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Women and Retirement Challenges

By | 2021, Money Matters, Newsletter | No Comments

The pandemic expanded the chasm women face when planning for retirement. Many women put their careers on hold or significantly reduced their work hours to stay at home becoming educators, primary caregivers, and much more. This has left many feeling ill-prepared for retirement.

Many women, fortunately, had the option to continue working from home. However, according to a report by Qualtrics, only 13% of women working remotely with children at home say they received a pay increase compared to 26% of men. This has only widened the pay gap observed by many working women.

Why is this so important? Women already face many challenges in planning for retirement. Typically, they have shorter career spans, entering the workforce later or working fewer hours while raising a family. They also leave the workforce early to care for aging parents. In both instances, their earning power is impacted and reduces their overall retirement savings and the benefit of long-term compounded growth.

Longevity is another challenge. Women outlive men on average by 5-6 years. When planning for retirement, this means more money is required to provide for those additional years. It is no surprise that 6 women in 10 do not expect their income to last their lifetime. To say it another way, 60% of women expect to run out of money during retirement. It is no wonder women are concerned.

Luckily, it is not all doom and gloom. Women can feel confident about retirement with some advanced planning. A plan will help you understand how your current saving and investing habits will impact your financial goals and can uncover potential shortfalls in retirement income. It will help you determine how to plan for specific milestones and at retirement when to access Social Security to maximize your benefits. It will provide a strategy to manage risk and allocate your assets to outpace inflation. All of this is done with a focus on your personal financial values and goals. Over the following few issues of our Money Matters newsletter, we will dive into some of these planning concerns.

For today, we will start with the most important: saving and investing habits. In the popular book, The Richest Man in Babylon, author George S. Clason points out that a part of everything you earn is yours to keep. This means you need to pay yourself first. Just like you pay your mortgage, utilities, auto loans, etc., start by putting yourself at the top of the budget list. If you are at the top, it is more likely you will get paid. On the other hand, if you put saving at the end of the list, you may not get paid when the money runs thin.   

To have money for future needs, you must love your future self as much as you love yourself today. This might mean giving up a few of the things you enjoy so you can save money for later. However, it is not an all-or-nothing choice. Take, for instance, your retirement savings. Employers provide 401(k), 403(b), or other types of plans where you contribute directly from your paycheck. The employer might sweeten the deal by matching what you put in up to a specific limit. If you are currently saving a percentage of your income, increase that percentage annually or each time you receive a pay increase. Saving 10% to 15% of your income annually will help you prepare for the future and allow you to maintain and enjoy your retirement years.

If you do not have an employer-sponsored plan, do not worry. You can contribute to an IRA or Roth IRA. Here, you can make an annual contribution or, even better, make a monthly contribution. Put everything on autopilot, so you do not have to think about it every month.

The sooner you begin saving and investing, the more compounded growth you will receive. Over time, this can amount to a large part of your nest egg. If you are just out of college with your first job, sign up for your company-sponsored plan. If you are behind the curve and retirement is not too far off, augment your retirement saving with non-retirement accounts. There is no limit on how much you can save in a non-retirement account. There is also no requirement on when or how much money you must take out of the account. You are in complete control.

Now, think about your personal situation. Do you have a plan for the future? Are you saving enough to meet your goals and maintain an enjoyable lifestyle in your retirement years? If you answer these questions with anything other than yes, give us a call. We can help assure you are on track for a successful financial future.

In the next issue of Money Matters, we will cover how inflation impacts retirement income.

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Investment Debate: Stocks or Real Estate

By | 2021, Money Moxie, Newsletter | No Comments

I am often asked if real estate is a better investment than stocks. The answer depends on several variables. Both real estate and stocks have their advantages. They both can offer great returns, passive income, and inflation protection. They also carry their own risks and challenges.

As with any investment opportunity, an understanding of the return potential, the risk involved, and the objective are fundamental to making a wise decision. While real estate and stocks are certainly not the only investment options available, they are the only asset classes that will be considered here.

Unsystematic Risk
One aspect that makes real estate investing difficult to assess generally is that every property is different. Therefore, each investment opportunity must be analyzed by its own unique characteristics. While some properties may provide fantastic returns, others are a bad investment.

