Broker Check

December Newsletter

December 1, 2023

“Inflation and Longevity Are Here to Stay. Get Prepared”


As I write this letter, many mourn the passing of four American icons who have left their footprint on who we are today; and we are all better off for it, as we prepare for the future! Supreme Court Justice Sandra Day O’Connor lived her ninety-three years working diligently for the Constitutional rights of all women; assuring their equal treatment under the law. She inspired generations of female lawyers – including the five women who served on the high court after her nomination. Over time, she became known as a moderate conservative and often the swing vote on hot-button social issues. Another icon, Rosalynn Carter spent three decades of her 96 years as a dedicated volunteer for Habitat for Humanity and her belief in equal treatment for all, fueled her leadership in issues concerning women’s rights and her advocation for mental health initiatives. 

Henry Kissinger was a master in communication; he is best known for his achievements in global relations with China, where Kissinger occupied a singular role as he was the one American granted consistent access to Beijing's most senior leaders back to Mao Zedong. Kissinger last traveled to China in July, to restore communications ahead of a potential visit to the US from Xi Jinping.  He left us after one hundred years on earth and he will be remembered and admired by world leaders for decades to come.

Last, (but certainly not least), Charlie Munger left Warren Buffett’s side at Berkshire Hathaway at the age of ninety-nine.  I have told many clients and colleagues my Buffett/Munger story from my early CPA days working at Price Waterhouse in Los Angeles. Charlie’s law firm was a client serviced by my boss, Bob Ford, and I was occasionally tasked to hand deliver documents to Charlie, whose office was just down the street from PW. Later, as a new senior accountant at PW, I saw first-hand Charlie convince Warren to purchase See’s Candies Stores in 1972. See’s Candies then contributed over two billion dollars of cumulative earnings for Berkshire over the coming decades. Our firm’s name comes from the Ben Grahm book on investing, subscribed to by Warren and Charlie, The Intelligent Investor. Grahm’s “value investing” premise has proved very instrumental to our success in building our successful equity portfolio.

Our domestic equity portfolio includes a significant allocation to a fund that holds primarily Berkshire stock and the publicly traded companies included in Berkshire’s portfolio of diversified and name-recognized storied companies. Berkshire Hathaway has consistently outperformed the S&P 500 going back to its earliest years in the 1960s.  The SRH Total Return Fund (STEW) has produced a portfolio return of 9.84 percent for the YTD period ended November 30th. The passing of Charlie’s ninety-three-year young mind has NOT impacted our enthusiasm for holding STEW in our portfolio. Berkshire has taken steps to ensure that the Company will continue to be managed by Warren’s hand-piked and seasoned portfolio managers at his passing. Likewise, the Company’s legal structure will ensure continued majority ownership by his family and its management. We believe that the time-tested portfolio management team will continue to produce outsized returns for our managed domestic equity portfolio.

For the same year-to-date period, our aggregate managed portfolio has produced domestic equity portfolio returns of 12.35 percent (roughly 30% of the total portfolio of equity and income investments); lead by our technology fund returning 49.11 percent, driven by the “Magnificent Seven” large-cap technology stocks held in that fund. We are also encouraged by the small-cap fund, Royce Value Trust; the fund we encouraged Roth conversion action earlier this year, due to continuing out-sized returns as the broad market turns upward.

On the income side of the portfolio, the CD/bond ladder has returned 4.81 percent so far this year, with an up-trend driven by current expectations of continued falling interest rates. Similarly, the alternative income portfolio has returned 7.31 percent through November 30th, driven by investments in Business Development Companies (BDCs) providing lending to middle-market companies, as well as by investments in preferred stocks paying attractive dividend rates.

As we continue to focus on the future, we are increasingly concerned about the sustainability of portfolios for clients currently in retirement distribution mode and those that are looking forward to the day they can retire. Most of our clients fall into these two categories. Although our long-term portfolio performance continues to be impressive, the negative effects of the Pandemic period are impacting performance and expectations as a direct result of the overwhelming (and now built-in) inflation and the Fed’s reaction by increasing interest rates which are hamstringing the economy. Inflation is certainly taming, and the Fed has taken its foot off the gas pedal, but the damage has been done. Having said that, the securities markets surged in November with historic gains as investors embraced expectations of economic growth in the future. And, December has started off with a bang, possibly due to a FOMO rally.  However, we do expect the volatility to be with us as our economy deals with growing government deficits as market returns gravitate toward more historic long-term levels.

Our bigger concern now is the expectation of living longer as medical advancements and lifestyle changes almost guarantee living to one hundred, and beyond. Just refer to my opening paragraphs for real examples of such longevity. Many of our retired clients are now in their seventies, eighties and nineties, with a sharp eye on one hundred.  Even Jeannie (in her sixties) is making plans for her one hundredth birthday party! However, even with portfolios regaining double-digit growth levels, sustaining distributions for over thirty years will be a challenge.

Many in our profession have been examining these issues and are sounding the alarm “Rethinking 65” has become the new mantra. Seventy-five is the new sixty-five for retirement.  As advisors, what do we tell our clients?  Living longer will require lower distribution rates and higher equity risk profiles. In response, most client equity risk profiles have now been adjusted to pre-Pandemic levels. Even with the built-in higher cost of everything, some clients are adjusting their distribution rates downward to allow portfolios to recover lost ground from the Pandemic period. Academically, the “risk-free” distribution rate has ratcheted down to three percent of portfolio values. We continue to believe that our portfolio strategies can sustain four percent; but rates higher than four percent may not sustain distribution periods longer than twenty years.  The message is clear: GET PREPARED.  And, for our younger clients and next generation investors: Start early, save more and spend less. 

There are options we are now discussing with retired clients. We traditionally have considered home equity to be what provides for moving into a retirement home or providing for long-term care. Although we have not been big fans of Reverse Mortgages in the past (primarily due to high costs and potentially hidden traps), the newer, more regulated versions of these arrangements have proven to be helpful for some clients. The loan amounts taken are tax-free and the funds can be a source of monthly retirement income. Properly structured, the arrangement can allow for less stress on your investment portfolios, allowing them to grow and sustain longer distribution periods. If you are interested, please start a conversation with either James or me. Also, Laura has a brochure prepared by an independent and objective source that you should read. Reach out to her if you are interested. And know that IIM is not selling reverse mortgage products and that we do not benefit financially from your decision. The concept could add another “leg to your retirement stool” so you can plan for your one hundredth birthday celebration.

During this holiday season, all of us at Intelligent Investment Management wish you and your family health, happiness and longevity.



Intelligent Investment Management, LLP

Stephen Wheeldon, CFP