Casey: Hi and welcome. My name is Casey Boland and I'm a Wealth Advisor and partner here with HCM Wealth Advisors. I'm joined today by Doug Johnson, who's our Senior Investment Strategist and partner with HCM Wealth Advisors. Welcome to our webinar, Doug. Great pick by the way, if you'd like to ask a question,
Casey: Go ahead
Doug: No. I was just saying, I know it's not officially summer yet, but it's starting to feel like it outside.
Casey: Yeah. And my garden doesn't look like that by any means. But those tulips that you have, I have to say back in the day in the Dutch republic maybe those could really have fetched a handsome sum. Back during the 17th century, some tulip bulbs sold for more than 10 times the annual income of a skilled artisan. I mean, that could practically buy a home. But that bubble, it burst in a matter of months. And some people refer to the tulip mania as the first economic bubble.
So welcome to our webinar, everybody. If you'd like to ask a question, please go to the bottom of your screen, click on the q and a. There you'll have an opportunity to submit your question and we'll do our best at the end of our webinar to answer those questions.
And these two quotes that you have here, Doug, I thought they were paired perfectly with investing. Looking at quote number one, you really do need to step out of your comfort zone and take risks to realize significant gains.
And that second quote that you have listed there. It was Warren Buffet. And Buffet’s been one of the most disciplined investors, I think, in history, who shared this negative knowledge. It's important not to chase speculative investment trades. Now, part of the reason why we're sharing these pictures of the tulips, it seems like in the last year we see a lot of speculation in asset prices, different securities from stocks being been up on reddit message boards, dues, facts, some different cryptocurrencies. It's okay to play in some of these areas, but make it a very small portion of your assets, Doug, give us an update.
Doug: All right. So we'll start with, everybody's favorite or least favorite topic. Covid update. So if you've been a part of these webinars in the past, you've certainly heard us talk about this and I think it’s very much relevant in the idea that the reflation trade very much depends on a reopening economy.
And we looked at vaccination statistics in the United States last time compared to an emerging market country like India. So I want to go ahead and look at those again and see from April 19th, which was the last time we did the webinar to right now, what are the numbers looking like? So if we start in the top left here, we can see the vaccination numbers on a visual basis going to May 18th.
I know the date on there says May 15. But sometimes when we snip these out the lines move. I can assure you that this date and data is in fact from May 18th. So going back and comparing to April 19. So in the US alone, we had 132 million people that had at least one dose of the vaccine. That’s 40.3% of the population. That's a pretty significant number. Then we have 85 million people that are in fact fully vaccinated. So that's 26% of the population. Those are very strong numbers. And as of that day, we had 70,000 new cases in The United States and that number had been trending down.
If you look then in the bottom left, here's where we have new cases updated as of May 18th. Looking at this week's number, we have 158 million with at least one dose of the vaccine. So 48.2%, up almost 8% from the last time that we looked at these numbers, 124 million who are fully vaccinated, 37.9% of the population. We'll go ahead and call that 38%. So that's an additional 12% of the population that has been fully vaccinated. How is that relating to new case numbers as well? It seems like it's doing what it's supposed to be. The most recent one that we came across was 27,000 new cases.
And in addition, last week we saw the CDC come out with some very I'd call it surprising and aggressive guidelines in terms of reducing the use or the requirement for people to wear masks who have been fully vaccinated. And that is set to go into effect June 2nd in a lot of places. So I'm sure people have seen the literature around that and, seen how that policy has affected them when they've gone out to different locations. Some businesses have chosen to go with the new guidance while others have chosen to kind of stick with the old guidance for now until they're sure that everything is working well.
Now, as we look at a country like India - emerging market country, very large population, very… what's a nice way to say this… They don't have the most sophisticated infrastructure in terms of medical services. So the ability for them to distribute the vaccine on a widespread basis - so far, we haven't seen that. So we go back again last month, when we first touched on this April 19th, 109 million with at least one dose, that's 8% of the population that we're seeing right now. And then 17 million fully vaccinated, only 1.3% of the population in India. So on April 19th, we had 260,000 new cases in that country - a very significant number.
