News & Insights

I recall a television advertisement years ago featuring legendary investor Peter Lynch. Lynch helped popularize the “growth at a reasonable price” (GARP) strategy that Provident largely follows today, registering a sterling track record as the manager of the Magellan Fund at Fidelity between 1977-1990. This advertisement probably aired toward the end of his tenure with the Magellan Fund. In it he emphasized the link between earnings growth and market performance, saying something along the lines of “earnings drive the market.” As an impressionable youth with an interest in the investment business, this message stuck with me. It is something I think most investors generally understand, but the breakdown in short-term correlation between earnings growth and market performance sometimes obscures the tie between the two.

For example, look at what has happened in markets over the past year and a half. In 2022, earnings for the S&P 500 grew 5%, while the market fell 18%. The story in 2023 has been just the opposite, as earnings for the S&P 500 through the second quarter were down while the market advanced nearly 16%. This is not how celebrated market wizard Peter Lynch told us things work! I’m being facetious because what Lynch implied in the advertisement was that while the link between earnings and the market can be tenuous over any shorter period, it generally holds over the longer-term.

Artificial Intelligence has burst on the scene in 2023, paced by OpenAI, L.P.’s release of ChatGPT (Chat Generative Pre-trained Transformer) last November and Microsoft’s further $10 billion investment in OpenAI that will support incorporating Artificial Intelligence (AI) into current and future products. Investor enthusiasm has been somewhat bubble-like as companies viewed to be on the cutting edge of AI have been rewarded with rich valuations that will only be justified if AI produces profits. It seems that every company has jumped on the AI bandwagon. I can hardly get through the first few minutes of company quarterly earnings or conference presentations without hearing about how they use AI or plan to do so in the future.

For non-investors, I’ve seen and read several articles and blogs speculating that ChatGPT and its further development will eventually lead to Skynet, the fictional conscious-mind AI from the Terminator movies that launched a global nuclear holocaust to destroy its enemy, humanity.

Clients often ask whether Provident can manage the assets in their 401(k) or 403(b) employer-sponsored retirement plans. Until recently, our answer was “no” because we could not trade client accounts custodied outside of Schwab. Assets left behind in a previous employer’s plan could potentially be rolled over into an IRA at Schwab which we could manage. However, with respect to assets in the current employer’s plan the best we could do was to evaluate options and offer a complimentary recommendation for the client to consider. Whether the client acted on those recommendations or revisited the problem in the future as life circumstances changed was beyond our control.

A new technology provider, Pontera, now allows us to trade accounts in employer plans, turning that “no” into a “yes”. Pontera integrates with our reporting system, Tamarac, and allows us to show you a combined portfolio report, including current holdings and historical performance for assets custodied at Schwab alongside those in your employer plan.

Most of you do not know me, but I have been behind the scenes at Provident for almost 25 years. Scott Horsburgh asked me to share my observations with clients following my retirement on June 30th.

When I joined Provident Investment Man­agement in October of 1998, the company was Seger-Elvekrog, named after its founders. I interviewed with Ralph Seger, Maury Elvekrog, and Scott. Ralph was pleasant with his wonderful reassuring smile, and it was apparent his mission was to share his gift of successful investing. Maury was eloquent, easy to talk to, and then presented me with a psychological multiple-choice test with his charming smile.

I recently became an uncle. Meeting my nephew was a great experience. After I held the little guy for as long as he would let me, his parents put him to bed and we talked about newborn things – how he was eating and sleeping, where daycare costs and college savings fit in the budget, etc. I asked my brother if he had increased his life insurance coverage with the new dependent. I was happy to hear that yes, he took care of this a while ago and hadn’t thought much about it since. That’s how it should go. The sooner you set it and forget it, the lower the cost to you. But it’s important to periodically review your life insurance policy as your life progresses.

Life insurance is not the kind of thing we think about every day. There are no news programs dedicated to daily moves in policy rates or conversion options. For most people, life insurance serves to replace income when one passes away. The risk of losing your life in any particular year is low, but the financial severity of the loss is high, larger than the accidental loss of your home or automobile. For risks with those characteristics it’s smart to transfer the risk to a third party. Customers pay the life insurance company a premium to assume that risk.

