Significant Shrinkage

Significant Shrinkage

Significant Shrinkage

Buffeted by Inflation

Is it time to double check your household budget?

Chances are the budgeted expenditures of the vast majority of Americans are about to get buffeted. Or so says the Oracle of Omaha.

In the latest shareholder meeting of Berkshire Hathaway, Mr. Buffet sounded an alarm:

We are seeing substantial inflation. We are raising prices. People are raising prices to us, and it’s being accepted.[1]

​Specifically, Mr. Buffett pointed to the rising cost of steel affecting Berkshire’s businesses in housing and furniture.

People have money in their pocket, and they pay higher prices.  It’s almost a buying frenzy. [The economy is] red hot.[2]

​Mr. Buffett isn’t the only town crier sounding the alarm. Consider what happened at Bank of America. BofA has been tracking the “mentions” of the word “inflation” in corporate earnings calls since 2004. In late April, their analysts said, “Buckle up! Inflation in here.”[3] The analysts showed a chart depicting a tripling of inflation “mentions.”

But after another week of earnings calls, the BofA analysts had to revise their findings. They then found that “mentions” of “inflation” had quadrupled.

When Money Chases Assets

We don’t have to look far to see evidence of inflation. And we don’t have to wonder why prices are rising. When the Federal Reserve increases the U.S. money supply at an annual rate of 37%,[4] those dollars have to go somewhere. They go into the stock market, into real estate, into art works, and … into the groceries you buy every week.

Stock Market Is Up

So far this year, the S&P 500 Index is in positive territory.

Housing Prices Are Up

In northern Virginia, the median price of a house rose by 9% in 2020. According to WTOP News:

​The median price of a home that sold in Northern Virginia last year was $590,000, up 9%, and $90,000 more than the median price throughout the D.C. metro.[5]

“Art” Prices Are Way Up

Surely you’ve heard by now that a piece of crypto art sold at Christie’s for $69 million. An artist known as Beeple (a young man in Charleston, South Carolina) had created a piece of digital art for 5,000 consecutive days. He then cleverly combined all 5,000 pieces into a single piece of digital art and made it an NFT (a nonfungible crypto token). Strangely enough, a buyer then plopped down a whopping $69 million for the ownership of this single NFT, which resides somewhere on a blockchain. But we don’t have to pay to see it. It’s all over the Internet. It appears in a CNN article.[6] Take a look:

Shrinkage – Your Grocery Bill

The prices of many grocery items are not going up. But inflation is rampant. How is that possible? One word: shrinkflation.

Instead of raising prices, producers of consumer goods are shrinking the amount in a package. Seemingly, the package size remains the same. But in fact, a smaller quantity is offered at the same price.

Consider this picture of paper towels offered at Costco.[7] The roll on the right has 160 sheets; the one on the left, just 140.

Or check out these pictures of Nathan’s Pretzel Dogs, which appear in an article on Mouseprint.org.[8] The first box contains five; the second, just four.

Shrinkflation Is Everywhere

Scads of manufacturers are now playing the shrinkflation game. Len Penzo, in his blog, reports more than two dozen items where product size has shrunk.[9] Here’s his list of changes in product size since 2020:

Powerade (Was: 32 oz.; Now: 28 oz.)
Lay’s Potato Chips, party bag (Was: 15.25 oz.; Now: 13 oz.)
Nutella (Was: 14.1 oz.; Now: 12.3 oz.)
Puffs tissue (Was: 56 count; Now: 48 count)
Dawn dish soap, small (Was: 8 oz.; Now: 7 oz.)
Hillshire Farms Polska Kielbasa (Was: 16 oz.; Now: 14 oz.)
Nathan’s Hot Dogs, skinless: (Was: 16 count; Now: 14 count)
Keebler Club Crackers (Was: 13.7 oz.; Now: 12.5 oz.)
Charmin Ultra Strong toilet paper (Was 286 sheets; Now: 264 sheets)
Hershey’s kisses, family size (Was: 18 oz.; Now: 16 oz.)

Inflation Primarily Hurts Those on Fixed Incomes

If a family’s income stays the same and prices go up (or shrinked products reduce the amounts purchased), then slowly, over time, that family become poorer.

The solution? Buy assets that are also inflating. If a portion of a family’s savings can be allocated to assets that also inflate, then they have a chance to see their lives remain pretty much the same, or, if they pick the right assets, improve over time.

