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Bank & Trust Insights - February 2021

February 2021

Each January, Parkside Financial Bank & Trust updates the Capital Markets Assumptions we utilize for planning.  This year, with interest rates at historic lows and equity valuations at historic highs, our capital markets assumptions for 2021 model a near term (next 10 year) annualized return of only 4.50% for a portfolio with 30% invested in core bonds and 70% invested in S&P 500 stocks. 

Why is this return low?  
What do we think can increase returns?  

Since the COVID-19 pandemic began, 10 year Treasury bonds have traded at lower yields than at any other time in modern history.  This makes the return outlook for core bonds grim; there is not much interest to earn, little room for rates to go down and when rates go up, existing portfolios lose value.  As a result, our near term return expectation for core bonds is only 1.39% over the next 10 years.  

On the equity side, today the S&P 500 is trading at more than 35 times earnings.  The S&P 500 has only traded higher at two other times in history; each time destined to fall quickly afterwards.  As a result, we expect large US stocks to average 5.82% annually over the next decade.  The combination of these returns produce a near term average return of 4.50% in our models. 
To improve core bond returns, investors can add exposure to alternative investments including high yield, multi-sector, and absolute return.  Within the equity markets, investors can look beyond large cap US stocks to diversify a portfolio using smaller stocks, international stocks, emerging markets, and REITs.  While diversification does help, it does not result in average near term return much over 5.3%.   

We believe in order to achieve near term portfolio returns in excess of 6%, assuming a similar risk profile, clients will need to sacrifice some liquidity and consider other types of investments.  This is why for the past several years, Parkside utilizes the expertise of a specialized investment committee called the Private Investment Review Committee (PIRC).  Through PIRC, clients have access to non-traded investments covering private equity, direct real estate, and other less liquid asset categories. We believe adding an allocation to these categories can meaningfully enhance average portfolio performance.  

We understand this is sobering news for many.  While bond returns are depressing, portfolios need this exposure to balance equity market volatility. Given the outperformance of large cap stocks, many investors have become complacent with their expanding exposure to this space.  Remember, it is because of past performance that valuations in US large caps are high and our outlook for the future is low.  

We encourage you to review your equity diversification. If you are overexposed to large cap investments, consider harvesting some gains.  Most importantly, don’t be fooled by past performance.  Lastly, for investors with access to properly screened and vetted opportunities, consider sacrificing liquidity and adding investments like those offered within Parkside’s PIRC. 

Parkside's Private Investment Review Committee

For qualified clients, Parkside’s PIRC provides access to investment opportunities in Long/Short Equity, Private Equity, Oil and Gas, and Direct Real Estate.   These investments can increase cash flow, improve total return, and deliver tax benefits.  It is hard work, requiring significant oversight and due diligence, to maintain a vetted list of these unique opportunities, as most investments open and close within a short period of time.  Fortunately, we are committed to going above and beyond to source the best investment opportunities for our clients. PIRC reviews dozens of potential opportunities each year and then utilizes our buying power to negotiate favorable terms for clients when the select few are approved.  

Click above to learn more about eight unique investments PIRC approved in 2020, and what investments are in our review pipeline now. 

As always, we are available to answer any questions. 
Please do not hesitate to contact our team. 

DISCLAIMER: This newsletter is intended to provide thought-provoking commentary.  The information presented herein has been obtained from and is based upon sources and vendors deemed to be reliable, but may be incomplete. Sources include research partner Asset Consulting Group.  Parkside Financial Bank & Trust does not itself endorse or guarantee, and assumes no liability for, the accuracy or reliability of any third party data or the financial information contained herein.
Parkside Financial Bank & Trust is not a tax advisor. All decisions regarding the tax implications of your investments should be made in consultation with your independent tax advisor. We will work with you independent tax and/or legal advisor(s) to help create a plan tailored to your specific needs. The material contained herein is for informational purposes only and does not constitute tax advice.
Investments are not insured by the FDIC or any federal government agency, provide no bank guarantee, are not a deposit and may lose value.