A new chapter in the history of American bank regulation began the night of Wednesday, March 8. That’s when Silicon Valley Bank revealed that the need to raise cash to meet customer withdrawals forced it to book $2 billion in losses on the sale of securities, leading it to look for more capital. Less than 48 hours later, regulators shut down the bank as it lacked sufficient liquidity to satisfy withdrawal demands. An incredible 96% of its deposits exceeded the FDIC insurance limit of $250,000 per depositor. Shockwaves rippled through the bank system. Clients asked us whether their banks were safe, even behemoth Chase.

Over the past 40 years, we’ve had the “Latin American debt crisis” in the mid-1980s, the “savings and loan crisis” in the late 1980s-early 1990s, the Global Financial Crisis in 2008-2009, and now this mini-crisis. Regulatory changes are made after each one, but we always end up back in the soup!  Many blame this crisis on changes to bank regulations in 2019, but in fact there is plenty of blame to go around.

The original “Setting Every Community Up for Retirement Enhancement Act” (SECURE Act) was signed into law on December 20, 2019. A new bill dubbed Secure Act 2.0, was introduced in November of 2022 and signed into law on December 29, 2022. The intention of the law is to build upon the existing Secure ACT by improving retirement savings opportunities. The recently adopted provisions offer new benefits to employers and employees in order to generate greater participation in retirement plans. Secure Act 2.0 will be a rolling process, where enhanced features will be implemented over the course of several years. There are 90 provisions in the updated Act; we will cover some of the key retirement provisions that have the broadest impact.

Changes to Required Minimum Distributions

The Original Secure Act raised the age for required minimum distributions (RMDs) from Traditional IRA accounts and workplace retirement plans to 72 from 70 ½. Effective January 1, 2023, the age for RMDs has been further increased to 73 and on January 1, 2033, the threshold age for RMDs will be increased to 75. In addition, the penalty for failing to take an RMD decreased to 25% from 50% of the undistributed amount. The penalty is further reduced to 10% if the undistributed portion of the RMD is subsequently taken in a timely manner. As for RMDs from inherited IRAs, these were eliminated with the original Secure Act, the only requirement was that an IRA had to be liquidated by individual beneficiaries within 10 years of the date of the original owner’s death. Secure Act 2.0 lacks clarity whether annual RMDs will be reintroduced alongside the 10 year liquidation requirement. Finally, starting in 2024, Roth accounts in workplace retirement plans will not be subject to RMDs.

We are approaching the ten-year anniver­sary of Detroit’s 2013 bankruptcy filing. In light of 2022’s market downswing, as well as recent high inflation, this could be a useful time to brush up on the history of Detroit’s bankruptcy, as other distressed municipali­ties could find themselves in jeopardy in the future.

With over $15 billion in obligations at the time of filing, Detroit became the biggest municipality in U.S. history to file for Chapter 9 reorganization. Technically, that record still stands today, although in 2016 Puerto Rico began a process resembling bankruptcy, governed by a special act of Congress abbreviated PROMESA. States and territo­ries do not currently have an avenue for bankruptcy, but the path for cities is well established under Chapter 9.

In a reversal of a long, consistent trend, we just experienced a year where “value” stocks outperformed “growth.”  In 2022 the Russell 1000 Pure Value index lost 8% while the Russell 1000 Pure Growth Index fell 38%.

Though they are widely used, I’ve never been fully comfortable with these classifications.  To be fair, the labels serve a purpose, as people generally understand what they mean.  “Value” typically implies something along the lines of a company with a low price-to-earnings ratio or a low price-to-book value.  Growth, I think, is self-explanatory.  While conceding these can be useful labels, they ignore important nuance and can be misleading.

I don’t know about you, but I’d like to put 2022 firmly in the rear-view mirror. The war in Ukraine, inflation, the Federal Reserve’s interest rate increases, bear markets in both stocks and bonds, and the meltdown in the cryptocurrency markets have made 2022 a miserable year for investors.

However, this doesn’t mean we haven’t been working to make Provident a better firm to serve your needs, especially now that interest rates have risen above zero. In the investment community there has been an acronym, “TINA”, to describe the low interest rate environment over last decade – “There Is No Alternative” to stocks.

2022 is shaping up to be tough for investors. However, as the year draws to a close, focusing on short term market performance is not productive. Now is the perfect time to focus on your financial goals and re-evaluate your progress. It is important to take proper steps before year end in order to best position yourself for achieving your goals.