Like real estate, stocks also have significant variability in returns. The risk of a poor-performing stock is easily reduced by diversification. Diversification in real estate is challenging, expensive, and for many investors, unattainable.

One of the benefits of investing in real estate is the ability to use leverage. Debt always adds risk to the equation, but debt can be a powerful tool if used properly. Lenders typically require a down payment of at least 20% for an investment property. But that 20% allows the investor to participate in 100% of the property’s appreciation.

Leverage can also be used to purchase stocks, but it is usually not recommended. Margin trading means borrowing money from a broker to purchase stocks. Trading in a margin account increases your purchasing power, but it also amplifies losses.

At one point or another, liquidity becomes important to every investor. Stocks are liquid. If a stock investor needs cash, she can place trades and usually receive the money within a couple of days.

Real estate is not liquid by comparison. In most circumstances, a real estate investor cannot pull cash out of a property without a refinance or complete liquidation. This can be problematic.

A real estate investor has the advantage of deducting expenses to reduce tax liability. He or she can also depreciate the asset over time. This can be beneficial year to year; however, one major problem is the taxes due upon the sale of the property. Depreciation recapture can assess taxes on the depreciation previously claimed, and the appreciation becomes taxable all in the same year as the sale. This can create a significant tax bill. A 1031-exchange defers the tax liability but only if the money is quickly reinvested into a like-kind asset. This does not help an investor looking to cash in on their investment.

Stock investors do not have the ability to deduct expenses or depreciate assets. There are several tax-advantaged accounts that give the investor tax-free or tax-deferred growth. These accounts provide significant control over how and when investments are taxed. When losses occur in taxable accounts, the stock investor can strategically sell to offset gains. They can also sell portions of the portfolio as needed and spread the tax liability over many years, thus reducing the marginal tax rate.

Costs, Fees, and Expenses
Costs, fees, and expenses can significantly eat into returns. The expenses with real estate are significant and impossible to project. Transaction costs are high. Maintenance and repair costs are ongoing. Property taxes, insurance, and possible HOA fees need to be considered. If hired, a property manager will take a good percentage of the profit. If a property goes unrented for a time, monthly costs can significantly increase.

Stocks, on the other hand, have a low barrier to entry, and fees are minimal. Opening a stock account is generally free, and trading costs are zero in many cases. Sales loads, management fees, and annual expenses are all comparably small and remain relatively consistent.

Real estate can be demanding, especially if the investor decides to cut costs by acting as the landlord. Appliance failures and other problems can occur day or night and often require immediate attention. Work, holidays, and family vacations can all be interrupted. Finding renters, enforcing house rules, and property maintenance takes time and energy. Dealing with renters and evictions can be stressful and time-consuming.

Stocks are very low maintenance. Generally, the less attention you give a proper portfolio allocation after purchase, the better.

Both the real estate market and the stock market deal with volatility. Both markets suffer periods of depreciation and loss. But stock market volatility is measured daily and is constantly called to our attention. We cannot escape it. This can lead to emotional volatility, which can result in bad investment decisions.

Real estate volatility is more hidden. An investor may become aware of large swings but is mostly incognizant of market movements.

Historical Returns
According to the Federal Reserve Economic Data website, the S&P 500 index has consistently outperformed the general real estate market. Note, these numbers reflect gross appreciation and do not take into account income or dividends. They also do not consider costs, expenses, or fees (of which real estate has many).

Although I believe stock investing is better suited for most people, the right real estate investment can be advantageous and profitable. Before you make any significant financial decision, reach out to your Private Wealth Manager at Smedley Financial. We can help provide you with the information needed to make the best decision for you.

*Data from Federal Reserve Bank of St. Louis. Returns through March 31, 2021. Investing involves risk, including the potential loss of principal. The S&P 500 index is widely considered to represent the overall U.S. stock market. One cannot invest directly in an index. Diversification does not guarantee positive results. Past performance does not guarantee future results. The opinions and forecasts expressed are those of the author and may not actually come to pass. This information is subject to change at any time, based on changing conditions. This is not a recommendation to purchase any investment.

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Cryptocurrency – a Quick Guide

By | 2021, Money Moxie, Newsletter | No Comments

What are cryptocurrencies?

Completely virtual form of money invented by computer programmers for peer-to-peer digital transactions. Its value is determined by demand.

