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How dynamic, risk-managed investment solutions are performing in the current market environment

1st Quarter | 2024

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Current market environment performance of dynamic, risk-managed investment solutions.

By Jerry Wagner

Historically, homes have been a place to live and the cornerstone of personal wealth for many Americans. Most members of the baby boomer generation believe that their home was the best investment they ever made.

And why not? From January 1953 to the present, the median value of a home in America has grown from about $18,000 to approximately $405,000. A member of the baby boomer generation, I bought my first house in June 1974. From then to now, the median price of a U.S. residence has increased over 13 times, a 1,372% gain!

The real estate environment is changing

From the time I knew there was such a thing as homeownership, the advantages of it had been drummed into my head:

  1. Equity growth: Credit Karma reports that according to April 2022 statistics of the Federal Housing Finance Agency (FHFA), “Since 1991, the average annual home price increase has been 4.3%, according to the FHFA. Since 2000, the average rate has been 4.7%. And since 2012, the average rate has been 7.7%.” This steady appreciation helps homeowners build wealth over time.
  2. Tax benefits: Tax incentives for homeowners can significantly reduce annual costs. For example, the IRS allows deductions for mortgage interest up to $750,000 of indebtedness, providing substantial tax relief.
  3. Stability and security: Owning a home offers emotional and financial stability. One financial website concluded, “… Owning a home brings a sense of pride in ownership. You have a tangible asset you are proud of and can create a living space that reflects your personality and lifestyle. Such an accomplishment can provide emotional benefits like increased happiness and well-being.”
  4. Freedom to customize: Unlike renters, homeowners have complete freedom to modify their properties, which can enhance comfort and increase property value.
  5. Forced savings: Paying a mortgage is a form of forced savings, accumulating valuable equity for homeowners, a crucial aspect of building wealth.

Despite these advantages, many members of the younger generations need help to afford or are not interested in homeownership. CNBC reports, “About one in three millennials under the age of 35 owned a home at the end of 2018, according to the U.S. Census Bureau. That number is eight to nine percentage points lower than Baby Boomers and Gen X homeownership rates were at ages 25 to 34.”

The reasons given seem almost the reverse of the boomer generation’s perceived advantages:

  1. High entry costs: The chart above demonstrates that the median home price for new buyers is significantly higher today than for their parents. Since 2019, median home prices have soared over 25%. During this period, mortgage rates have skyrocketed while the inventory of homes for sale has declined.
  2. Student debt: With student debt averaging over $30,000 per borrower, young adults need help saving for a down payment, which impacts their ability to buy homes. According to Bankrate.com, three times as many millennials cite student debt as an obstacle to homeownership compared to older adults (19% to 6%).
  3. Job market volatility: Career flexibility often requires geographic mobility, constraining homeownership. The new job market demands mobility, something that having a mortgage may not allow.
  4. Hidden costs of homeownership: The 2019 Bankrate.com survey found that millennials’ most significant disincentive was the “hidden costs” of homeownership. In addition to principal, interest, taxes, and insurance, home maintenance costs can be substantial. One expert cited in the 2019 survey estimated that homebuyers should set aside at least 1% of the purchase price per year for these costs.
  5. Homeownership isn’t the road to happiness: In 2011, an academic study of 600 women from Ohio found that owning a home did not make them happier. Because they had less leisure time, these homeowners reported that they “derive significantly more pain from their house and home.”

An active approach to homeownership

The chart above demonstrates that real estate doesn’t always rise in value. Like the stock and bond markets, there are periods when you could have sold and bought back into the real estate market years later at a lower price. The chart shows such periods in the 1980s, 1990s, and as recently as the COVID years of the early 2020s. Of course, the most significant downturn occurred in the first decade of this century when a real estate crash sent home prices spiraling lower from 2007 to 2010.

As profitable as homeownership has been in this country, even more value could be created by buying the lows and selling at the highs over the decades. Yet homes are not considered liquid investments. They can remain on the market for long stretches, are subject to economic forces and changing tastes, and incur significant costs for moving and title transfer for buyers and sellers.

