September Newsletter to Clients
Submitted by Moneywatch Advisors on September 6th, 2023Enjoy this month’s edition that features an update on the conversion to Schwab, an explanation of diversification within our portfolios and a reminder that those 50 and older can make catch-up contributions to their retirement accounts.
Schwab: The long-awaited conversion from TD Ameritrade to Schwab occurred over Labor Day weekend. While our team at Moneywatch Advisors will have to get used to slightly new software, you the clients at Moneywatch don’t have to do anything different. You can still access all of your accounts through the Moneywatch portal or directly through Schwab if you have created an account. If not, you can do so here https://client.schwab.com/Login/SignOn/CustomerCenterLogin.aspx.
As always, please call the office with any questions: 859-268-1117.
Portfolio diversification: We often mention the benefits of diversifying our portfolios with mutual funds that are expected to zig when others zag. This month we’ll take a look at the benefits of having a mutual fund(s) that own companies outside the U.S. On your Moneywatch Rebalancing reports this is the International category.
One way to measure the benefits of diversification is by looking at the correlation of the mutual funds we own to each other. What does that mean? Correlation is a statistic that measures the degree to which two investments move in relation to each other. So, if stocks are perfectly correlated – meaning their share prices move in exact tandem – their correlation is 1. If they are perfectly uncorrelated – meaning they move in the exact opposite direction – their correlation is -1.
Over the past 40 years the correlation between U.S. stocks and international stocks has averaged 0.59. This is a moderate correlation. A stronger correlation – meaning stocks move more closely in the same direction – is the relationship between the S&P 500 and small U.S. stocks, which is about 0.8. Owning small U.S. stocks does provide diversification but, historically, not as much as owning international companies.
Currently international stocks, as measured by the MSCI EAFE index of international companies, has a Price/Earnings ration of about 13. This means we pay $13 for $1 of earnings within that stock index. Contrast that with the P/E ratio of almost 19 of the S&P 500 and purchasing international stocks looks like a meaningful discount.
Most of us own the mutual fund T. Rowe Price Overseas Stock Fund (TROSX) in our Individual, IRA, and/or Roth IRA accounts. The fund’s objective is to seek long-term growth and it owns shares of 152 companies such as Nestle, Siemens, Taiwan Semiconductor and ASML Holding. A purchaser of $10,000 of TROSX ten years ago would have a value of $17,274 at the end of July, while a purchaser of the MSCI EAFE stock index of international companies would own $16,934 after the same period. So, TROSX has outperformed its benchmark over the past 10 years. And added diversification to our portfolios too. Of course, past performance is no guarantee of future results.
Reminder: If you are age 50 or over and still working, you may make “catch-up” contributions to your 401k, 403b, 457b. The IRS contribution limit for tax year 2023 is $22,500 and, if 50 or over, you may contribute an additional $7,500 this year for a total of $30,000. Additionally, if you are employed at UK, you may make catch-up contributions to both your 403b and 457b accounts – essentially two years of savings for one year of employment. The catch-up contribution for IRAs is $1,000.
Thank you for your continuing confidence.