Digital currency is not ownership of a company like stocks or interest-paying debt like a bond. It is also not a commodity like oil.

How many cryptocurrencies are there?

As of January 2021, there were more than 6,700 (Vanguard). And on May 20, 2021, Jerome Powell said the Federal Reserve would have a U.S. Digital Currency announcement this summer.

Where is cryptocurrency stored?

Cryptocurrencies are stored in “digital wallets,” which are stored somewhere on the internet and act as a virtual bank account.

What is the technology behind it?

Blockchain is the underlying technology that makes cryptocurrency possible, and it is the most interesting part of the innovation. It is a ledger of ownership.

Blockchain supports all kinds of transactions and tracking that go beyond digital currency. It helps track ownership and royalty payments for music and art through non-fungible tokens (NFTs). Blockchain could also help securely share medical data and track greater logistic detail for companies.

How is digital currency used?

A limited number of stores will accept a few types of cryptocurrency as payment. It is more commonly used as a vehicle of speculation by individuals hoping to sell it to someone else for more U.S. dollars.

Those trying to hide transactions from the government find cryptocurrency incredibly alluring as well. For example, the Colonial Pipeline in May 2021 paid hackers nearly $5 million worth of Bitcoin to reopen the gas line operations.

How is digital currency different from regular money?

(1) While images display digital currencies like gold coins, in reality they are not tangible but digital. They exist only on the internet.

(2) Cryptocurrency is more difficult to spend on real goods and services. Cryptocurrency value fluctuates so much that it would be impractical to accept it as payment without calculating its value in U.S. dollars at the moment of a transaction.

(3) The creators are often anonymous. Ongoing management of the currencies has no transparent, central authority.

Cryptocurrency prices fluctuate widely. They may be difficult to sell quickly at a reasonable price. They are not supported by any government, are subject to cybersecurity risks, do not have any intrinsic value, and do not generate any cash flows, dividends, or interest. This article is not a solicitation, offer, or recommendation to buy or sell. There is a potential for loss as well as gain. Past performance is no guarantee of future results.

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Higher Inflation is Here

By | 2021, Money Moxie, Newsletter | No Comments

In 1979, global oil production dropped roughly 4%, primarily due to the revolution in Iran. This triggered panic among Americans who still remembered the shortages of 1973. The price of oil doubled in 12 months as lines started to build at gas stations, sending prices for all kinds of goods through the roof.

Since World War II ended, U.S. inflation has averaged 3.9%. In the decade prior to 1979, prices averaged a 6.6% increase per year. America had not seen back-to-back double-digit inflation since 1920, but in 1980, prices rose another 13.5%, then 10.3% in 1981. We have not seen anything like this since.

Inflation has been incredibly low over the last 40 years, thanks to technology, globalization, demographics, and the Federal Reserve. During this time, inflation has averaged just 2.7%.

Demand and supply of goods are the basics of economic pricing. If either one rises or falls without the other, prices move. When panic demand for supplies hit in the spring of 2020, we did not see huge changes.

We did see a lot of changes in other areas. Oil demand fell around 10%, and the price of oil at one point went negative. On April 20, 2020, the prices of West Texas Intermediate oil fell to -$40 per barrel. Unbelievable! Companies could not give it away. Gas prices stayed positive (around $1.50 per gallon in Utah).

The U.S. government slammed on the economic brakes and then created around $12 trillion to keep things going. That is in an economy that produces less than $22 trillion in a year. It was massive, and it appears to have worked. Now, the government seems to have the economic tiger by the tail. It is hard to say what will happen if it lets go.

As stimulus efforts continue, prices will probably continue to rise. Official inflation came out on May 13, 2021, at 4.2%. That is a long way from 1979 levels, but it is the biggest number in decades. Many of these numbers are being compared to unusually low prices from a year ago. The Fed refers to this as a base effect.

Fed Chair Jerome Powell insists that these significant increases are temporary. If Powell is correct, then I expect we will begin to see price changes calm down by the end of summer. That does not mean prices will fall; it means they should stop rising so quickly. There is also a reasonable chance the Fed is wrong, so I will be keeping an eye on inflation.

