The Fed Just Cut Rates (Again) - Do CDs and Treasuries Still Make Sense?

Contributed by: Mallory Hunt

The Federal Reserve’s recent decision to continue cutting interest rates has left many investors wondering about their next moves and how to adjust their portfolios. Safe investment options like Certificates of Deposit (CDs) and U.S. Treasuries remain viable options for conservative investors seeking stability and predictable income. As interest rates fluctuate, it’s crucial to assess whether now is a good time to invest in these types of investments or if other options might yield better returns based on you and your investment goals. Here’s why we think these instruments are still worth considering and how you can make the most of them in the current economic climate. Let’s break it down.

Understanding CDs & Treasuries

*A Certificate of Deposit (CD) is a time deposit offered by banks that typically provides a fixed interest rate for a specific term, ranging from a few months to several years. CDs are considered low-risk investments, often insured by the FDIC up to $250,000 per person on the account, making them appealing to conservative investors.

U.S. Treasuries are debt securities issued by the United States Department of the Treasury to finance government spending consisting mainly of Treasury Bills (short-term securities that mature in one year or less), Treasury Notes (medium-term securities that mature in 2 to 10 years) & Treasury Bonds (long-term securities that mature in 20-30 years). They are considered one of the safest investments because they are backed by the full faith and credit of the U.S. Government.

Why CDs Are Still a Good Investment

Despite the rate cuts, CDs continue to offer several benefits for conservative investors:

1. Safety and Predictability: CDs provide defined income over a fixed term. If you’re risk-averse or looking to preserve capital, CDs can be a stable option, even in a lower-rate environment.

2. No Market Volatility: Unlike stocks or bonds, CDs are not subject to market fluctuations, making them a reliable choice for those who prefer to avoid risk.

3. Potential for Laddering: With a lower interest rate environment, you might consider a CD ladder strategy, where you stagger the maturity dates of multiple CDs. This allows you to take advantage of potential future rate changes while still securing some cash in safe, interest-bearing accounts.

As with any investment, what may be suitable for one investor might not be ideal for another. CDs do come with their own set of limitations such as potential liquidity constraints (tying up your funds for a predetermined period) or risks related to reinvestment and interest rates. It is crucial to be thoroughly informed on both the advantages and disadvantages of any investment before making a commitment.

The Appeal of U.S. Treasuries

U.S. Treasuries are another safe haven for investors, especially during periods of economic uncertainty:

1. Government-Backed Security: Treasuries are backed by the full faith and credit of the U.S. government, making them one of the safest investments available.

2. Variety of Options: Treasuries come in various maturities, from short-term bills to long-term bonds, allowing you to tailor your investments to your financial goals.

3. Interest Rate Sensitivity: While treasuries’ yields may decrease following a rate cut, they often perform well during economic downturns as investors seek safe assets.

While the recent rate cuts may have reduced the yields on CDs and Treasuries on the front end of the curve, these instruments still offer valuable benefits for conservative investors. In fact, yields on CDs & Treasuries with longer maturities have actually INCREASED since The Fed began their rate cutting cycle. By employing strategies like laddering and diversification, you can navigate the changing interest rate environment and continue to achieve your financial goals. Keep an eye on economic indicators and remain flexible; the investment landscape can change quickly, and adapting your approach can lead to better outcomes. As always, consult with a financial advisor to tailor your investment strategy to your unique situation. Whether you choose CDs, Treasuries, or explore other avenues, making informed decisions is key to achieving your financial goals.

Mallory Hunt is a Portfolio Administrator at Center for Financial Planning, Inc.® She holds her Series 7, 63 and 65 Securities Licenses along with her Life, Accident & Health and Variable Annuities licenses.

This market commentary is provided for information purposes only and is not a complete description of the securities, markets, or developments referred to in this material. Any opinions are those of the author and not necessarily those of Raymond James. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Past performance does not guarantee future results. Diversification and asset allocation do not ensure a profit or protect against a loss.