Which assets?

That’s Our Job at Research Financial Advisors

We have a long track record of protecting a family’s assets and making sure they battle the ravages of inflation. If you’d like us to review the current account we manage for you … or if you have accounts that either you manage or others manage for you … we’re happy to provide a review of your holdings.

How to Manage Your Money and Your Risk Exposure

Forgotten 401Ks

Zombies
They’ll eat you alive!

Failure to Rebalance – Zombie Sign #1

When was the last time you rebalanced your 401(k) or other retirement account? When you set it up, you took a fairly conservative approach and bought 60% stock mutual funds and 40% bond mutual funds. Over time, the values of those funds have changed, perhaps significantly. Right now, your stock funds might comprise 85% of your account. Great. Excellent gain. But . . . . you are now subjecting yourself to greater risk. You need to rebalance. Now. And at least every six months.

If you’re sitting on an out-of-balance retirement account—or several different retirement accounts—then you are sitting on a Zombie Account. That’s right. That’s what investment advisors call it: an account left for dead, an account that might just rise up (at night, of course) and devour your net worth.

Not a pretty sight, these Zombie accounts . . . .

iStock by Getty Images

Failure to Increase Contributions to Retirement Accounts – Zombie Sign #2

When was the last time you increased your contributions to your retirement account? You’re making more money now. Shouldn’t you be saving more? Yet many people set up retirement accounts in their youth and establish relatively small automatic contributions. But as your income increases, so should your retirement allocations. Under current federal tax law, you can contribute $19,500 to your 401(k) or similar workplace plan; that’s up from $19,000 in 2019. If you’re 50 or older, the catch-up contribution limit is $6,500, up from $6,000 in 2019. “If your employer allows after-tax contributions or you’re self-employed, you can save even more. The overall defined contribution plan limit moves up to $57,000 [in 2020], from $56,000 [in 2019].”[i]

Ask any rich person, “What’s your secret?” One answer they always give: “Save as much as you can. Compounding investment amounts in tax-free accounts can result in large returns when you reach your 60s.”

So any retirement account you have sitting around growing with contributions you made when you were young . . . . Well, that’s a Zombie Account.

Failure to Move Old Retirement Accounts – Zombie Sign #3

Oops, what about that account you set up when you worked for Acme Widgets? Great job, that was. But your current position pays a boatload more. Did you have a retirement account at Acme? The stats should make any working American sit up and take notice. Get this:

A 2013 survey by ING Direct USA showed half of American adults who participated in an employer-sponsored retirement plan, such as a 401(k), have left an account at a previous employer. These “orphaned” accounts represented more than $1 trillion in investment dollars in 2010.[ii] (emphasis added)

You need to launch a search for any Zombie accounts sitting around with previous employers. You can call the Human Resource people at those companies for assistance. You might also get in touch with the Pension Benefit Guaranty Corporation. Or you can check the National Registry of Unclaimed Retirement Benefits at unclaimedretirementbenefits.com. According to the website, “The National Registry is a nationwide, secure database listing of retirement plan account balances that have been left unclaimed by former participants of retirement plans.”

Once you locate these Zombie accounts, you need to roll them over into your current 401(k) or IRA. You should check with an investment advisor or your CPA to make sure you’re performing a tax-free rollover and not a taxable distribution.

Act Now

Anyone with Zombie accounts needs to take the steps we’ve outlined above.

Beating the Zombies

There is a better way. No Zombies can arise in the dark of night from funds we manage at Research Financial Advisors. Check us out here: rfsadvisors.com. When you establish an account with us, we ascertain your comfort level of risk. If you’re relatively young, you should probably use our Aggressive Growth Model where we automatically invest your funds in a variety of ETFs we think show the best chance of growth. Right now, as of August 14, 2020, our Aggressive portfolios are up 23.02% year-to-date, net-of-fees. Yes, you read that right. We’re up 23.02%.

Our more conservative portfolio, consisting of 100% bonds, is designed for those who want to reduce risk and increase income. But the market value of our Bond Model is up 1.62% year-to-date, net-of-fees. And that doesn’t count the income the Bond Model has produced.

Many of our clients choose a mix between the Aggressive Model and the Bond Model. The returns on those accounts are less than the Aggressive results but more than the Bond.