For this reason, a home has been historically considered a passive investment. Homeowners usually buy and hold for long periods. According to the National Association of Realtors (NAR), the median American homeowner tenure in 2021 was around 13 years.

But are homes truly a passive investment? Like any worthwhile endeavor, whether a hobby, athletic pursuit, or homeownership, owning a home requires active management. This includes making repairs, renovations, and additions, all of which cost money. Home Advisor’s True Cost survey in 2018 estimated that the annual maintenance costs of owning a home, on average, exceeded $6,600. Neglecting these tasks can decrease a home’s value, even in a rising real estate market.

Unfortunately, some neighborhoods provide a real-life example of what I’m talking about. Hopefully, your area doesn’t include houses like this one, where active management has been absent for decades.

While homeowners can minimize some maintenance costs through do-it-yourself efforts, most tasks require skilled artisans and professionals. These experts restore and beautify our homes while we live there and when we prepare them for sale. They support and grow the value of our homes.

Similarly, financial advisers and the professional money managers they work with play a crucial role in managing your investment portfolio. They assist in choosing and maintaining your investments.

Dynamic, risk-managed investing to build wealth brick by brick

Some advisers manage portfolios rather passively. They allocate the portfolio to investments representing various asset classes and periodically rebalance the allocations to maintain their original percentage ownership. They rely solely on diversification for risk protection. Their approach resembles a handyman performing routine tasks like touching up paint and fixing broken doors.

Then, there are the active risk managers. They go beyond mere repair and maintenance; they also seek to actively manage the risk and returns of investments. Similar to shifting trends in the real estate market, these managers adapt to changes in the financial market environment and manage accordingly.

They are the builders and renovators in the financial service markets. They tear down what doesn’t work and rebuild your portfolio to respond dynamically to current financial market conditions, not just those present on day one of your investment.

Flexible Plan Investments (FPI) is one of these active managers. We create investment strategies set not in concrete but built and rebuilt over time to match the desired level of suitability for clients, as dictated by ever-changing financial market conditions. We establish, maintain, and respond to a security system designed to moderate investment risk while taking advantage of profit opportunities that may be available in the market.

Consider our Classic strategy. While it’s not always on the right side of the market, it successfully avoided significant market declines such as the 1987 one-day 25% stock market crash and most of the COVID-related decline in 2020, quickly reinvesting at the start of the subsequent rally.

2022 was challenging—stocks fell more than 25%, and even longer-term bonds and bond funds, usually havens for retreating stock investors, dropped over 30%. Despite few options for shelter, our active management approach enabled the Classic strategy to minimize losses for the year and capture most of the subsequent stock market recovery.

However, active management involves more than creating a strategy with excellent tactical allocations. Such a strategy can be right in most environments but often wrong when the market environment changes.

To be prepared with a solution for countless variations of good and bad market scenarios, we have created over 100 dynamic, risk-managed strategies over our 43-year history.

But how do you or your financial adviser choose among them? How do you decide which strategies to combine to create a diversified portfolio? When do you stick with the selected strategy or switch to another that better fits the current market?

We developed our Multi-Strategy Portfolios, custom full-service adaptive portfolios, to address those questions and more. These core and explore portfolios come in five suitability profiles and feature the following:

•  Tailored portfolio design.

•  Comprehensive strategy oversight. 

•  Selective strategy integration.

  Precision strategy execution.

•  Responsive strategy adjustment.

Additionally, as these are all Quantified Fee Credit (QFC) strategies, we do not bill the FPI portion of the advisory fee on accounts starting at $100,000 and only a very low part of it on smaller accounts.

There's a famous saying: “A house is made with walls and beams; a home is built with love and dreams.” At FPI, we have a similar belief about our efforts: “Strategies are mixed in portfolios with care, knowing that risk and returns will always be there.” Like building a home filled with love and dreams, crafting strategies that effectively manage risk and return requires diligent, active management.



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