with what is actually happening today is of more value than planning for some outcome that at best may be months away and might not happen at all. For this reason, stock market predictions are usually not worth what you pay for them – especially when they are free.

Predictions can also cause problems for the investment managers who make them, as they create bias in the predictor. They become psychologically anchored to the predicted outcome. If the expected event does not happen, the investment manager who made it will be more likely to be pulled away from their normal disciplines expecting for the prediction to eventually be fulfilled.

That is why the Hepburn Capital/Shadowridge team uses active management tactics to keep your accounts in sync with the current market conditions. We don’t make predictions, we react on what is really happening, right now.

Save the Date!

2021 Investment Update on Zoom

Friday, January 8^th at 11:00 am (Mountain Time), my Shadowridge team will be doing a video presentation with four short segments, including a market update by Shadowridge CEO and Chief Investment Officer, Ryan Redfern, market insights by myself, and tax and planning tips from Laura Redfern, Certified Financial Planner™, and Phil Lebkuecher, Behavioral Finance Specialist.

Please plan on watching and getting to know your investment team. The presentation is scheduled for less than 30 minutes plus time for Q&A.

Newsletter Format Changes

The look of our newsletter will be changing over the next few months as Hepburn Capital’s merger with Shadowridge continues. You can expect the same timely content, just with a different look.

New Phone Tree

Early January will see Hepburn Capital’s phone line (928-778-4000), integrated into the Shadowridge phone tree. Naturally my oh-so capable Client Service Manager, Yvette Zurita gets top billing, but I am also listed along with Ryan, Laura and Phil.

If I am not available, this improved technology includes a voicemail that will be quickly emailed to me. I try to return calls promptly, and even if I am traveling, I usually get to everyone within 24 hours.

College Classes Coming

Tell your friends that my long-running class at Yavapai College, “Fundamentals of Investing for Retirees” will be offered again beginning on February 3rd. Here is the college’s description:

This fun class will help you become more confident making financial decisions. The easy-to-grasp format of this class provides a broad knowledge of investments preferred by investors approaching or already in retirement. Learn about stocks, bonds, mutual funds, annuities and more. Topics include recognizing risk, smart IRA strategies, avoiding common investment mistakes, and simple risk reducing strategies that anyone can use. Bring your questions.

You can sign up online for this Yavapai College Class here: Sign Up

Ready for a Review?

You have asked me to take care of your investments for you, so I don’t like to bother you, but it is important that we occasionally review your circumstances and investment portfolio to ensure that you understand what I am doing for you, that you are comfortable with my work, and the strategies I am employing on your behalf are still appropriate for your life circumstances.

If your life circumstances have, or will soon change, you would like to see the details on a strategy or review anything else about your portfolio, please call the office to arrange a time to talk, either in person or on the phone.

The number is 928-778-4000.

December 2020 Market Commentary

(By Ryan Redfern, Shadowridge Asset Management, LLC)

Well, there you have it. Another trading year behind us that has been quite a ride. The S&P 500¹ looks like it will end the year up around 17.5% (FastTrack data). That is incredibly surprising, given that the same index was down over -30% at one point back in March. It seemed a certainty that the economic shutdowns due to the Coronavirus were going to put the economy into recession. But somehow, we avoided that…for now.

Looking ahead to 2021, there isn’t much in the near future that looks negative for the stock markets. Many cyclical patterns suggest it could be another decent year. So, what could go wrong? At the moment there are two items of interest on the horizon that could shake things up a bit.

First, a move back to total lockdown, much like we had in early to mid-2020. There is no doubt that economic damage was done to certain parts of the economy that may never recover. But I remain an optimist in that, while we may not return to the old normal, I believe these hardships and setbacks can lead to new ideas, businesses, and ways of living that we would never have gotten to otherwise. Difficult times can lead to amazing innovation, so that is my hope for the future.

The second item is what I’m keeping in mind the most: the valuation of the stock market (as measured by the Shiller PE Ratio). The current valuation, just over 34, is higher than the peak that preceded the 2008 financial crisis. It is higher than the peak that preceded the great depression in 1929. In fact, the only peak it is not higher than is the one that preceded the Tech bubble burst in 2000.

So, while the market is currently historically overvalued, if it follows the path of 1999/2000, we could see another 50% of upside before things get ugly. But let’s stay positive for now as we put an ugly and exhausting 2020 behind us.