*Raymond James Financial Services, Inc., is a broker-dealer, is not a bank, and is not an FDIC member. All references to FDIC insurance coverage in relation to Brokered CDs and/or Market-Linked CDs address FDIC insurance coverage, up to applicable limits, at the insured depository institution that is disclosed in the offering documents. FDIC insurance only covers the failure of FDIC-insured depository institutions, not Raymond James Financial Services, Inc. Certain conditions must be satisfied for pass-through FDIC insurance coverage to apply.

The Shortened Trade Settlement Cycle

Contributed by: Mallory Hunt

In the ever-evolving landscape of financial markets, efficiency is the name of the game. Every advancement that streamlines processes not only saves time and resources but also enhances market dynamics. One significant recent development is the shortened trade settlement cycle.

In the past, trade settlements took several days to complete, which meant longer periods of time until you could access your money. On May 28th, 2024, the U.S. Securities and Exchange Commission (SEC) is shortening the settlement cycle from the current two business days (Trade date + 2 or T+2) to one business day (T+1) for most securities transactions, including but not limited to trades for stocks, corporate and municipal bonds, mutual funds, and unit investment trusts (UITs).  

What does this mean for you, and why does it matter? At its core, a shortened settlement cycle reduces the time it takes for a trade to be finalized, allowing you to receive faster payment following the sale of a security. Keep in mind that this also means you will be required to provide funds more promptly following the purchase of a security or interest, which will begin accruing after the settlement date if the debit has yet to be covered. 

While the benefits of shortened settlement cycles are clear, the implementation is not without challenges. Market infrastructure, including trading platforms, clearing and settlement systems, and regulatory frameworks, must adapt to support faster settlement processes effectively by investing in technology and operational enhancements. Coordination between exchanges, clearinghouses, custodians, and regulators is essential to ensure a seamless transition in these processes and compliance with new requirements.

Nevertheless, the benefits of a shorter settlement cycle far outweigh the challenges and are a testament to the industry's ongoing commitment to efficiency and innovation. By streamlining the process of buying and selling securities, market participants can enjoy greater confidence, increased liquidity, and enhanced operational efficiency. You can find more information about this industry-wide change here. As with anything, if you have any questions on this upcoming change, please do not hesitate to reach out to us!

Mallory Hunt is a Portfolio Administrator at Center for Financial Planning, Inc.® She holds her Series 7, 63 and 65 Securities Licenses along with her Life, Accident & Health and Variable Annuities licenses.

The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Mallory Hunt and not necessarily those of Raymond James.

Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. Investment advisory services are offered through Center for Financial Planning, Inc. Center for Financial Planning, Inc. is not a registered broker/dealer and is independent of Raymond James Financial Services.

Five Reasons Supporting the Case for Discretionary Investing

Contributed by: Mallory Hunt

We all lead busy lives. Whether you are getting down to business (in the throes of the grind??) or enjoying your retirement to the fullest, who wants to worry about missing a call from their advisor because something in their portfolio needs to be changed? Perhaps cash needs to be raised to meet that monthly withdrawal to your checking account so you can keep paying your traveling expenses. Or maybe you are still in the saving phase, and money has to be deposited into your investment account to keep pace with your retirement goals. Regardless of your situation, many investors find it challenging to make time to manage their investment portfolios. We would argue that this is far too important to be left for a moment when you happen to have some “spare time” (is that a thing?!). In the dynamic world of finance, making the right investment decisions can be a complex and intimidating task. Discretionary investing emerges as a powerful solution for clients seeking an investment strategy that places the decision-making responsibilities in the hands of seasoned professionals, offering a myriad of benefits that cater to the diverse needs of investors.

What is Discretionary Management?

Discretionary management is the process of delegating day-to-day investment decisions to your financial planner. Establishing an Investment Policy Statement that identifies the guidelines you need your portfolio managed within is the first and arguably the most important step of the process. Investment decisions can then be made on your behalf within the scope of your unique criteria laid out in this statement. Think of it as utilizing a target date strategy in your employer’s 401(k): you tell it how old you are and when you will retire, and Voilà! All of the asset allocation, rebalancing, and buy/sell decisions are made for you.