Fast forward to May 18th, we have 144 million with at least one dose; a significant number increased, but only a 2.6% increase on an absolute basis from 8% to 10.6%. So again, moving in the right direction. But as the percentage of population is still very much behind the trajectories, we're seeing in places like the US, the UK, and Israel. Now we look at the new case numbers May 18th. We have 144 million with at least one dose, which is 10.6% of the population. Only a small jump, 40 million fully vaccinated. Only 3% of the population remains fully vaccinated. So compare that to what we saw with The U S on the last slide. It's a pretty significant difference there. And it's showing in the fact that now they have 267,000 new cases and that's actually come down from a peak. I believe it was about 10 days ago, that it was north of 400,000.
The vaccination process continues all over the world, but it's being done at different rates. But what we're seeing so far is encouraging in the sense that it seems like there is a positive correlation with the increase in percentage of population being vaccinated versus the number of new cases that they are seeing.
Now, nothing is set in stone, but if we can continue to move in this direction, I think that is a good thing for reflation, economic reopening, and ultimately the positioning that we have set up in the portfolios at this time.
Now, one thing that we've talked about in the past, but we're going to go through a little bit in more detail today is a concept that I call fun with numbers. And as you can see, we tried to create a font that looks a little cartoonish. It feels a little fun, I guess. But what we're trying to describe here is something called the base effect. And we're going to show a numerical example here and then kind of talk about how that's going to relate to a lot of the data that you're going to see over the next month.
So this is a fictitious company. In 2017, their sales equaled to a hundred; jumped to 2018 sales equal to 105. So the year over year growth, that's 5%. Pretty straightforward. Now we jumped to 2019. The sales have increased to 110. Year over year growth is now 4.8%. So still solid numbers. Now we go to 2020 where sales drop all the way to 50.
The year over year growth at that point becomes negative 54.6, a very big number. Now we go to 2021 and the sales have jumped all the way back up to 110 - everybody's cheering. Year over year growth number comes in at 120%. Everybody goes crazy because that's an outrageous number and we're off to the races.
Well, if we look at 2017 to 2021, the annual growth rate was only 1.92 per year, and we're only really 10% above where we started in 2017. So the base effect is the idea that when you're looking at a lot of the comps that are coming out now, specifically the ones that are year over year, they are all going to be comped against the kind of trough of covid activity. So everything kind of shut down in April, starting to come back in May, but this is going to reverberate through every economic reading that you're going to see over the next two months. So we see the inflation at the very bottom of that slide. This is from Market Watch - US inflation sores in April to a 13 year high.
Okay. So people read that and they think, wow. We're about to go into this massive inflationary environment. And in fact, we may still get there, but you have to remember, you're working off a very depressed number in terms of comping all this stuff. And this doesn't go for inflation. This goes for earnings. Any kind of data that's a year over year number is going to be skewed because of this base effect.
So what is going to be more vital is if these trends continue into the June, July and August months, then we might see some kind of sustainable path. And visually we look at inflation there's a lot of colorful lines on this page. A lot of different ways to read inflation. We'll just focus on the red one, which is core CPI and the one that kind of everybody references.
But what you'll see is a significant uptick in that number. I mean, the line is almost going vertical at this point where we're getting close to touching 3% year over year in terms of inflation. Now it's kind of difficult to see here, the line that proceeds it along with this recession, comes down. But again, that's where you're basing these new columns from.
Now another takeaway from this is that this goes back to January of 90. So you've got 30 years’ worth of data on here. And even with this spike, we're still not really in an area that's an outlier on this chart at all. I mean, we've got 5% inflation back in the early nineties during a recessionary time, but this is not the inflation that you saw in the 1970s. We're going to talk about the seventies in a little bit, but before we jump to the conclusion that massive inflation is at our doorstep and there's nothing we can do about it, we need to take a step back, realize there's some base effects going on here, and there needs to be some follow through with this.
Before we're really running into significant issues with that doesn't mean it's not going to happen, but to jump to conclusions that this is going to be this massive inflationary period, is a little premature, right now.