Required Minimum Distributions

If you are 72 or older and have a Traditional IRA or an employer-sponsored retirement plan such as a 401(k) or 403(b) and are retired, you must take a required minimum distribution (RMD) by December 31st each year. The IRS penalty for failing to do so is 50% of the required amount not withdrawn. In addition, an owner of an Inherited IRA that was inherited prior to 2021 is required to take a minimum distribution. The same December 31 deadline and 50% penalty apply to an Inherited IRA. Keep in mind that most custodians do not send out notices about the Inherited IRA RMD; it’s up to the owner in most cases to stay involved with calculating the RMD amount and making sure it is distributed. There is no need to wait until December to take the distribution and risk missing the deadline. The distribution amount is calculated by dividing the prior year-end balance of the account by an IRS estimate of your life expectancy. We calculate the RMD amount you need for your accounts with Provident.

Every couple of years we provide clients with an update on cybersecurity and overall data security. This update comes with two goals: to inform clients on our progress on these fronts and to share with you what we’re seeing in this ongoing battle.

Provident is in the early stages of a cybersecurity consultation with Charles Schwab and our IT partner, N2M Technolo­gies. This project isn’t undertaken as a result of any known problems; rather, it is a proactive effort to identify areas needing improvement. The bad guys keep getting better at hijacking data, so we need to keep improving as well.

I recently presented at the 70th BetterInvesting National Convention (BINC) held in Dallas from June 23rd to 26th. Provident has been a long-time supporter of BetterInvesting (www.betterinvesting.org) and owes its existence to co-founder Ralph Seger, a tireless volunteer and board member who thought BetterInvesting principles could be applied to managing investment portfolios.

I was a member of an investment club in the 1990’s but didn’t know much about the organization behind it that, at the time, was called the National Association of Investors Corporation (NAIC), later renamed BetterInvesting. At BINC each of the more than 300 attendees received a book written by former Detroit Free Press newspaper columnist Mike Wendland. The 2001 book, From little acorns grow: MAIN STREET MILLIONAIRES, was a quick read and a fascinating historical account of NAIC/BetterInvesting.

After languishing as a somewhat obscure instrument since its introduction in 1998, U.S. Series I savings bonds (“I Bonds”) started drawing meaningful attention last year thanks in large part to inflationary pressures and media coverage highlighting its substantial yield for a nearly risk-free investment. The first article I recall seeing was from the Wall Street Journal’s Jason Zweig in May 2021 pointing out features like the 3.54% annualized yield at that time, inflation protection, tax advantages, and the backing of the US. Government. Since then, given inflation readings that have only recently come slightly off 40-year highs, I Bonds purchased through October now promise a 9.62% annualized yield over the next six months. The attractiveness of a government guaranteed instrument generating such a high current yield has driven significant inflows to I Bonds over the past year, and the subject continues to pop up in conversations I have with friends and family. I felt an overview of I Bonds might be helpful for those who were either curious or perhaps remained unaware of their existence.

I Bonds look to be a reasonably attractive investment given the risk/reward tradeoff, but it is worth understanding both the basics behind the bonds and the details of how the variable yield is calculated. The bonds are available to U.S. Citizens, residents, and government employees and are subject to annual purchase limits. You can purchase up to $10,000 per person each calendar year electronically. Another $5,000 in paper I bonds can also be purchased each year using federal income tax refunds. There are ways to stretch the limits, for example, bonds can be purchased for spouses and children, and Treasury also allows the purchase for trusts and estates, which are essentially treated as separate individuals.

In Monopoly, another $200 enters the game whenever a player passes ‘Go’. Over time, the increasing money supply finds its way into property development. Something similar has played out in real life all over the world. Players have recycled a rising money supply into property. Now the game is suddenly getting tougher due to inflation.

Central banks printed enormous amounts of money during the pandemic, which they traded for bonds held on their balance sheets. The U.S. Federal Reserve’s balance sheet more than doubled from $4 trillion to over $8 trillion. The European Central Bank’s balance sheet nearly doubled to €8.5 trillion. The Bank of Japan’s balance sheet rose about 25%, which sounds moderate in comparison but is actually similar in magnitude because after many years of persistent debt monetization the BoJ’s balance sheet was, stupendously, about four times larger relative to GDP prior to the pandemic!