*Research by SFS. Data from the Federal Reserve Bank of Minneapolis and the U.S. Bureau of Labor Statistics. Investing involves risk, including the potential loss of principal. The S&P 500 index is widely considered to represent the overall U.S. stock market. One cannot invest directly in an index. Diversification does not guarantee positive results. Past performance does not guarantee future results. The opinions and forecasts expressed are those of the author and may not actually come to pass. This information is subject to change at any time, based upon changing conditions. This is not a recommendation to purchase any type of investment.

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Getting Back to the Office

By | 2021, Executive Message, Money Moxie, Newsletter | No Comments

After a year of change and adaptation, we can see the light at the end of the tunnel. As more of us are vaccinated, we can look forward to better days. For you, it may be gathering with family and friends to renew acquaintances and catch up on life’s changes. For us, it includes getting back to the office with the option to meet with our clients in person. After only a short time, I can personally say it is so good to meet with you face-to-face.

During the pandemic, business for many companies continued virtually – from the newly appointed kitchen and living room offices of their employees. It worked so well that we see a shift in how many companies view office locations and the 9 to 5 workday. Working remotely has become routine, and an office can be anyplace there is access to the internet. Worldwide, employers and employees are managing a new work-life balance.

As the world around us changes and technology advances, we are also adapting. Smedley Financial is adopting a flex schedule for our employees and expanding our ability to work with our clients. You now have the option to meet in person at our office, online via Zoom, or by phone.

The influence of technology in our business is extremely beneficial and helps us work more efficiently. It also provides you with fingertip access to your financial information. New tools, including an iPhone or Android app, allow you to view your accounts at your convenience.

Like many things, technology comes with some downsides. It is easier than ever for scammers to reach unsuspecting victims with nefarious activities. Recently, they have been using technology to impersonate advisors through email and by phone. Please remember, we will never reach out to you by email requesting personal information. Calls you receive from our office will display our company phone number 801-355-8888, even when our team members are working remotely.

Regardless of how we connect, our commitment to you remains the same. You will continue to have an exceptional experience and receive the highest level of service.

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The American Families Plan – the Good, the Bad, and a lot of Debt

By | 2021, Money Moxie, Newsletter | No Comments

The U.S. middle class is shrinking. There has been growing polarization as the rich become richer and the poor become poorer. The Biden administration is proposing the American Families Plan to be a “once in a generation investment to rebuild the middle class and invest in America’s future.”1 Here are some of the key points and their potential impact if the plan is enacted.

Making Education Affordable
The Biden administration plans to make education more affordable and expand opportunity. It is proposing two free years of community college and lower costs for minorities to attend college or a university. The amount of Pell Grants may increase. There could also be universal access to free pre-kindergarten (preschool).

Providing Economic Security for Families
The goal is to make it easier for everyone to have “the opportunity to join the workforce and contribute to the economy.” The plan does this by ensuring that no one earning under 150% of the state median income pays more than 7% of their income on high-quality care for children. The plan also provides paid family and medical leave to care for a new child or for a serious illness.

Expanding Tax Credits to Help Workers and Families
The plan uses tax credits to transfer wealth to those with lower income. It proposes tax credits of up to $8,000 to cover childcare expenses for a family with children under age 13 who make under $125,000. The income phase-out moves from $125,000 to $438,000. The plan also increases child tax credits for the next 5 years from $2,000 per child to $3,600 for children under age 6 and $3,000 if over age 6. It also makes permanent the earned income tax credit for low-income childless workers.

As with all legislation, there would be good, bad, and unintended consequences. We do need a workforce educated for our modern economy. Education is a key to opening opportunities.

Families with children stand to benefit, especially low-income families who would gain access to childcare.

There is some concern that the administration “strongly prefers getting kids out of the home and parents into the workforce.” There is also a concern that “too much focus on federal mandates might be detrimental to the effects on children who otherwise might be raised with the involvement and investment of a parent.”2

Taxes are another concern. Right now, the administration is only planning tax hikes for high-income earners, investors, and corporations. Additionally, the administration is planning an infrastructure spending bill. We are facing a massive national debt that is at $28 trillion and may reach $89 trillion by 2029.3

Social Security and Medicare also have to be fixed. There isn’t a way to tax the “wealthy” enough to account for all of the government spending. As taxes go up, the economy may slow. This could be the unintended consequence that we fear.