5 Reasons This Can Be a Suitable Option for Investors:

1. Adaptability to Market Changes: Financial markets are inherently unpredictable, and staying ahead of the curve requires constant vigilance. Discretionary management allows for swift responses to market changes, adjusting and rebalancing portfolios in real-time to capitalize on emerging opportunities or shielding against potential downturns. In the face of evolving market conditions, this adaptability ensures that your investments remain aligned with your financial goals, whether you can be reached or not.

2. Time Efficiency: For many clients, the demands of daily life leave little time for in-depth market research and portfolio management. Discretionary investing provides a welcome solution by freeing clients from the burden of day-to-day decision-making. This frees up your time and allows your focus to be redirected to what’s important to you: your family, your career, and personal pursuits. After all, time is the resource we all struggle to get our hands on. Need I say more?

3. Tailored Approach to Unique Goals: Discretionary investing is NOT a one-size-fits-all strategy. Seasoned investment managers take the time to understand each client’s unique financial goals, risk tolerance, and time horizon. This personalized approach ensures that investment strategies are aligned with the needs outlined in the Investment Policy Statement. Think of this as your customized roadmap to financial success. While this is similar to non-discretionary investing, discretion will allow investment managers the ability to keep your portfolio at this set target in a timely manner through strategic and tactical rebalancing when the markets are changing.

4. Diversification & Risk Management: Successful investing is not solely about maximizing returns but also about minimizing risks. Discretionary management employs strategies to diversify portfolios and manage risk effectively. By expanding investments across various asset classes and geographical regions, we can create a resilient portfolio that can weather market fluctuations and aims to deliver more consistent returns over the long term. Again, while this can also be applicable to non-discretionary management, it comes down to the time efficiency offered by discretionary management to continuously monitor your diversification and risk management with no bother to you.

5. Expert Guidance: Discretionary investing allows clients to tap into the expertise of financial professionals; it’s what we are here for! Financial planners and investment managers bring a wealth of knowledge and experience to the table, navigating the intricacies of the market to make informed decisions on your behalf, with your best interest in mind always. In turn, leaving the decision-making to the professionals may reduce the potential for poor investor behavior. Let those not emotionally charged by fluctuations in the market make decisions on your behalf.

In the fast-paced world of finance, where information overload and market volatility can overwhelm even the most seasoned investors, discretionary investing presents itself as a compelling choice. By entrusting investment decisions to experienced professionals, clients may enjoy soundness, time efficiency, and a tailored approach that empowers their financial future. If you have questions on whether discretionary management suits you and your portfolio, don’t hesitate to contact us. We’d be happy to help you weigh out your options!

Mallory Hunt is a Portfolio Administrator at Center for Financial Planning, Inc.® She holds her Series 7, 63 and 65 Securities Licenses along with her Life, Accident & Health and Variable Annuities licenses.

Keep in mind that discretion may not be appropriate for clients who prefer to participate in investment decisions or maintain concentrated positions. Additionally, discretionary authority may not be possible with certain investing strategies or accounts, such as options or annuities. Another consideration is whether an advisory account is the best option for client or if a brokerage account would be more suitable. Its important to consider all options and speak with a financial advisor about your specific situation.

The information contained in this blog does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Mallory Hunt and not necessarily those of Raymond James. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Every investor's situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. Prior to making an investment decision, please consult with your financial advisor about your individual situation.

Capital Gains: 3 Ways to Avoid Buying a Tax Bill

Contributed by: Mallory Hunt

As you may be aware, when a mutual fund manager sells some of their holdings internally and realizes a gain, they are required to pass this gain on to their shareholders. More specifically, by law and design, registered investment companies are required to pay out 95% of their realized dividends and net capital gains to shareholders on an annual basis. Many of these distributions will occur during November and December. With that in mind, ‘tis the season!  