It’s important to have a financial advisor who fits your circumstances. Selecting the right person or organization is a major life decision that can set the course for your future financial security. Imagine Provident didn’t exist. Here would be my list of essential steps that should be taken when evaluating a financial advisor.

One of the first questions to ask is if they follow the Fiduciary or suitability standard of care. The “Fiduciary” or “suitability” standard is the way to go. It requires the advisor to act in the client’s best interest when delivering financial advice. By contrast, the suitability standard means that the advisor is allowed to provide advice not necessarily in the client’s best interest, as long as it is suitable for them.

As a new parent, I’ve spent a lot of time thinking about how to prepare and provide for the newest addition to my family. A child is truly an extraordinary blessing that comes with new opportunities, new responsibilities, and no user manual. While I enjoy the present and each passing milestone, I also spend time considering his future. I’ve taken the same approach with our family’s financial plan to balance present needs and future security.

It’s a good thing kids are cute because they can do a number on even the most finely tuned budget. Based on the USDA’s most recent estimate, a new parent in 2022 can expect to spend roughly $315,000 to raise the child through age 17. This number includes basics like housing, childcare, food, and clothes. It does not include the cost of private, religious, or post-secondary education like college or trade school. According to the National Center for Education Statistics, four years of college at a private university can run $150,000. With inflation measured by the Consumer Price Index not projected to dip below 3% until well into 2023, all these costs will continue to increase.

Once upon a time, IRA distributions were relatively straightforward. Retirees would take distributions based on their life expectancy and that of their primary beneficiary. Distributions would have to begin no later than age 70-1/2, a number etched into our brains. Surviving spouses of deceased IRA owners could roll the IRA into their own. Non-spouse beneficiaries had the option to take distributions over their own life expectancies (so-called “stretch IRAs”). The only noticeable change to distribution rules occurred in 2006 when Congress began allowing charitable contributions directly from IRAs. With that one exception, IRA rules changed very little for decades, until recently.

Beginning in 2020, the SECURE Act introduced a number of changes. The most noticeable change was that the government now incorporated longer life expectancies into IRA distribution schedules, allowing RMDs to begin the year the IRA owner turns 72. Other favorable changes ushered in by this law included allowing employees age 70-1/2 and older to contribute to IRAs, and making part-time employees eligible to participate in 401k plans if they work at least 500 hours for three straight years (versus 1,000 previously).

Two years ago I wrote a Viewpoint entitled A Bad Idea Bubble in which I warned that prices for speculative stocks were coming unglued from reality. I named three specific examples of marginal businesses whose stock prices were being bid up to spectacular heights in a raucous market. In retrospect, I was awfully early in my warning, too early to be useful, like a tornado siren going off days or weeks before the actual twister. After a brief Covid-induced lull in early 2020, the bubble continued to expand.

In early 2021 I checked back in on those three companies in a follow-up Viewpoint called Bubble Fatigue. All three had continued to rise. The party just raged on and on. My theme in Bubble Fatigue was the emotional exhaustion of watching people hypnotized by greed and fantasy throw more and more money after whatever dumb themes happened to be working and, in the process, screw up the game for the rest of us. There is a saying, “price is truth,” which emphasizes that successful investing is buying assets that go up, not having elegant, rational arguments why the assets you own deserve to go up. In a crazy market, insisting that price is truth becomes like gaslighting—a form of psychological abuse in which the abuser stubbornly denies fundamental truth and eventually causes the victim to doubt their own sanity.

Many of us have seen some variation of the following advertisement for an online brokerage: A well-dressed businessperson stands on a busy metropolitan street corner mid-day, carefully surveying the scene. This person, acutely aware of their surroundings, notices what others presumably do not… that an abnormal percentage of people are wearing the same brand of shoes, a brand that is a new entrant to the market! With a slight smile on their face, this very-observant individual logs on to their trading account via their smartphone and buys shares of Company X, the maker of the hot new style of footwear. The ad cuts off there, but we are left to imagine the rich rewards undoubtedly awaiting Mr./Ms. Observant.

Or perhaps you have seen the recent advertisement featuring actor Matt Damon encouraging people to invest in cryptocurrencies. He walks past multiple images in the ad, including a climber summiting Mount Everest and the Wright Brothers, before stopping next to a picture of Mars. He then encourages investment in crypto by saying, “Fortune favors the brave.” The message is clearly, take a chance by being an early adopter and ultimately become a hero!