Employment we've talked about before in detail. And the recent job numbers that came out were very lackluster. They were either the worst or one of the worst readings against economic consensus since the time series even started. So the expectation was for around a million jobs to be added. And the number ended up being around 266,000. A big miss. Now, does that pretend a slowdown in the job market? Probably not. But I think the bigger picture, where are we in this recovery? And if you look at the time series on this chart the two lines that are going to jump out, obviously the 2007 employment recession. So that was a significant recession followed by a very long recovery.
What we have here is a very steep, quick recession with a recovery that started out in a v-shaped manner, but has flattened out a little bit. But I think the main takeaway here is that all of the other job loss recessions post-world war II took a little bit of time before we got back to full employment.
So as long as we're continuing to put positive job numbers, granted, if they're going to be in the 200,000s for the next few months, that's probably not a good sign, but if you're seeing 500, 600, 700, a million jobs being added month over month, that is going to eventually get us back to the level that we were pre Covid.
Now, of course, there's been some chatter around the possibility that some of this has to do with extended unemployment benefits and kind of some of the stimulus packages that have come through from the government. I'm not going to necessarily comment on that because it's hard to determine that, but in a way, some of that could have issues in terms of people, maybe being a little bit hesitant to rush back and seek work at this time. A lot of questions come in regarding valuations and mainly our valuations too high. So two ways to kind of consider this - the left chart is the actual price of the S&P 500 in light blue. Comped against the actual level of earnings per share as an aggregate level.
So what you'll notice in this chart is that these lines don't have to necessarily go on top of each other, but they do tend to touch and cross at different points in the cycle. Now this goes back to 2011, so it is an approximately a 10 year chart. And we see a big gap right now between where the price level is and where earnings are now. We're seeing some very big numbers in terms earnings growth, and don't forget the base effect because that has some issues with this, but earnings are projected to grow very well actually through the end of the year.
So what might happen is that this dark blue line continues on a vertical path. While the light blue line, which is the level of the market, maybe doesn't move as quickly or even flattens out a little bit. And you begin to close that gap between prices and earnings and ultimately valuations become, in some people's eyes a little bit more palatable. And I use the word palatable loosely because you switched to the chart on the right. And you're still seeing levels that are well above what the five-year average pe ratio is, and the 10 year average pe ratio.
Now we've certainly leveled off and this can come down if we get that compression between price and earnings. But as we've said in the past, elevated valuations are not necessarily a good indicator of anything in the short term. What they have done a very good job of is predicting longer term returns in the market.
So if we were going by the historical precedent, what we would see is that when we use today as a starting point in terms of valuations, the next 10 years will likely be below average in terms of equity returns. We've had this conversation with a lot of clients. And the other thing is the sequence of how that happens. You could get, if the average is eight, you could get six every single year for 10 years and there you go. You could get a huge market jump in the first three, followed by a lot of bad years, or you could get vice versa. So there's a lot of ways to get to the average. But that sequencing is very important and something that we talk a lot about when we focus on planning.
Now, one of the quotes in the beginning of the presentation talked a little bit about doing what is comfortable is often not profitable. So for a lot of folks, last year was a very easy exercise to look at growth and some of these profitless tech companies that were booming and saying, okay, the price keeps going up, why would I not start investing in this stuff? Almost letting price dictate the narrative and ignoring kind of common sense at times. So here is an updated version of the profitless tech company chart, which peaked at the beginning of the year and since has fallen off approximately 38% peak to trump.
The point in this is that some of these companies will survive and one or two of them may become the next Amazon, but chances are for every Amazon you're seeing in this list, you're going to see 10 to 15 Cisco. And Cisco is a good company now. It's actually a part of our dividend growth portfolio or has been in the past.
But a lot of people forget in the 2000s, Cisco was set to be the next or the first trillion dollar company. Since then it lost, I believe 70 to 80% of its value and has never recovered in pride and will never recover. So it's important to look at this and remember that speculation needs to be done if at all, in a much more measured fashion. Most people are willing to do it, and it just needs to be done responsibly.
And for the most part, we need to remember that price can distort our view of a lot of things that we may look at and say, what? I know this isn't a good idea, but it keeps making money. So I just got to get in the game. It's almost like that gambling feeling. If you're familiar with the casino, you walk in there, you're kind of milling through and Casey, I don't know if you've ever been in this situation, but you walk into a casino and you say, I've got x amount of money and I'm not going to spend more of it.
