Topic: Investing Strategies

  • Rethinking Compounding: A Dual Lens on Wealth and Life

    Compounding is often viewed through the financial lens, but its magic can extend far beyond money and can be instrumental in shaping a richer life.  In this reflection, we will explore two powerful forms of compounding that intersect in remarkable ways.

    1. The Financial and Mathematical Power of Compounding
    2. The Human Potential Behind Goals, Growth, and Purpose

    Compounding Wealth

    First, financial compounding is the amazing ability to make money with money over time.  Albert Einstein famously said that “compounding interest is the eighth wonder of the world. He who understands it, earns it…he who doesn’t…pays it”. 

    The beauty lies in the math of compounding: 

    1 → 2 → 4 → 8 → 16 → 32

    Said differently in financial terms:

    $100,000 → $200,000 → $400,000 → $800,000 → $1,600,000 → $3,200,000

    This illustration shows us the importance of getting the process started as soon as possible.  That is why time is arguably the most important variable in the compounding equation. 

    The Rule of 72 is a simple way to figure out how long it would take to double your money at a specific rate of return.  If your money is earning 7%, dividing 72 by 7% shows your money will double roughly every 10.3 years.  At 9%, $1,600,000 will double in 8 years to $3,200,000. 

    Fundamentally, compounding relies on rate of return, time, discipline, risk/reward, and strategic asset allocation.  But the real ‘secret sauce’ is truly your savings rate.  You must save consistently to unlock compounding’s full potential.  For instance: setting up systematic monthly contributions to your 401(k), brokerage account, Roth IRA, 529 plan; and letting the process do the heavy lifting.

    Financial freedom doesn’t come from what you earn – it comes from what you save and own.

    Compounding Life: Growing Joy, Purpose, and Momentum

    Wealth is not the only thing that compounds.  In fact, the most meaningful kind of compounding happens when you apply the same principles to your life. 

    What are you really saving for? 

    What matters most to you?

    What is your why? 

    Just as money compounds, so do tiny efforts in the areas that can help maximize life:  

    • Learning something new (e.g., language, sport, hobby)
    • Building strong relationships (family/friends/colleagues)
    • Prioritizing health and mindset
    • Creating memorable experiences
    • Growing a business or team
    • Surrounding yourself with positive growth-minded people
    • Volunteering, mentoring, or giving back to others in your community

    Small daily actions like reading ten pages of a book in an evening, having one thoughtful conversation, taking a walk around the neighborhood with your significant other – they may seem insignificant in the moment, but over time these tiny wins snowball into momentum, resilience, and joy.

    Imagine planting a single acorn as your first “learning seed”.  You water it daily by practicing that new skill or reading/asking questions or simply staying curious.  At first, there is no sign of progress.  But then, a shoot appears.  A few leaves and a tiny tree.

    Decades later, that acorn becomes a mighty oak – a living testament to your consistency and care.  The leaves?  They’re the skills you’ve learned, the insights you’ve gained, the confidence you’ve earned. 

    The Parallel Truth

    Compounding in finance teaches us that lasting wealth is built quietly over time and not through quick wins.  The same is true in life. Whether in dollars or days, the power of compounding rewards those who begin early, act consistently, and stay the course. 

    Whether you are saving for retirement or learning to play the piano, the formula is similar:

    Start now.  Have a plan. Stay consistent.  Be patient.  Water the seed!

    Do you have a plan for maximizing your life?  Act now.   

    Sources: The Psychology of Money (Morgan Housel), Rethinking Investing (Charles D. Ellis), Simple Wealth, Inevitable Wealth (Nick Murray), Mindset (Carol S. Dweck).

    Zac Saunders
    About the Author

    Known for his professionalism and calming demeanor, Zac is focused on helping his clients reach their financial goals through comprehensive financial planning and unbiased guidance.  Zac and his team support and care for the overall financial well-being of their clients.

  • 5 Key Steps to Help Ensure Your Financial Plan Informs Your Investments

    Investing can be a powerful tool for building wealth and helping to secure financial stability, but to maximize its benefits, it should be aligned with your personal financial goals. A Financial Plan, supported by the professional guidance of a Wealth Management firm, such as Confluence Financial Partners, can help your portfolio reflect your long-term aspirations. Here are a few key steps to help make sure your financial plan drives your investing decisions.

    1. Define Your Financial Goals

    Before diving into investing or reassessing your current investments, it is best to establish clear financial objectives. Are you investing for retirement, a major purchase, or perhaps even leaving a legacy for your children? Whatever your objectives are, you should evaluate your existing investments to ensure they still align. A Certified Financial Planner (CFP) or Financial Advisor can help you set realistic, time-bound goals that serve as a foundation for your investment strategy.

