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February 2025

Feb 11
Love0

What’s Your Relationship with Your Finances?

By Financial Planning

An often-overlooked relationship is the one we have with our finances. As we celebrate the month of love, reflect on whether the relationship you have with your finances supports your long-term goals, or if a shift in that relationship is needed.

 

When you think about your finances, what’s the first feeling that comes to mind? Is it confidence? Indifference? Or perhaps anxiety? Like any relationship, your relationship with money requires consistent effort and care if you want it to be a fulfilling one. It’s also a malleable relationship, meaning that even if you feel overwhelmed by financial stress or detached from your goals right now, you can always change it to one that makes you feel confident about your financial future.

In psychology, a common way professionals assess relationships is through attachment theory. Attachment theory offers a framework for understanding how people form emotional bonds, particularly in early life with caregivers. These attachment styles include anxious, avoidant, and secure. Attachment theory can help us see how we approach all kinds of relationships, including the one we have with money!

First, understand your relationship with money was probably determined early on in life, maybe before you even understood the concept of money. This could be when you were a child seeing your parents or caregivers anxiously struggling to make ends meet, or seeing them spend money without considering long-term goals, etc. These early experiences shape how we interact with money and should be considered when assessing your current relationship with your finances. With that in mind, here’s how each attachment style may manifest in present-day financial behaviors:

Anxious

In the clinical sense, anxious attachment is characterized by a fear of abandonment and rejection. These individuals probably had inconsistent caregivers who were sometimes there and sometimes not. This made it hard for them to trust when things were good that the other shoe wouldn’t soon drop. When applied to finances, this could manifest as someone feeling overwhelmed, constantly worried that anything and everything could derail the progress they’ve made. These individuals often lack confidence in their ability to achieve their financial goals, even when all evidence suggests otherwise. Consumed by worry, they may find themselves paralyzed, unable to make the decisions necessary to reach their goals.

Avoidant

An avoidant attachment style involves a fear of closeness and difficulty trusting others as trusting others involved consistent disappointment in their earlier life. If someone has an avoidant style when it comes to their relationship with money, they may detach themselves from financial planning and long-term goals. If they avoid making goals, then there’s no fear of failure, but there will also never be any progress. These individuals might procrastinate, downplay the importance of financial milestones, or dismiss the need for accountability, all as a means of maintaining control while avoiding the potential disappointment that comes with falling short of their goals.

Secure

Finally, a secure attachment style enables an individual to feel safety, stability, and trust in close relationships. These are the people who had caregivers who offered affection when needed, encouraged independence, and were consistent. In the context of finances, someone with this attachment style approaches their goals with confidence. They trust their ability to make decisions that support their goals. They’re able to be present, engaged, and adaptable as circumstances change without feeling overwhelmed. Rather than fixating on the possibility of failure, they focus on success and the steps needed to achieve it.

 

Cultivating a Secure Attachment Style

If you feel like your attachment style leans avoidant or anxious at times, don’t worry! As stated previously, these attachment styles are malleable. This means you can change them! To cultivate a more secure attachment with your finances, think about what the behaviors of someone with a secure attachment might be. Some things you may want to consider:

