April Newsletter to Clients

Enjoy this month’s edition that features a review of the first quarter’s market returns on stocks and bonds, a note on an interesting Schwab study, and a response to a commonly asked question.

First Quarter Returns

The S&P 500 Index of large, U.S. stocks was up 10.5% during the first quarter of 2024. That’s its best start to a year since 2019 and puts it up five of the past six quarters. That kind of early-year returns historically bodes well for the rest of the year. Since 1950, when the index gains 10% or more in the first quarter, it has finished the year higher 91% of the time. It has also averaged a gain of 6.5% during the remainder of the year.

In addition to the S&P 500, the Russell 2000 of small U.S. stocks gained over 5% during the quarter and international stocks rose almost 6% based on the MSCI EAFE index.

We diversify your portfolios so that when one asset class zigs, hopefully another one zags. Bonds zagged during the first quarter as U.S. Treasury yields rose. As a reminder, bond prices decline as their yields rise. The U.S. Aggregate Bond Index declined 0.78% during the first quarter as the 10-Year Treasury yield rose to 4.363%, its highest level since Nov. 27 of last year.

Schwab Study

Schwab reported that retirement plan participants who were assisted by a financial advisor – blush - had account balances almost twice those who were not. The average balance for advised accounts was $502,424, while non-advised accounts held $270,803.

In addition, advised accounts had a more diversified asset allocation mix and a lower concentration of assets in particular securities, and a lower percentage in cash.

Borrow or Pay Cash?

It isn’t unusual for us to be asked by clients how they should pay for a large expense. Should I pay off my student loans early? Should I pay for this unexpected medical expense with cash or finance it?

The way we try to answer these questions is to compare the cost of the debt with what we would estimate the average annual return to be if the amount were invested over the same time period.

For instance, if someone has two student loans – one with an interest rate of 7% and one at 3% - we would compare those interest rates with expected returns over the next, say, 10 years. The first loan at 7% we would probably recommend the client pay that amount off with cash, if possible, or pay down that loan sooner rather than contribute to a retirement plan. Why? Because the cost of that money is about what we would expect their retirement savings to return on average over the next decade. It is important to still contribute enough to the retirement plan in order to receive the employer’s match, but any savings that could be contributed above that amount should be directed to paying off the higher interest rate student loan.

We would probably recommend paying off the 3% loan on schedule, however, because the client’s money will probably return more over the next decade by being invested than the amount of interest saved if the loan was paid off early.

As always, circumstances differ from client to client so it’s always best for us to talk through your particular situation. Please call when we can help.

Thank you for your continuing confidence.

Ramsey Bova, Owner and President, CFP®