This month’s chart is a snapshot from the Shadowridge data dashboard that we use to get a feel for the current market context. The L/T Trend (Long Term Trend) is positive and stretched 2.51% beyond its average. Generally speaking, this is a big picture positive for the current market environment and the signals can last for months at a time. The Mid-Term Cycle, where we combine money flow and directional momentum, has been leaning negative for a couple of weeks now. Its job is to focus on the probable market direction in the medium term, meaning weeks at a time, and to give us a heads-up as to when to consider being vigilant. Therefore, we are being somewhat cautious going into the new year.

Bonds – the bond markets have had a decent year considering the excessive volatility they also experienced in March. The Aggregate Bond Index AGG is up 7.39% Year-to-Date (FastTrack Data). An especially interesting rebound in the High Yield Municipal Bond market has also been occurring post-election. And High Yield bonds are still moving steadily higher, though only up around 4.39% YTD (FastTrack Data).

This year has been exceptional for us at Shadowridge. Our total assets under management nearly doubled and many of our models (both equity and fixed income) beat their benchmarks while taking less risk.

We also expanded the team to include Will Hepburn and Yvette Zurita when we merged with Hepburn Capital in September. They are both huge assets and an absolute pleasure to work with, enhancing the Shadowridge team in so many ways.

Finally, as we close out 2020, we are spending a lot of time reviewing our investment strategies. What worked? What didn’t? Where can we improve? These questions have already led us to some new and interesting paths to explore in the coming year that I’m excited about. And although these are new ideas, we would never offer something we wouldn’t put our own money into.

Happy New Year, everyone!

1 The Standard and Poor’s 500 is an unmanaged, capitalization-weighted benchmark that tracks broad-based changes in the U.S. stock market. This index of 500 common stocks is comprised of 400 industrial, 20 transportation, 40 utility, and 40 financial companies representing major U.S. industry sectors. The index is calculated on a total return basis with dividends reinvested and is not available for direct investment.

2 Charts are for informational purposes only and are not intended to be a projection or prediction of current or future performance of any specific product. All financial products have an element of risk and may experience loss. Past performance is not indicative of future results.

Avoiding Stimulus Scams

(By Laura Redfern, CFP®, Shadowridge Asset Management, LLC)

With another round of stimulus checks on their way, this is a great time for fraudsters to pounce. Don’t be a victim! Follow these smart tips:

If you receive a suspicious email or text message, DON’T respond, click on links, or open attachments. Banks and government agencies will NOT ask for confidential information — such as your Social Security Number, bank account number, credit card numbers, passwords or PINs.
If you do get a call or message that you think is from a government agency, call the agency back at a number you trust or a number that is listed on their official site, rather than replying directly to a call or email.
Beware messages that ask you to “verify” your payment or to provide additional information. This is NOT required by the IRS to receive your payment and is likely a scam.
Also, high pressure tactics like telling you that something needs to be done immediately, or saying if you do not do something you will lose your payment, are also probably scammers.
Finally, any offer to get your payment faster “for a small processing fee” is NOT legit. Don’t fall for it. There is no such thing as speeding up payments.

You can check the status of your stimulus payment and/or your eligibility directly with the IRS, here.

What’s Happening in Your Portfolio

The Shadowridge/Hepburn Capital suite of growth strategies finished the year strongly to post solid gains for the year 2020. That result is remarkable due to the devastating losses most investors suffered in the “Covid Crash” in February and March.

The S&P 500 Index** produced a 33.9% loss (Fasttrack data) in the 5 weeks between Feb 19-Mar 23, 2020, and the math of gains and losses tells us that index chasing investors would need more than a 50% gain to recoup that amount of loss. Amazingly, the stock market did bounce that much and more, and the Index finished in positive territory for the year.

But how often should investors expect gains of 50% or greater to overcome a 5-week loss? It is a rare occurrence. That is why I believe managing risk should be a bigger priority than beating the market.

During the Covid Crash our growth strategies experienced only a small fraction of the index’s loss, making our positive results easier to earn. On a risk adjusted basis, our growth accounts experienced excellent results.

Our current holdings for growth accounts include a mix of stocks and stock funds, cash and bond funds. Due to weakening market indicators, as of December 31, 2020 we have greatly lowered your account’s risk and our net stock market exposure has been reduced to only 50%.

Both HCM Income* and Municipal Income* accounts finished the year strongly, outperforming their respective benchmark indexes since the bond market meltdown and FED intervention in March. Both strategies are fully invested as of this writing on January 2, 2021.

And that is how we are staying in sync with this market.

Making Your Life Easier

If you would like to add to your IRA, Roth or taxable account you can now do so without having to writing a check. Yvette can send you a DocuSign email that will create a one-time electronic deposit from your bank to your E*Trade Advisory Services account.

