The pain of loss has an impact on us that is at least twice as powerful as the joy of gain.

This potent observation from Daniel Kahneman has implications in nearly every area of our lives, but especially in our finances, where losses and gains are so clearly illuminated numerically.

Last week, we discussed how financial planning is inherently an exercise in mistake management, but the question is still begged, “How do we recover from our mistakes?” So, this week we'll offer a one-step process for recovering from financial screw ups.

And Tony's back, fresh from a five-week sabbatical, to update us on another active week in the markets with some insight he gained from his visit to Alaska.

Thanks for spending a part of your weekend with us in our collective pursuit of financial LIFE planning!

Tim

Tim Maurer, CFP®, RLP®

Chief Advisory Officer

SIGNATUREFD

In this FLiP weekly you'll find:

• Financial LIFE Planning:

  • A One-Step Process For Recovering From Financial Screw Ups

• Quote O' The Week:

  • Martin Luther King, Jr.

• Weekly Market Update:

  • Be Prepared

Financial LIFE Planning

A One-Step Process For Recovering From Financial Screw Ups

The pain of loss has an impact on us that is at least twice as powerful as the joy of gain. This potent observation from Daniel Kahneman has implications in nearly every area of our lives, but especially in our finances, where losses and gains are so clearly illuminated numerically.

We’ve discussed how financial planning is inherently an exercise in mistake management, but the question is still begged, “How do we recover from our mistakes?” Here’s a one-step process for getting back on track:

1. Do the next right thing.

While the recovery movement has mastered this simple maxim, its origin predates Alcoholics Anonymous, I just learned, even as its source was almost anonymous. Would you believe that the eminent psychiatrist Carl Jung responded to letters from random strugglers with life-changing guidance that cost nothing more than a postage stamp?

Indeed, in 1933, Jung responds to Frau V., struggling to find direction in life:

“There is no single, definite way for the individual which is prescribed for him or would be the proper one,” Jung writes.

We need to pause here because within this single statement lies a truth that we, as a community of financial guidance (in which I place the whole of the financial industry and all the self-styled financial gurus out there) have failed to acknowledge:

There is no one way to do financial planning.

It’s not your bank, brokerage firm, or insurance company’s way. It’s not Dave Ramsey or Suze Orman’s way. It’s not even your personal advisor’s way because the optimally positioned advisor acts as a guide, not a dictator.

The whole benefit and point of financial planning isn’t to arrive at a number, but to discern and discover what’s most important to you in life—then, and only then, to enlist your host of financial and other resources to pursue those aims. But I digress.

Jung continues, “But if you want to go your individual way, it is the way you make for yourself, which is never prescribed, which you do not know in advance, and which simply comes into being of itself when you put one foot in front of the other.”

This reminds me of the BAT Success Triangle—Behavior, Attitude, and Technique—that while we too often spin our wheels hunting for the perfect technique or waiting for the epiphany that will right our attitude, it is the simple choice to act (or not), to put one foot in front of the other—that is the foremost requirement for any successful pursuit.

So, how do we know if the step we’re taking is the right one—the perfect one? “And then you know, too, that you cannot know it,” Jung reminds, “but quietly do the next and most necessary thing.”

The implication here is that we know what that “next and most necessary thing” is. And indeed, while the margins of wealth management can get extremely complicated, most of the financial screw-ups that get us in trouble have self-evident solutions. Most of the time, it’s about doing what we know more than knowing what to do.

The reward for doing the next right thing is also often self-evident because “…if you do with conviction the next and most necessary thing, you are always doing something meaningful,” according to Jung.

And don’t we know this to be true? The first day of a new diet, a new gym routine, a new job, a new relationship, or a new financial resolution, always feels right. So, while I have and will continue to unpack the myriad of financial planning possibilities in this column, there will always be steps two through however many, while the first step remains:

Do the next right thing.

Quote O' The Week

Simple, but not easy:

Martin Luther King, Jr.

"You don't have to see the whole staircase, just take the first step."