    2. Develop a Financial Plan

    A well-crafted financial plan can serve as the foundation of a successful investment strategy. It starts with a clear understanding of your financial goals, risk tolerance, and time horizon. A comprehensive plan should incorporate key elements such as budgeting, debt management, savings, and insurance to establish a strong financial footing. It should also define both short-term and long-term objectives, providing a structured roadmap for building and preserving wealth. By thoroughly evaluating your current financial situation and anticipating future needs, a strategic plan can empower you to make informed investment decisions that support your overall financial well-being.

    Confluence Financial Partners takes a holistic approach to financial planning and can help provide you with actionable steps to integrate the aspects of your financial life seamlessly. Rather than viewing investments in isolation, Confluence works to align them with cash flow management, tax strategies, estate planning, and risk mitigation to create a cohesive and strategic path toward your goals. This coordinated approach can help maximize wealth accumulation and long-term financial security, give you clarity and confidence in your decisions. With a well-defined plan in place, you can move forward with greater confidence that your financial future is built on a solid, strategic foundation.

    3. Optimize for Tax Efficiency

    An essential component of financial planning is optimizing for tax efficiency. Tax considerations can significantly impact investment returns, and working with a Certified Financial Planner (CFP) or Financial Advisor can help minimize tax burdens through strategies such as tax-loss harvesting, asset location planning, and retirement account maximization. By integrating these tax-efficient approaches, after-tax returns could increase and more of your wealth can be put to work toward your financial future.

    4. Review, Monitor, and Adjust Your Investments Regularly

    Beyond initial planning, continuous review and monitoring of investments can be critical to long-term success. As your life and goals change, your investment strategies should also adapt. Regularly assessing your portfolio in light of your plan can help it remain aligned with your financial objectives. Whether you’re starting fresh or reevaluating existing investments, partnering with a wealth management firm can provide professional oversight, helping to navigate market fluctuations and build a portfolio to help you live the life you want to live. With a proactive approach and professional guidance, you can more confidently pursue financial security and long-term prosperity.

    5. Work with a Wealth Management Firm

    Confluence Financial Partners is committed to a disciplined approach, guided by five key principles, to shape effective investing strategies. We manage investments to achieve individual client goals, not to beat arbitrary benchmarks. Our objective approach combines active and passive strategies, strategic planning, and tax-efficient solutions to help maximize returns and minimize long-term costs.

    The Five Principles of Investing at Confluence Financial Partners

    1. Objective-Based
      We believe clients are best served by focusing on how their investments serve their long-term goals rather than outperforming industry benchmarks.
    2. Unbiased
      We take an unbiased approach in selecting investment types—active or passive—while maintaining transparency and prioritizing objectivity in the decision-making process for a sound investment strategy.
    3. Strategic
      We use a balanced approach that combines strategic planning with carefully selected opportunities to align client investment portfolios with their specific goals.
    4. Tax-Efficient
      For taxable accounts, we believe outcomes should be optimized not just for what the investments return, but for what the investments return after taxes.
    5. Cost-Effective
      We believe optimizing the spend of client investment dollars on investment expenses is a key determinant of long-term success.

    Confluence Financial Partners offers professional guidance in investment planning, risk management, and long-term financial strategy, providing clients with confidence and clarity in their financial journey. By leveraging the knowledge of experienced professionals, we can help develop a structured approach to investing that aligns with your financial aspirations and adapts to changing economic landscapes.

    Final Thoughts

    Investing is more than just buying securities—it’s about strategically growing your wealth in alignment with your personal financial goals. It’s about helping make sure that you aren’t just saving for saving’s sake, but rather you are building wealth while maximizing both your life and legacy. With the guidance of a Certified Financial Planner (CFP) or Financial Advisor, you will have someone to assist you with your investment decision as you work towards the life that you want. Working with Confluence Financial Partners provides access to our dedicated team that offers strategic insight, thoughtful guidance, and tailored solutions which can help turn your financial aspirations into reality.

    Randy Holcombe
    About the Author

    The opportunity to make a positive difference in people’s lives is why Randy chose a career in wealth management. He is passionate about helping his clients achieve their goals and cut through the constant noise of the day-to-day financial markets.

  • Banking Safety in Uncertain Times: A Guide to Deposit Accounts and Cash Investments

    The banking system recently became front-page news following the failure of two banks in March. The headlines related to bank failures can illicit very emotional responses about safety of deposit accounts and cash investment solutions.

    We believe it is more important than ever to look through the headlines to the fundamentals of cash management.

    Cash management fundamentally breaks down into two categories:

    1. Deposit accounts, and
    2. Cash investment solutions.

    While the two have similarities, there are fundamental differences with structure and protection.