Or I'm just coming here tonight. I'm going to have fun. You walk by that craps table and people are just losing their mind and you stand there for a minute and they win. They win. They win! And you know in your mind that statistically, the game is probably going to end at some point, but you just have to get in on the action.
And that is a lot of what took place in this profitless tech company market. And we may be starting to see the beginnings of that possibly in places like the cryptocurrency market, the NFT market, things that we've talked about, but not spend a ton of time diving into.
So just a quick update here year to date equity performance, and the styles that we've mentioned. So at the very top in green, you have I shares value factor. So value again, performing very well here again oday. Moving on down, you've got the Russell 2000, which to note small cap at 12%, you have the broad market right around 10, international, little below that at nine. And then you have vanguard growth, which is kind of a higher quality growth - maybe doesn't include a lot of those profitless tech names, right around 3.4%. So we've gotten into this weird period to where everything has become very sensitive to rates. So rates go up, value goes up, rates go down, growth goes up, and we've kind of got this yo-yo for the past few days.
But in terms of looking at the growth versus value theme, this goes back five years. Shows the total return of the Russell 1000 growth versus the total return of the Russell 1000 value. And we can see while this very much was in favor of growth through a good portion of last year, that trend has turned towards value and continues to work in value's favor.
But again, it's not going to be a straight line. You're going to see days, weeks where this doesn't work out exactly according to value being up every day versus growth. But we think that the conditions right now are in place for this to continue for the foreseeable future.
So one of the topics that we that we mentioned in kind of the preview of this was this idea of stagflation and of all of the “flations” that we talk about mainly inflation and deflation, stagflation could be one of the worst, but it's also one of the least talked about. So we've taken our shot here at the meme culture and created our own on this picture and basically showing a tug of war. Right now on the left side, you've got the inflationary pressures. You've got economic reopen supply chain issues across the board. You have stimulus and money supply growth off the charts, and then you have commodity and housing prices really accelerated. Casey is going to talk a lot about housing here in just a bit.
Then on the other end of this, you've got the deflationary pressures. You have increasing levels of debt, and then you have continued kind of innovation or technology disruption - that's in fact deflationary. And then you have the issue of demographics, kind of the aging population, so to speak, and the rate of trying to replace that, not being as quick as some would hope.
And in the middle of this, which is very interesting, is you have the ten year bond. So for all of the inflationary pressures that we have seen over the past month and kind of the follow through with value assets performing well, you would expect the ten-year Treasury bond yield to move higher, but it actually has not. And in some cases, it’s gone down and, for kind of a summary has gone sideways. So that's a really interesting observation that we're going to continue to pay attention to because the bond market is the biggest and probably the most prominent market in terms of signaling inflation, not only in the US but in the world.
And a lot of other asset classes are priced off the ten-year Treasury rates. So the idea that the ten-year Treasury bond is not necessarily agreeing with all of this data, could tell us that there's something else on the horizon. The bond market's usually very good at sniffing this stuff out.
Now, what I will say is the Fed may have distorted a lot of this, but it's certainly important to pay attention to. And then you've got here watching all this take place, the Fed. who came out yesterday and now is starting to talk about the table discussion. And then you have the idea of stagflation.
So what is stagflation? So stagflation is simply the combination of stagnant economic growth, high unemployment, and high inflation. Now what causes stagflation? You have conflicting policies that promote both expansion and contraction. I know that sounds very counterintuitive, but it can happen.
So right now, you've got the Fed expanding the money supply, but also telling people, hey, we might raise rates. You have economic growth that has been pretty good. Then you have a job report that is lackluster, and then you have the possibility of taxes increasing going forward. So you have those ingredients that are starting to kind of percolate a little bit. And then when was the last time we actually saw stagflation? In the 1970s. Now, Casey, I don't want to out you here, but can you give us any direct experience from the 1970s?
Casey: Unfortunately, I can. The only direct experience I can give had to do more with energy prices at that point in time. And my parents constantly then saying, turn the light off. Turn the light off. We need to save energy. Turn the light off.