Weekly Market Update

Despite a big up day for just about everything on Friday, the divergence between large / growth and small / value companies:

• -  0.83%.SPX (500 U.S. large companies)
• + 1.21% IWD (U.S. large value companies)
• + 3.40% IWM (U.S. small companies)
• + 3.99% IWN (U.S. small value companies)
• + 0.35% EFV (International value companies)
• -  0.09% SCZ (International small companies)
• + 0.43% VGIT (U.S. intermediate-term Treasury bonds

Be Prepared

Contributed by Tony Welch, CFA®, CFP®, CMT, Chief Investment Officer, SignatureFD

I just got back last week from a cruise to a few Alaskan ports. We went to Sitka, Skagway, and Juneau. They were stunning. However, I got rained on - a lot. In fact, in all three cities, we were treated to chilly conditions and drizzle for the entirety of our stop. And I must admit that my first inclination was, “How can people live in a place like Sitka where it is raining roughly 2/3 of the days?” But they do.

And we still had a lot of fun. Why didn’t that chilly, unending rain ruin our experience? Because we were prepared. We had layers of attire and rain gear that kept those layers dry. With that preparation, we could enjoy the scenery around us.

We spend a lot of time talking about portfolio growth, but risky assets like stocks don’t just perpetually increment higher. We get bumps along the way. An average year tends to see about three separate 5% corrections, one 10% correction, and in every three years, you could expect a full 20% bear market.

One of the ways you can prepare is to start your portfolio design by fully stocking your Protect and Live buckets before turning to your Grow and Give buckets. We don’t want to have to draw from our Growth strategy during one of those bear markets. Front-end preparation is one of our best defenses against making difficult decisions in real time. That’s true of financial design as much as it is of Alaskan weather.

The Message from Our Indicators

There has been plenty to report on from a political, economic, and market perspective over the past few weeks. But we’ll start with the bottom line – the message from our indicators has not changed. The macro/monetary and trend evidence remain bullish for stocks while the fundamental picture is mixed due to rich valuations and accelerating earnings growth. Fundamentally, the latter somewhat justifies the former. Overall, the evidence leans bullish for stocks, especially relative to bonds.

Now, onto some of the details. From a political perspective, the U.S. presidential race has been eventful. Following the debate, the market began to quickly discount a “Trump” trade. Industries in the Financials sector that may benefit from deregulation rallied strongly, while areas that could experience a tariff headwind, like Luxury Goods, performed poorly. Additionally, small cap stocks have recently been outperforming, while large cap Growth stocks have found themselves in a correction.

The race may have tightened somewhat following Biden’s exit, but we haven’t seen much quality polling data yet with Harris at the top of the ticket to know how much of the gap may or may not have closed. Regardless, if the market senses that Trump is likely to win, potentially bringing both houses of congress along, the aforementioned Trump trade may fully play out before the election. That’s the nature of markets. They discount political events very quickly. And we’re reminded that a similar trade played out in the first several weeks following the election in Trump’s first term, only to give way to the secularly positive fundamental trends of mega cap Technology stocks.

From a macro perspective, the big data release from last week was Q2 GDP. Real GDP surpassed analyst expectations in growing by 2.8% in Q2. Growth was again led by consumer spending, but there were also positive contributions from investment and government spending. However, GDP is not a good leading market indicator as it was reported nearly one month following the quarter and included data from about four months ago. Stocks are constantly looking ahead. That’s why we follow the monetary environment. Fiscal and monetary policy can have a major impact on future growth. The Fed has not cut rates yet, but their preferred gauge of inflation, PCE, was at 2.5% in June. A potential September rate cut remains on the table. Regardless, monetary policy has been far less hostile than in 2022. For now, the economic expansion remains intact, likely supportive of earnings growth.

On that note, the earnings season is well underway. As of Friday, 182 S&P 500 companies had reported, resulting in an earnings growth rate of 8.5%. Sales growth has been 3.9%, so much of the earnings growth comes from profit margin expansion. The Tech sector has been front and center owing to an ongoing correction in stock prices. In reporting thus far, Tech companies have grown earnings by 17%, but that is only on 3.2% revenue growth. That’s a healthy bottom line number, but investors could be questioning the sustainability given soft topline growth. Though missing expectations can lead to some corrective action in the short term, the stock market tends to trend higher in the long term, as long as earnings are not outright contracting.

Finally, from a trend perspective, we like to say that the most sustainable bull markets are broad-based. The post-debate Trump trade and strength in smaller stocks have helped to broaden market participation, despite a correction in Growth stocks. The so-called Magnificent Seven stocks comprise over 30% of the S&P 500 so it would be quite difficult to have a bull market at the index level without their participation. That is a trend we will be watching, but for now, the cyclical bull market does appear intact, and we are encouraged by broadening participation.

Now, back to the Olympics!

Tim