    Deposit Accounts

    • Bank Deposits: Interest-bearing account at a banking institution, such as a savings or checking account.
      • These accounts do not have market risk.
      • Insured by the Federal Deposit Insurance Corporation (FDIC) to applicable limits
        • FDIC deposit insurance is backed by the full faith and credit of the United States government. Currently, FDIC coverage extends to $250,000 per owner (and per account type), considering the underlying banking institution. For example, a joint account may have $500,000 of FDIC coverage at a single banking institution.

    Cash Investment Solutions    

    • Certificates of Deposit (CDs):  Investment that earns interest on a lump sum basis for a defined period of time.
      • In contrast to deposits, CD’s typically offer higher interest rates versus bank deposits to compensate for monies being unavailable during the life of the investment.
      • FDIC coverage applies to $250,000 per individual per issuing institution.
    • Individual Treasuries: Securities issued by the US Government, can be interest-bearing or zero coupon (earn lump-sum at maturity). The term of Treasuries can vary significantly: 4 weeks to 30 years.
      • Exempt from state and local taxes, but subject to federal tax.
      • Not covered by FDIC insurance, rather explicitly backed by the full faith and credit of the United States government.
    • Government Money Market Mutual Funds: Mutual funds that invest in Treasuries and US Government securities, paying interest on a recurring basis. Government money markets target a stable $1.00 value (not guaranteed)
      • Not FDIC insured.
      • Money market mutual funds underwent significant changes starting in 2016, which introduced redemption fees and liquidity gates, an effort to introduce a tool to combat any “run” on money markets. Only government money market funds are exempt from the rules surrounding redemption fees and gates (however, they can adopt them if previously disclosed to investors). Currently, none of the government money market funds offered by Raymond James have adopted redemption fees and gates.

    In addition to FDIC insurance and backing of the full faith and credit of the US government, most assets held at firms such as Raymond James are covered by the Securities Investor Protection Corporation (SIPC), to applicable limits. The SIPC was established in 1970 and protects client assets up to $500,000, including $250,000 of cash. SIPC account protection would apply in the event a firm fails financially and is unable to meet obligations to clients, not against a loss in market value.

    Despite the negative and unsettling headlines, there are multiple robust cash management solutions available to clients, with multiple layers of risk mitigation. At Confluence Financial Partners, we believe in the soundness of our banking system and maintain complete confidence in our client cash management tools. 

    William Winkeler
    About the Author

    Bill has more than 12 years of experience in the investment industry, most recently as Managing Director of Investments at a private wealth management firm. In his role at Confluence, Bill chairs the Investment Advisory Committee and develops and implements investment strategy for clients of the firm, as well as communicates investment content with clients.

  • 4 Investment Themes for 2023

    Heading into 2023, the Investment Advisory Committee believes we are beginning to return to a more historically normal, rational economic environment.

    The Committee has identified four key themes for 2023 and the years ahead:

    1. Fundamentals Matter Again:

    • From 2009 to 2021, expansive government and monetary policies kept interest rates and inflation near record lows.
    • This environment favored US and growth stocks, whose stock prices are driven primarily by future growth prospects, as opposed to things like profitability and earnings.
    • The unwinding of these accommodative policies is leading us back to an environment where strong company fundamentals will likely again be vital when building investment portfolios.

    2. Dividends Back in Focus:

    • Dividends represented a historically small amount (16%) of the S&P 500’s return during the 2010’s and early 2020’s.
    • Going back to 1926, dividends have contributed 38% of the market’s annualized return.
    • As we return to a more normalized environment, we believe dividends will likely become a larger portion of total return.

    3. “Income” is Back in Fixed Income:

    • The rise of inflation was a key catalyst for pushing interest rates back to historical levels.
    • While difficult in some ways, the new interest rate environment means investors can likely rely on bonds again for income.

    4. Asset Allocation Works Again:

    • In 2022, value stocks performed better than growth stocks and international stocks beat US stocks. This was in contrast to the past decade where returns have been concentrated primarily in US Growth stocks.
    • We believe the shifting environment could result in continued normalization, benefitting diversified portfolios.
    • For the first time in over a decade, bonds will likely play a meaningful role in portfolio composition.

    Source: Morningstar

    The future is impossible to predict, and nobody has a crystal ball. However, we believe that the four themes listed above will likely have a major impact on investor outcomes over the next year and beyond.

    If you would like to talk through how these themes may impact your portfolio, please give us a call.

    William Winkeler
    About the Author

    Bill has more than 12 years of experience in the investment industry, most recently as Managing Director of Investments at a private wealth management firm. In his role at Confluence, Bill chairs the Investment Advisory Committee and develops and implements investment strategy for clients of the firm, as well as communicates investment content with clients.