Doug: Yeah. And a big part of that period was the issue with oil. There was an oil embargo, there was price fixing, there was a lot of things going on that I don't know that will be repeatable but that certainly had a lot to do with it.
As we think about this, do the conditions for stagflation exists today? At this exact moment, I don't know because we've got good economic growth, we have a low unemployment rate, but from the chart earlier, we saw we can maybe make the argument that unemployment is still high, and then we have inflation beginning to increase.
The possibility of this playing out is real. If you saw a, I don't want to say “double dip recession” because that's too strong, but something along the lines of an economic slowdown, now you're starting to sow the seeds of a stagflationary environment. You look at the cartoon there, stagflation is tough to get away. You can't just yell “shoo” and have it go away. The Fed will put itself in a box if you get to that point, because the way to fight inflation, bad inflation, is to raise rates and. By raising rates aggressively, you're going to tamper growth. We aren’t there yet, but this is definitely something that people should be aware of and have on their radar because it will have, if it does come to fruition, it would have significant impact in the way that portfolios are allocated and how that is approached overall.
One quick chart on rates here. You're seeing the inflation expectation number 2.37. While that's continued to move up, market expectation or market rates (ten-year Treasury) has simply moved sideways. It hasn't really continued to go with the market’s inflation expectations. I like to say somebody's wrong in this. I don’t know who it is. Either inflation expectations are too high, o r the ten-year Treasury rate is too low. And at some point those are going to remedy themselves. And it could have some implications to what we see going forward. But from our perspective, we still see growth being strong. We see a reopening taking place and we see rates eventually continue to move higher, whether that's aggressively higher or slowly higher. We think by the end of the year, based on the numbers we're seeing right now, that's going to eventually reach that point.
Now we talked a little bit about housing earlier. And if some of you recognize the movie this came from and the scene that it came from, Dumb and Dumber, and what it's saying is you got a 520 credit score, you’re telling me there's a chance I can buy a house? And the last time this happened was back in 2007.
So. Casey. Why don’t you fill us in a little bit on the state of the housing market right now? Because I know it's on a lot of people's minds. And I know it has been for the past 10 years.
Casey: Yes. And it's interesting this, the title of the slide with the, from the movie, Dumb and Dumber, it really almost with a movie title, framed very perfectly what was going on at that point in time, because somebody with a 527 credit score could buy a home.
I think you mentioned the acronym to me back then. What was that? That acronym that you mentioned to me?
Doug: NINJA. No income, no job application.
Casey: And you qualify for a home. And you had also something called “Pick a Payment” loan. “Pick a Payment” loan with a fixed rate mortgage where you had various mortgage payment options to choose from, one of which was paying less than the interest on the actual loan. The loan actually increase in value over the course of time, which is absolutely crazy, but that was the housing bubble. And not what was going on back then. As we think about what was going on, then you fast forward to today, the lending standards are much different at this point in time.
We've got a cute little video here that we're going to share with you and go ahead, Doug, and hit play on this. This happens to be a video where it's going to track prices for various countries going back from the year 2000 through 2020.While this is running, I can tell you, lending standards have changed dramatically, and you're going to see now there's changes that occur along the way. And some pretty interesting price drops, and some pretty distinct price increases over the course of time. Wow, I mean, take a look at what's happening with the u s how much it's dropped during the course of the housing crisis there. And now as things start to build back up over time, which you've had very little return from an investment standpoint with housing. Sometimes people look at housing and say, it's my biggest asset. And so they have certain expectations for return, but the reality is over time, probably the best that you can do is get inflationary type of return from your asset.
It's lifestyle choice, it's really not an investment. And look at Canada. My goodness, it's amazing, the increase that occurred in Canada.
All right. Moving on, as we look at the tight housing market that we're seeing right now, and I'm sure you've seen many headlines about the little inventory that's out there in what's occurring.
Let's reflect a little bit on the past. If you look at 2000 to 2007. you had a surge of the home building industry with quite a bit of inventory that was coming on, and then it continued to be high, but unfortunately those numbers stayed high as homeowners were starting to lose their homes during the great financial crisis.