  • General Financial Wellness: This includes having a monthly budget, an emergency fund, and a robust savings account. All of these will lay a foundation for you to build towards your bigger goals, but remember growing a “robust savings account” or creating a monthly budget are goals in themselves. So don’t let this first part overwhelm you, break it down into smaller, manageable steps and turn each one into its own goal!
  • Maintain Financial Awareness: It’s so easy to check out or lose focus on money. You see your monthly power bill or insurance premium go up, and you think, “Well it’s only $20.” But remember, that’s $240 a year! Push back the resistance that makes you want to ignore things, and instead keep track of bill increases, unnecessary purchases, and anything else that can burn a hole through your wallet. Being aware of these increases is the first step in mitigating them!
  • Set Goals: Know what you want to accomplish, because if you neglect to define your goals you will never achieve them. If your goals feel overwhelming, break them up into smaller goals. When you’re setting bigger, long-term goals, consider the power of compound interest. The returns you can gain over time can significantly help you reach those goals. For example, if you know you want to retire one day and your employer has a matching 401(k) plan, perhaps at the very least contribute enough to take full advantage of that match. If you want to send your child off to college one day, look into a 529 plan. If you are starting younger with a few decades before retirement, time is on your side, so take advantage of it.
  • Protect Yourself and Your Family: While preparing for the unexpected can be difficult, having a plan in place can help you face these challenges without feeling overwhelmed or shutting down. For this, you may want to consider a life insurance policy that works for you and your family. Life insurance policies have evolved over the last decade and can be better shaped to a policyholder’s needs, these policies can even have riders added to them to help you plan for long-term care. A will and/or estate plan will also help give you peace of mind knowing that if anything were to happen to you, you have taken steps to ensure your family will be taken care of, with your wishes spelled out and legally documented.
  • Know Your Triggers: If your attachment style leans anxious or avoidant, understand what triggers that attachment style. You can change your attachment style, but it requires a commitment to remaining present and addressing those maladaptive traits when they pop up. For example, maybe when you receive a bill you put off looking at it until the day before a late fee kicks in. Receiving a bill is the trigger, how can you address that trigger? Maybe you can enroll in automatic payments, or maybe set aside time every so many days to go over your bills, or maybe something entirely different altogether. Addressing your triggers will be something for you to figure out and can widely vary from person to person. The first step for everyone, however, is to face those triggers head-on and look for a solution.
  • Seek Help: Changing your attachment style is no small task, but you don’t have to do it alone! Partnering with an experienced financial advisor can make the process more manageable and less overwhelming. An advisor can help you define your goals, break them down into actionable steps, and provide guidance and support along the way!

If you’re looking for support in navigating your financial attachment style or want guidance to maintain a secure mindset, we’re here to help! You can reach Bay Trust Financial at 813.820.0069.

Feb 11
Love0

Mitch Zacks – Weekly Market Commentary: The Current Equity Risk Premium is Zero. Should Investors Ditch Stocks?

By Weekly Market Commentary

Stocks and Bonds Offer Similar Yields. Does That Make Stocks Too Risky?

As I write, the S&P 500 trades at roughly 22x projected 2025 earnings, and the 10-year U.S. Treasury bond yields roughly 4.5%. That makes the earnings yields on stocks and bonds basically the same.

For clarification, the earnings yield on stocks is derived by dividing the stock market’s expected earnings by its price, which currently equals about 4.5%. When you compare this earnings yield with current bond yields, that gives you the equity risk premium, which theoretically tells investors how much extra reward stocks should offer over bonds.1

As readers can see, that reward is essentially zero today—which also marks the first time we’ve seen the equity risk premium this low since the tech bubble burst.

It is logical to assume that the lower the equity risk premium, the weaker the case for owning stocks versus bonds. After all, according to this metric, investors are not being compensated at all for taking the additional risk of owning stocks over Treasurys. There’s also the case of the late 1990s, when the equity risk premium turned negative and a bear market followed.

In my view, there’s a very reasonable risk argument to be made here about the stock-bond decision. But where the argument starts to fall apart, in my view, is in assuming that a low or even slightly negative equity risk premium tells us anything about future returns. When we look back on history at the relationship between the equity risk premium and forward 12- or even 24-month returns on the S&P 500, the case for correlation fizzles. And there’s essentially no argument for causation.

In 1996, the equity risk premium fell below zero and stayed negative basically until the bear market started in early 2000 (the equity risk premium turned positive for a short time in 1998 with the market correction). Investors could have used this metric to get out of stocks in 1996, but that would have been a mistake. There was still plenty of runway left in that bull.