For years we have made extensive use of these fast, free electronic transfers to client bank accounts when a distribution was requested. Now you can use this same convenient technology to make investments too.

And you won’t have to mail checks or drive across town. It is easy and safe because all of our electronic documents are encrypted.

Call the office at 928-778-4000 for details.

Getting Better, Slowly

(By Phil Lebkuecher, Shadowridge Asset Management, LLC)

The Wall Street Journal recently published an article about people who used high risk methods to buy high risk investments. These folks had turned relatively small amounts of money into exceptionally large gains in the past year. Earlier in the year, the WSJ also published an article about investors who had bought properties for short term rentals. These folks were making significant income from these investments. Several years ago, when fracking technology was new and oil was trading over $100 per barrel, people who owned the mineral rights to these properties began receiving royalty checks for significant amounts of money.

I have read the Wall Street Journal since 1986. Almost every year it seems there is some article about people who have received an enormous windfall. I also cannot recall the same people being so fortunate the next year or, bluntly, ever again. These are people who “won the lotto” and like many lotto winners, never repeat the experience.

So what is the key to real wealth, then? Unlike these folks I read about in the WSJ, there are people that I know personally who have managed to build real financial security. But it wasn’t overnight. It comes from the accumulation of small but significant steps over the years.

Here are my basic financial principles, based on years of observation of successful, and unsuccessful, people:

Have a clear understanding of how much you spend each month.
Save a reasonable amount of your income.
Pay off expensive debt like credit cards or loans. I would suggest that any loan or debt that is charging you 6.00% of interest or higher needs to be paid off as quickly as possible.
Ask yourself if what you spend your time and money on truly reflects what is important to you and your family.

My point here is that real wealth, real financial security, real meaningful ability to control your finances is a long-term discipline. Like eating healthy or physical training, it takes long term dedication and commitment to achieve true success. And like life, that success is not guaranteed. But I believe it is imperative that we put forth our best efforts. That means doing small things, slowly and consistently.

I have often described 2020 as “the best of times and the worst of times.” In many ways, a lot of good things happened, but the struggles of the year have also weighed heavily on all of us. We can see that weight as crushing, or as strength-building. It’s all in how you carry it.

I look towards 2021 with renewed optimism and wish you the best in the coming year.

Regards,

Mental Floss…

Slice of Life

A good friend invited us to dinner at Essence Kitchen and Bar in Chino Valley, and I am pleased to report that Chino Valley finally has a terrific fine dining experience to offer. In addition to steaks and salads, Essence has the best seafood selection I have seen in my 34 years in the Prescott area. I had the Black Squid Ink Linguini and Gina had the Cedar Plank Salmon. Both dishes were superb. Chef Jason and wife Julia really know what they are doing.

Check Essence out here: Essence Kitchen + Bar.

* The model accounts mentioned in this article are hypothetical examples of how the strategy may work as designed. Performance and activity in client accounts may be different from that in the model in amount of each investment, specific timing of trades, and actual security used, which may vary from account to account. Not all trades are profitable. It should not be assumed that current or future holdings will be profitable. A list of all trades in these accounts for the past 12 months will be provided upon written request.

** Indexes are unmanaged lists of stocks considered representative of a broad stock market segment. Investors cannot invest directly in an Index.

This newsletter may contain forward-looking statements, including, but not limited to, statements as to future events that involve various risks and uncertainties. Forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause actual events or results to differ materially from those that were forecasted. Information in this newsletter may be derived from sources deemed to be reliable, however we cannot guarantee its accuracy. Please discuss any legal or tax matters with your advisors in those areas. Neither the information presented nor any opinions expressed herein constitute a solicitation for the purchase or sale of any security.

In all investing, past performance cannot assure future results, and as such, our efforts are not guaranteed. Losses can occur. All strategies offered by Shadowridge Asset Management, LLC, adapt to changes in the markets by changing the investments they hold, therefore, comparisons to broad stock market indexes such as the unmanaged indexes mentioned may not be appropriate. Sometimes client accounts are invested in stocks or markets not included in these indexes. Past performance does not guarantee future results. Investment return and principal value will vary so that when redeemed, an investor’s account values may be worth more or less than when purchased. Mutual fund shares and other investments used in our managed accounts are not insured by the FDIC or any other agency, are not obligations of or guaranteed by any financial institution and involve investment risk, including possible loss of principal. Advisory services offered through Shadowridge Asset Management, LLC, a Registered Investment Advisor. Adviser will not transact business unless properly registered and licensed in the potential client’s state of residence.