Inventory continue to stay high for a period of time, but then after the great financial crisis may homebuilders were wiped out. You had inventory drop dramatically and that's just been exasperated by COVID inventory. If you look at these tight lending standards now, and these tight homes, if you think about what's happened the last year, who would want to move into an assisted living facility or nursing home during COVID? Who's going to commit to a forever home when it's unclear what remote work is going to look like?
Lending standards, as I mentioned, are much tighter, making more people decide to invest in live in their own homes. If they've seen prices climbs, they're going to invest some funds to make their homes nicer. But all of these factors, you start to get this reluctance that can take on a life of on its own when you're dealing with the tight housing market because there's not a lot of good options out there to buy. So you have these would-be sellers. You get skiddish because you can’t find anything for your next home and they start to back out of the market themselves. It’s a self-reinforcing cycle that happens. Along with that now, we've had mortgage forbearance, and that's extended for June, which means more homes haven’t gone up for sale that normally may have.
You put all these factors together and you have an extremely tight housing market, which unfortunately, due to the basics of economics of supply and demand, home prices have gone way up.
Let's take a look at new homes. I mentioned in the prior slide about the home builders and you can see the devastation from the fallout of a housing bubble. It wiped out so many home builders and many construction workers, they had to go on to other industries. When you look at the drop in the number of new homes built from 2006 to 2010, we were well below the long-term average. And then when you look at and you adjust for population, population’s grown over the years and you look at housing starts because population growing; I mean, we're still below a trend line that is going to take a long time. We need more homes and that's going to be one way that can fix it, but it's going to take a very long time in the cycle, unfortunately, to get there. As frustrating as it's been to seeing home prices skyrocketing recent years, if you're a Cincinnati, we look around the nation and you look at home prices, Cincinnati is actually kind of more in the middle of the mix as we look at the Midwest, and this is a similar trend. We look at other cities here in the region, so on a national basis, boy, it may feel like home prices have gone up a lot and they have, and I'm sure in certain pockets of neighborhoods, more so than others, but on a national basis, it's not been too bad.
Let's transition now from home buying to refinancing. A quick note now, before I get into the next few slides, if you're going to retire in the next few years, and you're thinking about moving or refinancing your mortgage: It's very much in your best interest to get this done before you retire because the paychecks stop.
And one of the main drivers, if you want to get approved for a loan, it's income. We've seen clients that have significant assets - last year, I can think of a specific client and they happen to get purchased. They got bought out. And then unfortunately their job then went away, but they're doing well, they've got significant amount of assets and they looked to refinance, and they can’t! They can’t, even though they've got a significant amount of assets. Upon retiring, you go from paycheck income to portfolio withdrawals as income, and Fannie Mae and Freddie Mac, the primary corporations that are behind dealing with mortgages, they’re going to look at assets a little bit differently than you will. So you might be in a tight window period of time. If you're looking to think about purchasing or refinancing and it's going to tie close to your retirement date, reach out to your HCM Advisor for guidance on this, we'd be glad to help.
Okay. How do you turn a 30 year mortgage into a 40 year mortgage? Well, we're going to run through some quick examples here. The loan amount we're looking at, if you look at option one, looking at a$ 200,000 mortgage, the annual interest rate is 5% over 30 year time period. And you'll see the middle section, the monthly payment is around$ 1,073 and change. If you stuck with this mortgage for 30 years and you made the total payments, you would have paid about$ 386,000 in change in the total interest paid was a little bit over $186,000. Now let's say five years have gone by. Let's look at the bottom part of this section and you have an opportunity to refinance a loan because interest rates had dropped
In the bottom section of this column, you're going to see your balance at year five. You're going to be now having a loan of $183,000 and change. Now, remember you made payments for five years. You've had 60 payments of $1,073. So you've paid over $64,000 in payments and you're valid. It went down by $13,000 or excuse me, $16,000 and change.
At this point in time, we're going to look to refinance. Let's look at the next column. If we look at the next column, we're going to take that $183,000. we're going to refinance it. And again, you're going to do it for 30 years, and now you're starting to see how amortization works.
Amortization with loans, the interest on the loans that you pay more and the payments earlier going to interest in very little or going to the principal part. Now as we make some headway during the course of refinancing down to a 4% loan for five, you're going to see your payment dropped by almost $200. and when we look after another Five years of payments, the loan balance, now we're down to $166,000.
