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Market & Investment Allocation Update

August 16, 2022

Greetings! Just a quick update to let you know a couple of things we’re thinking about as we continue to remain all in cash.

Thoughts on Stocks

First, we’re watching the stock market very closely. The rally that’s taken place the last several weeks could mean the bottom is in but it’s also very suspect. We’re continuing to exercise patience rather then put capital at risk at these short-term lofty levels.

The most probable next leg for the stock market is a selloff to the mean at a minimum. Once that happens then we’ll need to determine if it’s headed back down to retest the lows from June or if it’s a longer-term buying opportunity. Please take a look at my last letter sent on July 29th for a more in-depth look at the roadmap we see for stocks for the rest of the year.

Thoughts on Income Opportunities

With interest rates having risen significantly this year, there are definitely opportunities to allocate capital to areas of the market that generate income. The reason we haven’t put money to work in those areas yet is this:

Say we buy a short-term treasury exchange traded fund (ETF) that has a hypothetical yield of 3%. The 3% is great. But if short-term interest rates go up, the price value of that ETF holding will go down - possibly as much or more then the income we might have received from the position turning it into a net negative for your portfolio rather than a net positive.

There’s other things we could buy besides short-term treasury ETFs. We could buy individual treasury notes or bonds that have a maturity date or individual corporate bonds. However, with all of those, if interest rates actually go up then we’d take a hit on the value of whatever we bought, possibly a short-term hit that goes away at maturity but still a hit.

Structured notes are another strategy we’re seriously considering allocating capital to. They can pay coupons significantly more than the one in my example above, but if interest rates do go up and the stock market does come down, it would have been better to purchase structured notes after that happens, if it does. (I plan to do a more in-depth letter on structured notes in the future to help you understand them more.)

Near-term, we are concerned about interest rates going up more creating this slightly negative short-term outcome I describe. So we’re watching rates closely before taking advantage of these opportunities. That being said, these opportunities are something we’re very interested in acting on, possibly very soon, and we will do so when we believe it is the right time.

I welcome any questions that you have.

David W. Shepherd Jr. CFP®

6300 E El Dorado Plaza, Suite A200
Tucson, AZ 85715
Phone: 520-325-1600
Fax: 520-325-9097

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