Most people agree with the stated goals of this plan: providing education and opportunity. We want to help families have financial security. The challenge is paying for these programs. It will remain to be seen what the final impact is on the economy, the lower and middle classes, and the family as the fabric of society.


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What is the hubbub about cryptocurrency?

By | 2021, Money Matters | No Comments

In 2008, digital currency was invented. Known as cryptocurrency, it is a virtual way to pay for peer-to-peer transactions. Over the past decade, it has gained popularity and is often mentioned in the media. Today, cryptocurrency is a well-known term among investors, and many want to own it simply due to FOMO (Fear of Missing Out). However, many people are not exactly sure what it is, how it works, or something they should have in their portfolio.

As of January 2021, there were over 6700 cryptocurrencies. Bitcoin is the most widely known, but it is just one of many. “Bitcoin” is often used to describe cryptocurrency, like “BAND-AID” is used to describe bandages.

Digital currency derived its name from the technology used to create it. Blockchain technology is the complex encrypted computer code that keeps track of cryptocurrency. It is a database or ledger distributed across a peer-to-peer network that supports all types of transactions. Cryptocurrency is stored in a “digital wallet” on the holder’s computer or phone or in the cloud. This wallet serves as a virtual bank account.

Unlike the money in your local bank account, cryptocurrency cannot be universally used to purchase goods. For example, you cannot use it to pay for groceries or at the local fast-food drive-thru. There has been a lot of promise that it will take off as a form of payment, but there has been little progress at this point. In fact, the price volatility makes cryptocurrency unfeasible for many transactions.

Cryptocurrency is bought and sold directly on crypto exchanges, crypto brokerage platforms, and brokerage kiosks. The price of each cryptocurrency is in constant fluctuation, and while many have experienced recent growth, they can also experience significant losses. One crypto experienced an 83% loss in one year.

Investors need to know that these digital currencies are not a commodity, asset class, or currency, even though they do share some of the characteristics. Unlike stocks and bonds, cryptocurrencies lack intrinsic economic value and generate no cash flows, such as dividends or interest payments. Stocks are purchased to participate in the growth of a company based on the products they make or the services they provide. Cryptocurrencies do not have a central authority to manage them – there is no regulation. They are speculative in nature and generally purchased for potential appreciation.

The five biggest risks of investing in cryptocurrency:

  1. Volatility. Prices are subject to wide fluctuations.
  2. Liquidity risk. It may be difficult to liquidate quickly at a reasonable price.
  3. Lack of regulation. They are not overseen by any government or central bank.
  4. Pricing volatility. No central market for pricing.
  5. Cybersecurity risk. Exchanges and platforms are subject to breaches.

This information is provided for educational purposes only and is not a recommendation to buy or sell any type of investment.  If you would like additional information, please reach out to our wealth management team.

Source: Vanguard, Cryptocurrency | A quick guide to usage and risks

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From Tech-Loving Lockdown to a Stimulus-Charged Reopening?

By | 2021, Money Moxie, Newsletter | No Comments

The stock market does a good job discovering prices, but it gets carried away to extremes by narratives that capture everyone’s attention. When these stories change, the market changes.

In the early days of computing, memory was expensive, and programming in binary code was tedious. To save both money and time, programmers abbreviated years to two digits. For example, the year “1999” would have been recorded as just “99.”

This limitation was widely known going back at least to 1985, but by 1997, it was crunch time. Without a fix, there may or may not have been a valid date in computers for the first day of January 2000. And who would want to be in an elevator or flying in a plane when the clock struck midnight?

This “Year 2000 Problem” became known as Y2K. Companies all over the world were upgrading computer hardware and software in anticipation of Y2K. This further increased the high demand for technology, and the stock market investors were well-aware. It added fuel to the tech-stock fire and caused many to adopt a belief that the best way to make money was in technology stocks.

Covid-19 precautions created a similar tech-heavy narrative to investing in the year 2020. While many of the largest companies profited a great deal from the Covid-lockdown of 2020, investors began to favor any technology companies, even those without profits, by the end of the year.

I decided to go back over the last 20 years to test the idea that the best way to make money is in technology stocks. After all, who could argue that technology companies have not been the most successful since the year 2000? What I found surprised me. From February 2000 to February 2021, the tech-heavy NASDAQ index returned an average of 5.05% per year. How about the more diversified S&P 500? Over the same time, it averaged 5.02%—roughly the same with a lot less volatility.