Again, we've made substantial payments for 60 months, but we had to start that clock over again while rates dropped again. Hey, I could refinance get a great deal. Let's get a three and a quarter loan. If we get in three and a quarter loan, now we're in column three. Now we're starting off with that loan at $166,000 again. Check out our monthly payment, it’s dropped down to $723. Basically, we're paying $350 less than our original loan. And if we stick with this mortgage now for those 30 years, we're paid off, but we paid this loan over 40 years and not 30. Is there a better way to optimize when refinancing? Doug, how about we go to the summary slide and the summary slide, I think, can really hit home.
With the summary slide, we're going to compare some options. If we compare option one: option one was, you stuck with the original loan. You were at 5%. You pay over the course of 30 years. At least you have it paid over 30 years, but what you’re dealing with is interest payments of over $186,000. The scenario we just reviewed, we refinanced a few times, but we ended up taking that loan and then we turned it into a 40 year loan and you did save some money, you save some thousands of dollars there. When we look at that option three, the difference with option three was every time we took the extra money we refinanced and we apply it to the mortgage. We kept the mortgage payment always at $1,073 and change. We're comfortable with that, but instead of pocketing the extra money, every time it's similar to, if you've ever been offered whole life insurance versus term insurance. Whole life, the appeal that is that you're going to have some type of investment account that you can draw from. But it's very expensive. In a lot of cases, people are deterred from it. They’ll look and say, “I can buy term insurance. It's much less. I buy term. I save and invest the difference.” How’d that work out? Most of the time, most people don’t save and invest the rest of the money. In option three that's exactly what we did, but here we're applying it to the mortgage.
We paid at the same $1,073, but we're able to accelerate the payment of the mortgage. We've paid it off ultimately in 25 years and we saved almost $64,000. This is a great example of what you can do, what you can talk to a family member about, or suggest that they talk to us. These are things that we can help from a planning perspective. So don’t hesitate to reach out. We're glad to help.
Coming up next week, we've got a cyber security webinar with Dave Hatter. Dave is fantastic. He is eight experts. And I can’t say that. What without, I wish I could, but capital e capital x and the rest of the letters. He’s fantastic. Look out for an email to register.
Now, if you've been paying attention to the news in recent weeks, a major pipeline got hacked, had to pay a ransom of several million dollars. Wish they had Dave on their side. Now, I'm joking there. But the reality is, unfortunately, that this is a problem, and Dave can really offer a lot of great sense solutions, what to watch for, and what to do to help protect yourself. Don’t miss that on this webinar. I look forward to our discussion next week on Wednesday, the 26th at 4 pm.
Doug: And then one more note. The next town hall webinar will not be in June. We are taking a Summer schedule, so to speak, and we're going to do the next one on July 22nd at fouro'clock, which would be our normal time in the month, on a Thursday .
And then to go even further out, we will probably also skip the month of August, into September, and then do those on a monthly basis going forward with the understanding that if anything comes up in the market that we feel is timely or needs to be addressed, we can certainly schedule a webinar or a call with with our clients to address that at the time.
We've got two questions here that I'd like to go ahead and address. The first one is about more specifically towards bond funds. And the question was, there were some specific funds that were put in there and I don’t want to necessarily address those, because we do our best to avoid specific investments in this forum, so I'll certainly follow up with the person who asked this question to give them more detail. But, it was more centered around what type of bond funds would be appropriate for the environment that we're in. And the environment we're in, I think, we could characterize that as an environment where rates are growing, which honestly, for most people, they have not experienced that in a long time.
From our perspective, we've looked at our fixed income allocation in a few different ways, and you've probably heard me talk about the two pillars of fixed investment a lot. You're going to hear me talk about them again right now. You own fixed income for two reasons. One is income. One is safety.
