Broker Check

January Newsletter 2022

January 3, 2022

It’s Simple: TINA; FOMO; YOLO

To our clients:

 As we ended 2021, celebrating our 25th year of meeting our clients’ financial goals, we were glad to have “closed the books” on a very tumultuous year on many fronts. Although difficult, we more than survived and we were able to celebrate the Holidays with the Joy that gives us Hope for the future. In our continued support of local non-profits, Intelligent Investment Management, LLP, sponsored a Christmas Tree for Community Connections’ Festival of Trees 2021. We were proud to learn that our tree produced funds for this great organization that provides support and opportunities for adults and children with intellectual and developmental disabilities. Jeannie and I created lasting memories watching our wide-eyed grandkids enjoying the excitement of opening presents on Christmas morning which fueled their imaginations with fun and learning. Part of our traditional Christmas is remembering the times gone past of my childhood growing up with the joys of finding in my Christmas sock an orange, a handful of hard candy and a new pair of socks for the year to come. We encourage our kids to understand how fortunate they are to have many toys, new clothes and the material things they enjoy; all the time knowing that there are still many less fortunate souls out there who need our help and love.

Once again, our managed portfolio exceeded our performance expectations for 2021. The year ended with a Santa Claus rally with all major market indices closing near record highs; all despite increasing Virus levels, supply chain issues, run-away inflation fueled by the printing of money at unbelievable rates and announcements by the Fed that interest rates will be increased as many as three times in 2022. Yes, corporate earnings are growing from the massive amounts of consumer and government spending; but equity valuations remain at dizzyingly high multiples for reasons that defy fundamental approaches to valuation. For the year ended December 31, 2021, our aggregate managed portfolio of equity positions returned over twenty-seven percent.  (Led by our alternative equity/inflation hedge category returning over 42%.) For the same period, our aggregate income portfolio returned over nine percent. (Led by our alternative income category, returning almost 19%.)  The net result, after management fees, for our diversified mix of clients was a total portfolio return of almost seventeen percent for the year. These one-year returns are in stark contrast to our average annual returns over the past ten years (with positive returns in eight out of ten years) as follows:  equity returns averaged just over sixteen percent; income returns averaged almost eight percent; and the total, net portfolio return averaged just under ten percent.

When we look back to make sense out of the out-sized 2021 returns, we can see three forces at play that emerged in 2021 primarily driven by a combination of historic low interest rates and the massive amounts of money thrown at all of us to combat the economic downturn resulting from the Virus shutdowns. Large groups of at-home investors clamored to look for alternative returns to near-zero interest rates and new investors used their stimulus payments to “gamble” in the stock market casinos. The returns are therefore partially attributed to TINA (There Is No Alternative); FOMO (Fear of Missing Out); and YOLO (You Only Live Once). With the stimulus spigot being gradually turned off, our expectations for 2022 are more in line with our ten-year average annual returns noted above. We do believe that our economy will come out of Covid and adjust to the higher inflation trends and higher interest rates as consumers continue their spending spree, in part fueled by higher wages and growing confidence in the health of our expanding and robust economy.

We are continuing to make both strategic and tactical changes to our portfolio to stay ahead of the curve. Specifically, we have sold-off all International Equity positions and we are reinvesting the proceeds into the remaining portfolio categories. This decision was not made lightly: studying a combination of demographic forecasts and concern over the lack of capitalism in growing numbers of foreign economies, we see the US economy as being the driver of future returns as our population continues to grow (primarily from immigration) and our entrepreneurs continually find innovative and creative solutions to grow our consumer- based economy. To meet the challenges of growth in excess of inflation and growing needs for meaningful cash flows by our clients in, or near, retirement, we will rebalance all portfolios:

Younger and more aggressive clients:  Total Equities of roughly 60 percent (Domestic Equities at 25%; Alternative Equities at 25%; Global Allocation at 10%)

Older and less aggressive clients:  Total Equities of roughly 50 percent (Domestic Equities at 20%; Alternative Equities at 20%; Global Allocation at 10%)

For all clients, depending on needs for distributable cash flows, the CD/Bond ladder will cover roughly fifty percent of planned-for distributions and the balance will be invested in Alternative Income positions paying generally higher dividend rates.  

As noted above and in several recent monthly letters, our inflation fears have been realized and the investment management challenges have been met head-on through strategic and tactical changes to our managed client portfolios. It is clear that inflation is here to stay and our managed portfolios, our economy and each of our households and businesses will be impacted for the foreseeable future. We have been evaluating the impacts on our business model and have reached the conclusion that we need to marginally increase the first tier of our investment management fees (applicable to all aggregate balances up to $1,000,000), to be able to maintain the level of service our clients have come to expect. Effective January 1st our basic first tier fee will increase by one-quarter of one percent annually. The fee increase will be billed for the first time as of March 31, 2022, for the billing in arrears for the period January first through March thirty-first. Our fee schedule for all balances above one million dollars will remain unchanged at the current reduced percentage rates. In dollar terms, if your aggregate managed balance is one million dollars, the increase in the monthly fee will be $208.33. If your managed balance is five hundred thousand dollars, the monthly increase would be $104.17. Actual balances will of course be used in the billing process. This change will also be reflected in our annually updated Firm Brochure (Form ADV) which you will receive in the next month or so.

2022 will be a very busy year for all of us at Intelligent Investment Management, LLP. To meet the growing needs of our business and our clients, we are undertaking a search for the next generation of investment advisor and another administrative assistant. We are hopeful of finding qualified candidates who are currently here in Durango and can meet our demanding criteria for new team members. If you know of anyone who is looking for a meaningful career path in our industry, please have them contact either James or Laura for an interview.

Lastly, I would be remiss to not acknowledge the devastation and destruction caused by the recent fires in Boulder County. At the invitation of the Bank of Colorado, we are making a donation to the Community Foundation in Boulder as part of the Bank’s generous commitment to match up to $50,000 in donations. We hope that you can join us in this effort to rebuild and help the more than 35,000 individuals impacted by the fires.

In closing, all of us at Intelligent Investment Management, LLP wish you and yours the very Best Wishes for a Happy, Safe and Healthy New Year!

Intelligent Investment Management, LLP