How could the S&P 500 outperform when “FAANG” (Facebook, Apple, Amazon, Netflix, Google) companies have been so prominent? While these did fine in the early 2000s, the best performing areas were sectors outside of technology.

It is impossible to say exactly what the future will bring, but a change in leadership at some point is inevitable. As we enter the spring of 2021, we may have already seen a change begin. With vaccine distribution, investors have transitioned from a tech-loving lockdown to a stimulus-charged reopening. Only time will tell if this is truly the beginning of new market leadership or if that change won’t come until later.

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Has All This Stimulus Created A Rational Bubble?

By | 2021, Money Moxie, Newsletter | No Comments

One of the most absurd and fascinating financial stories of the pandemic was Hertz. Yes, the Hertz that pre-Covid was the second-largest rental car company. Last April, it had 700,000 vehicles sitting idle and $19 billion in debt! On May 22, 2020, Hertz filed for bankruptcy protection. Then, just a few days later, the stock began a miraculous rise.

Between May 26th and June 8th, Hertz stock rose nearly 1,000%. A savvy investor might think that after all creditors are paid, there may be something left over for stockholders. In reality, Hertz had become one of the first social media stocks of the pandemic.

Individual investors encouraged each other to buy Hertz because it was “going to the moon” and “You Only Live Once,” also known as just YOLO.

Hertz recently announced it might be purchased for just under $5 billion—a number far below the $19 billion in debt. Eventually, investors realized this would happen because the stock could not stay above its June 2020 high. In reality, it is now worth approximately zero.

We have seen the manic rise and fall of many stocks, most of them in January and February of this year and most of them unprofitable. The reasons are complicated, but we will summarize them below:

(1) Gamification of investing with free phone apps
(2) People stuck at home with more free time
(3) Free money from Uncle Sam
(4) Leverage through the use of options
(5) Market makers hedging their risks
(6) Short sellers forced to cover

Let’s focus on the one that impacts all of us as investors: “free money.” The U.S. government has now approved three rounds of stimulus, totaling around $6 trillion. (An additional $4 trillion from the Federal Reserve went into financial markets over the last year.)

As described in the graphic below, the majority of Americans are not planning to spend the stimulus immediately. It has led Americans to save more money in the past year than any other time recorded in U.S. history!

Combine all these savings with reduced household debt, and we get a very flexible consumer. Remember, consumer spending is 69% of the U.S. economy.

Much of these savings will eventually get spent or find their way into investments, which is why some have called the rise in the stock market a “Rational Bubble.”

The health situation has drastically improved since January. While the United States continues to face even more contagious variants of Covid-19, vaccine distribution has substantially expanded. As of March 15th, over 90 million doses had been administered. Plus, approximately 2 million more Americans receive a dose each day.

Nationally, the best-case scenario may be happening. High economic growth (likely to top 6% this year) and low inflation (rising to possibly 3%) make it easier to handle the heavy level of debt. Many states, from New York to California, are easing restrictions. Other, less densely populated states are already way ahead in reopening.

In Utah, the governor thought we would have a massive deficit when shutdowns began last spring. Instead, the state ended up with a $1.5 billion surplus, and in February 2021, Utah had an unemployment rate of just 3.1%.

A year ago, many debated what the financial recovery would look like. Would we have a sharp rebound or a V-shaped bounce, or would it be a slower U-shaped or volatile W-shaped recovery?

The reality has been a letter not previously used to describe economics, but one that I think we will see again in the future. Our current progress has been called a K-shaped recovery because while it has been good for some, it has been difficult for others. As we emerge in Spring 2021, we hope to see more joyful and prosperous times for all.

*Research by SFS. Data from the Federal Reserve Bank of St. Louis. Investing involves risk, including the potential loss of principal. The S&P 500 index is widely considered to represent the overall U.S. stock market. One cannot invest directly in an index. Diversification does not guarantee positive results. Past performance does not guarantee future results. The opinions and forecasts expressed are those of the author and may not actually come to pass. This information is subject to change at any time, based upon changing conditions. This is not a recommendation to purchase any type of investment.

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