Unfortunately, there hasn't been a lot of income to come by. And now you're seeing an environment where if rates go up, safety might not be there. Especially if the environment involves rates going up and that also affects the equity market. I don’t think you can ever go fully away from a bond allocation that doesn't own some of the we'll call it the index, The Barclays Agg, which I always refer to as the S&P 500 for bonds. But that particular index has some rates sensitivity to it. Year to date, it's down close to 3%. But we've taken a look at that and said, okay, how do we balance interest rate sensitivity with protection and income at the same time? And I think you've got to look at other outcomes. Your shorter duration products, so duration again, just a fancy way to talk about the relationship between price movement and interest rate movement. Bond prices go down when interest rates go up and the duration is the sensitivity. Higher duration, bigger price movement. If you lower your duration, you can take some of that sensitivity out of the portfolio. Now you're also lowering your income, but there that's a trade-off. Some of these strategic bond funds or kind of global macro strategies that we've seen, I think, have been good alternatives for the “core holding.”
They're able to have a little more latitude in what they can do and what they can invest in. A little bit higher level of income, maybe a little bit better rate protection, but ultimately embedded risks that are different from rate risks. You've got things like credit risk, fixed income risk, there's a litany of things.
Balancing those three aspects, rate sensitivity, protection, and income is really the key to doing that. Whether it's short duration, whether it's core, whether it's total bond plus, pick a sponsor, all of those strategies, you're going to do those things in a different way. And there's a place for all of them, but it has to be proportioned in the correct way. You're not overloading yourself with one of those specific risks. Casey, you have anything to add there?
Casey: The only thing I would add is probably predicting the path of interest rates historically has been much more difficult than predicting the path of the stock market. And so sometimes it can be tempting to want to avoid interest rate risk and just have short duration, but then you reduce your return, as you mentioned, with the income. And then, well, if rates are going to be more stable or rates may come down will give me more duration. Well, it's much more difficult than that.
Just like with stock investments, there are many different ways to diversify with bond investments. And diversification is always a key component to investing whether or not only just in stocks, but in bonds as well.
Doug: One last question here, cause I know we're right up against time.
Basically again, along the lines of inflation, what do we see as a more appropriate inflation investment: TIPS, gold, dividend-paying stocks? Again, they all have different features. TIPS have historically been one of those asset classes that sounds really good in theory, but then when you actually own them, they do things that you don’t expect. We talked about this idea of duration, well, TIPS adjust for inflation, but they also have a lot of duration of them. There's been times where rates move higher and the duration kills you, and then you still get an inflation adjustment, but the experience is maybe not what people are expecting.
They make sense in certain spots, but again, for somebody who looks at inflation and says, “It's coming, I'm putting everything in TIPS.” I don’t think that's a good idea.
Gold is also one of those odd asset classes. There was a prominent fund manager, his name is Kyle Bass, and he came up with the quote that “Gold is protection against the stupidity of politicians.”
You can’t go out and print gold, so it has a scarcity aspect to it. At the same time, I can’t go down the street, shave off some, pieces of gold and pay for gas. The takeaway with gold is it's historically been very much inversely correlated to real rates.
When you think of real rates, that's the difference between what the nominal rate is and what the inflation adjust the rate is. If you have high inflation expectations, which is kind of what we have now, and you have lower nominal rates, you get a negative real rate. And the more negative real rates go, the higher gold goes.
But, if the 10-year Treasury starts to move higher and those real rates compress, it's going to be challenging for gold. Owning gold, again, is one of those things where you never want it to be a hundred percent of your portfolio, but holding a little bit in a portfolio, I don’t think it's a bad thing.
And then obviously dividend investing stocks. We've been advocates to those since the beginning of the company, and they do a good job of providing adjusted cash flows over time, that's hopefully growing faster than the rate of inflation, and is dependable. And I know Mike can say that very quickly, rattle off anytime, and I'm trying to learn to do it as quickly as he can, but I can’t quite do it that fast.
I think I touched on the main points there. We have been, and always will be, an advocate of dividend paying stocks. Not only just in an interest rate environment that’s moving higher, but also one that might be moving lower as well. That's it for questions. Again, Casey, thank you again for joining us.
And I'm sure that the cybersecurity webinar next week is going to be interesting. I'll be sure to tune in and I invite everybody on the call to tune in as well. And until July, enjoy the warm weather, stay away from the cicadas and we'll see everybody soon.
Casey: Thanks everybody.