Many firms have started to publish estimates for what their respective mutual funds may distribute to shareholders in short- and long-term capital gains. Whether or not a capital gains distribution is considered short-term or long-term does not depend on how long you, as the investor, have held the fund; instead, it depends on how long the management firm owned the securities that produced the gain. Investors who hold funds with capital gains distributions in taxable accounts must report them as taxable income even if the money is reinvested in additional fund shares. In tax-advantaged accounts such as IRAs or 401(k)s, capital gains distributions are irrelevant as investors are not required to pay taxes on them as long as no withdrawals are made.

It can be frustrating to know that you may even face a tax bill on a fund with a negative return for the year. There are several reasons why funds may sell holdings and generate capital gains, including but not limited to:

• Increased shareholder redemption activity during a down market. In order to fund these redemptions, funds may need to sell securities, which may, in turn, generate capital gains.

• To reinvest the proceeds in a more attractive opportunity. 

• Concerns about earnings growth (or if a stock has become fully valued in the manager’s opinion).

• Corporate mergers and acquisitions also may result in a taxable sale of shares in the company being acquired. 

Investors concerned about tax exposure may want to consider investing in more tax-efficient equity funds. Such funds tend to be managed to limit capital gain distributions, when possible, by keeping holdings turnover low and harvesting losses to offset realized gains.

Capital gains distributions are a double-edged sword. The good news? The fact that a capital gain needs to be paid out means money has been made on the positions the manager has sold. Yay! The bad news is that the taxman wants to be paid. Boo! Do keep in mind that this is what you have us for, though. We are here to help manage around and alleviate the effect these capital gains distributions may have on you and your portfolio.

WHAT WE CAN DO TO MINIMIZE THE EFFECT OF CAPITAL GAINS DISTRIBUTIONS:

1. Be Conscientious

We exercise care when buying funds at the end of the year, which may mean holding off a couple of days or weeks to purchase a fund in your account in some cases. Why? We do this to avoid paying taxes on gains you didn’t earn. This also allows you to purchase shares at a lower NAV or Net Asset Value.

2. Harvest Losses

Throughout the year, we review accounts for potential loss harvesting opportunities (also known as Tax Loss Harvesting). Where available and when appropriate, we sell holdings we have identified with this potential to realize those losses and offset end of the year gain distributions from fund companies. *See our blog titled “Tax Loss Harvesting: The ‘Silver Lining’ in a Down Market” for more details on this strategy.

3. Be Strategic

We may sell a current investment before its ex-dividend date and purchase a replacement after the ex-dividend date to avoid receiving a company’s dividend payment. Dividends are treated as income by the IRS.

As always, there is a balance to be struck between income tax and prudent investment management, and we are always here to help distinguish.

Mallory Hunt is a Portfolio Administrator at Center for Financial Planning, Inc.® She holds her Series 7, 63 and 65 Securities Licenses along with her Life, Accident & Health and Variable Annuities licenses.

This material is being provided for information purposes only and is not a complete description of all available data necessary for making an investment decision, nor is it a recommendation to buy or sell any investment. Every investor’s situation is unique and you should consider your investment goals, risk tolerance, tax situation and time horizon before making any investment decision. Any opinions are those of Mallory Hunt and not necessarily those of Raymond James. For any specific tax matters, consult a tax professional.

Investors should carefully consider the investment objectives, risks, charges and expenses of mutual funds before investing. The prospectus and summary prospectus contains this and other information about mutual funds. The prospectus and summary prospectus is available from your financial advisor and should be read carefully before investing.

Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. Investment advisory services are offered through Center for Financial Planning, Inc. Center for Financial Planning, Inc. is not a registered broker/dealer and is independent of Raymond James Financial Services.