Worried about current market volatility? Afraid of another crash just around the corner? Not a problem here at RFS. We know how to play defense. Consider the recent crash. The all-time high of the S&P 500 Index was February 19th. By March 23, the S&P declined 33.92%. Just 8 days after the S&P all-time high, on February 27, 2020, just before the close at 3:56 p.m., we purchased SPXS for all our accounts (larger amounts in the aggressive funds, smaller amounts in the conservative ones). The SPXS ETF produces three times the inverse of drops in the S&P Index. If the S&P goes down 10%, this ETF goes up 30%.

Our purchase price for SPXS: $16.1189 per ETF.

It’s a risky ETF, and we watch it carefully. After all, when the S&P goes up 10%, this ETF drops 30%. But it performed beautifully in March of this year, and shielded our accounts from gut-wrenching market drops. At 1:06 p.m., on March 23, 2020, the exact date of the S&P 33.92% decline, we sold the SPXS positions, banking a significant profit.

Our selling price for SPXS: $26.28 per ETF.

Today, the SPXS is trading at $5.86 or so. The following chart of SPXS shows how we entered our positions at $16.1189 as the rise started to accelerate Notice that we exited our position on March 23 at $26.28, right near the very top of the spike in price.

Each day, we study charts like the one above. We stay alert, ready for the next market rise or the next market plunge. Will the market go down again? Yes. Absolutely. How much? No one knows. When? No one knows. But we’re ready. We’re nimble. We’ll act and play defense when our indicators tell us a drop is about to morph into a plunge.

So say good-bye to Zombies. At RFS, you’ll never experience a failure to rebalance (Zombie Sign #1), for we constantly review your account and make certain it continues to hold those ETFs best suited to your level of risk. Further, we’ll encourage you to increase your contributions to your account as your salary and other remuneration grow (Zombie Sign #2), making sure you comply with all applicable IRS regulations. And we sure as heck won’t let you forget us (Zombie Sign #3), because we stay in touch with you weekly . . . sometimes daily.

In fact, if you need to get in touch with us quickly, we give out our cell phone numbers: There’s no elevator music on our phone system.

Give Us a Call

So look around your financial world and see if some of your accounts qualify as Zombies. Look for the three signs: accounts not rebalanced, retirement accounts receiving low and out-of-date contributions, and accounts sitting at former employers. Or look at your nonretirement accounts. Do any of them qualify as Zombies?

You may call my cell number right now: (240) 401-2355. We can talk about your situation and look at your various accounts.

After all, doing it yourself can sometimes result in doing yourself in.

Best regards,

Jack Reutemann

 

[1] https://www.forbes.com/sites/ashleaebeling/2019/11/06/irs-announces-higher-2020-retirement-plan-contribution-limits-for-401ks-and-more/#7ecdb4e333bb
[1] https://finance.yahoo.com/news/zombie-401-k-131547647.html

How to Manage Your Money and Your Risk Exposure

Navigating Bear Market 17 & Covid19 Webinar

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This Webinar zeroes in on Technical Analysis and Active Management—two strategies that protect your assets in times of trouble. Our equity portfolio shows positive results year-to-date. It currently leads the S&P 500 Index by double digits.

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Enjoy!​

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Technical analysis is an emotionless investment decision making process that does not allow for getting caught up in the company or industry story. Investments are made through a series of technical factors. The most notable factor is one called “relative strength.” When a security price shows a recognizable pattern of higher highs and higher lows it demonstrates that there is higher demand than supply for that security. This means that the “buyers” are in control and not the “sellers.” While we cannot guarantee investment performance, securities that demonstrate this technical behavior have a higher probably increasing in value.

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The oldest law of economics is supply and demand. At Research Financial Strategies, we place a premium on when to make an investment decision based on price movements using technical analysis. Technical analysis is an emotionless investment decision making process that does not allow for getting caught up in the company or industry story. Investments are made through a series of technical factors. The most notable factor is one called relative strength. When a security price shows a recognizable pattern of higher highs and higher lows it demonstrates that there is higher demand than supply for that security. This means that the buyers are in control and not the sellers.

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Our ability to minimize portfolio risk for our client is a result of having a Sell-Side Discipline. Prior to investing in a security we establish an exit point based on the % of loss or price our investment advisors determine is acceptable. If the security price is violated then it is sold. This ensures that profits are protected for our clients, or worst case, risk to principle is minimized. Only through having an investment approach that has a pre-determined exit strategy for each investment position, can you mitigate portfolio risk during market corrections.

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