Tax Loss Harvesting: The “Silver Lining” in a Down Market

Contributed by: Mallory Hunt

"The difference between the tax man and the taxidermist is the taxidermist leaves the skin." Mark Twain

Three to five years ago, we would be singing a different tune, talking about capital gains and how to minimize your tax drag during the bull market. These days, we may be looking at capital losses (like those likely carried over by many investors after 2022) from this tumultuous market. Given the recent market downturn, tax loss harvesting is more popular than ever. While investors can benefit from harvesting losses at any time, down markets may offer even greater opportunities to do so. Investors who hold securities in taxable accounts (i.e., not your retirement accounts) can harvest losses that may benefit them in a couple of different ways depending on their specific situation. So let's look at the ins and outs of the unsung hero and how to use it to your advantage.

What is Tax Loss Harvesting and How Does it Work?

Tax loss harvesting is an investment strategy that can turn a portion of your investment losses into tax offsets. The strategy is implemented by strategically selling stocks or funds at a loss to offset gains you have realized or plan to realize throughout the year from selling other investments. The result? You only need to pay taxes on your net profit or the amount you have gained minus the amount you have lost. In turn, this reduces your tax bill. When and if capital losses are greater than capital gains, investors can deduct up to $3,000 from their taxable income. This applies even if there are no investment gains to minimize for the year, and harvested losses can also be used to offset the taxes paid on ordinary income. If net losses for a particular year exceed $3,000, the balance of those losses can be carried forward and deducted on future tax returns. 

With the proceeds of the investments sold, similar (but not identical) holdings are usually purchased to help ensure your asset allocation and risk profile stay unchanged while you continue to participate in the market. These newly purchased investments are typically held for a short period of time (no less than 30 days) and are then, more often than not, sold to repurchase those holdings that we sold at a loss initially. Do take heed of the wash-sale rule to ensure the proper execution of the strategy. This rule prohibits investors from selling an investment for a loss and replacing it with the same or a "substantially identical" investment 30 days before or after the sale. The IRS provides a substantially identical definition and, unfortunately, has not been very clear on what is determined to fall into that category, leaving a lot of gray area. If the same investment is purchased before the wash sale period has expired, you can no longer write off the loss. However, the opportunity is not lost as the loss will be added back to the cost basis of the position, and the opportunity to harvest the loss at a later date is still an option.

Additional Considerations

Keep in mind that your capital gains taxes on any profits are based on how long you have held an asset. Long-term holdings held for one year or more will be taxed at long-term capital gains tax rates (0%, 15%, or 20%, depending on your taxable income and filing status), which generally tend to be lower than short-term capital gains tax rates. Short-term assets held for less than one year will be taxed at the same rate as your ordinary income (10%-37%). Investors in higher tax brackets will see the most significant benefits from tax loss harvesting as they will save more by minimizing taxable gains.

If you want to harvest losses, transactions must be completed by the end of the year you wish to realize the losses. For example, if you want to harvest losses from 2021, transactions would have needed to be completed by December 31, 2021.

In the end, tax loss harvesting is one way for investors to keep more of their investment earnings. According to researchers at MIT & Chapman University, tax loss harvesting was calculated to yield, on average, an additional 1.08% annual return each year from 1926 to 2018*. Overall, this is a time-tested strategy and potentially helpful tool, particularly during down markets. Consider speaking to your Financial Planner about how they implement this strategy, and always consult a tax advisor about your particular tax situation.

*Source: https://alo.mit.edu/wp-content/uploads/2020/07/An-Empirical-Evaluation-of-Tax-Loss-Harvesting-Alpha.pdf

Mallory Hunt is a Portfolio Administrator at Center for Financial Planning, Inc.® She holds her Series 7, 63 and 65 Securities Licenses along with her Life, Accident & Health and Variable Annuities licenses.

While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.

The information contained in this letter does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Mallory Hunt, and not necessarily those of Raymond James. Expression of opinion are as of this date and are subject to change without notice. There is no guarantee that these statement, opinions or forecasts provided herein will prove to be correct. Investing involves risk and you may incur a profit or loss regardless of strategy selected, including diversification and asset allocation. Individual investor’s results will vary. Past performance does not guarantee future results. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation.

Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. Investment advisory services are offered through Center for Financial Planning, Inc. Center for Financial Planning, Inc. is not a registered broker/dealer and is independent of Raymond James Financial Services.

Put On Your Boxing Gloves: Active v. Passive Management

Contributed by: Mallory Hunt

Tale as old as time? Not quite, but the active vs. passive management debate is a familiar one in the financial industry. An already intense deliberation has turned up the heat a couple of notches during the most recent market turmoil. So which one wins, and how does it affect you and your portfolio? Let’s start with the basics.

Active Management- What Is It?

Active management is an investment strategy in which a portfolio manager’s goal is to beat the market, take on less risk than the market, or outperform specific benchmarks. This strategy tends to be more expensive than passive management due mainly to the analysts and portfolio managers behind the scenes doing the research and frequent trading in the portfolios. 

When the market is volatile (sound familiar?), active managers have had more success in beating the market and those benchmarks. Scott Ford, the president of affluent wealth management at US Bank, claims that “active managers probably do their best work in times like this of market dislocation and stress.” In the first half of 2022, 58% of large-cap mutual funds were beating their respective benchmarks.

Even after the decline throughout the rest of the year, actively managed funds were down roughly 5% less than the S&P 500 over that same period. Much can be said regarding outperforming on the downside, and risk management is one of the potential extras investors may receive with active funds.

And Passive Management?

On the other hand, passive management is an investment strategy that focuses more on mirroring the return pattern of certain indexes and providing broad market exposure versus outperformance or risk mitigation. 

Conversely to active management, with no one handpicking stocks and trading happening less frequently, this allows passive funds to pass on lower costs to the investor and tends to assist in outperformance when put up against active funds in the long term. These funds tend to be more tax efficient and do not typically rack up much in terms of unexpected capital gains bills unless you are exiting the position, giving you control over when the capital gains are taken. In turn, the less frequent oversight provides little with regard to risk management, as investors own the best and worst companies of the index that the fund tracks. 

This easy, cheap exposure to an index has caused an influx of funds over the past four years or so, and we are at a point where passive funds (black line) have actually superseded active funds (yellow line) in the US domestic equity market as evidenced by the graph below.

So, Whose Time Is It to Shine?

As with most things, while both strategies have advantages and disadvantages, the answer may not be so black and white. The question may not be active OR passive, yet a combination of the two; this does not have to be an either/or choice. We have extensively researched the topic and implemented a balanced approach between the two in our portfolios.

Just as the market is cyclical, so is that of active and passive management. Both skilled active management and passive investing could play an important role in your investment strategy. This can be even more applicable after periods of volatility, as investors close in on meeting their investment goals.

In certain asset classes, such as US Large stocks, consistently achieving outperformance for active managers has proven more complicated, and it may make sense to rely more on passive funds. In areas like International stocks and emerging markets, it may be helpful to depend on active management where it has historically proven more beneficial.

When all is said and done, there will never be an exact strategy that works for everyone; the correct mix will still depend on you and your investment goals on a case-by-case basis.

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Source: “Active vs. Passive: Market Pros Weigh In on the Best Strategy for Retail Investors”, Bloomberg News August 2022 

Mallory Hunt is a Portfolio Administrator at Center for Financial Planning, Inc.® She holds her Series 7, 63 and 65 Securities Licenses along with her Life, Accident & Health and Variable Annuities licenses.

The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of the Mallory Hunt, and not necessarily those of Raymond James. Investing involves risk and you may incur a profit or loss regardless of strategy selected, including diversification and asset allocation. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor's results will vary. The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market. Past performance may not be indicative of future results.

Securities offered through Raymond James Financial Services, Inc., member FINRA/SIPC. Investment advisory services are offered through Center for Financial Planning, Inc. Center for Financial Planning, Inc. is not a registered broker/dealer and is independent of Raymond James Financial Services.