On the flip side, the equity risk premium was nicely positive—roughly 3%—at the start of the 2008 Global Financial Crisis, and there were periods in the 2010s when bonds outperformed stocks even though the equity risk premium suggested stocks were the better buy. As mentioned, it’s difficult to find a convincing correlation between the equity risk premium and forward returns. There have been many instances where the signal seems to work and others where it doesn’t.

The key thing to remember, in my view, is that stocks’ earnings yield—again, theoretically—tells investors what return they should expect over the long run if earnings stayed constant and no dividends were paid. But as we all know, many stocks pay dividends, and earnings are rarely constant. As we begin to parse Q4 2024 earnings, the picture that emerges is one of improving outlook, with companies not only coming ahead of estimates but also providing reassuring guidance for coming quarters (see chart below).

There’s a scenario where earnings come in far better-than-expected in 2025, while long-duration Treasury bond yields remain range-bound. That would be a positive scenario for stocks, in my view, regardless of whether the equity risk premium turned positive or not.

Bottom Line for Investors

The equity risk premium is a useful metric that investors can use in evaluating the stock-bond decision, but it’s certainly not the only consideration, in my view. Investors should also think about where they expect interest rates, inflation, and earnings to be a year from now, which is another way of assessing whether the equity risk premium is expected to rise or fall looking forward. From my vantage, I expect inflation to moderate, earnings to accelerate, and growth to continue above trend—all of which bolster the case for equities, in my view, even as Treasuries now offer a more attractive risk-free rate.

1 Wall Street Journal. January 27, 2025. https://advisor.zacksim.com/e/376582/bonds-has-disappeared-c3f9c223/5sksqg/1143709360/h/oV5BlINqgf8gjfV1x98TM8Vm5hn9sYINQwDJg8KhF_A

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Zacks Investment Management, Inc. is a wholly-owned subsidiary of Zacks Investment Research. Zacks Investment Management is an independent Registered Investment Advisory firm and acts as an investment manager for individuals and institutions. Zacks Investment Research is a provider of earnings data and other financial data to institutions and to individuals.

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Any projections, targets, or estimates in this report are forward looking statements and are based on the firm’s research, analysis, and assumptions. Due to rapidly changing market conditions and the complexity of investment decisions, supplemental information and other sources may be required to make informed investment decisions based on your individual investment objectives and suitability specifications. All expressions of opinions are subject to change without notice. Clients should seek financial advice regarding the appropriateness of investing in any security or investment strategy discussed in this presentation.

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The S&P 500 Index is a well-known, unmanaged index of the prices of 500 large-company common stocks, mainly blue-chip stocks, selected by Standard & Poor’s. The S&P 500 Index assumes reinvestment of dividends but does not reflect advisory fees. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor. An investor cannot invest directly in an index.

The Russell 1000 Growth Index is a well-known, unmanaged index of the prices of 1000 large-company growth common stocks selected by Russell. The Russell 1000 Growth Index assumes reinvestment of dividends but does not reflect advisory fees. An investor cannot invest directly in an index. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor.

Nasdaq Composite Index is the market capitalization-weighted index of over 3,300 common equities listed on the Nasdaq stock exchange. The types of securities in the index include American depositary receipts, common stocks, real estate investment trusts (REITs) and tracking stocks, as well as limited partnership interests. The index includes all Nasdaq-listed stocks that are not derivatives, preferred shares, funds, exchange-traded funds (ETFs) or debenture securities. An investor cannot invest directly in an index. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor.

The Dow Jones Industrial Average measures the daily stock market movements of 30 U.S. publicly-traded companies listed on the NASDAQ or the New York Stock Exchange (NYSE). The 30 publicly-owned companies are considered leaders in the United States economy. An investor cannot directly invest in an index.  The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor.

The Bloomberg Global Aggregate Index is a flagship measure of global investment grade debt from twenty-four local currency markets. This multi-currency benchmark includes treasury, government-related, corporate and securitized fixed-rate bonds from both developed and emerging markets issuers. An investor cannot invest directly in an index. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor.

The ICE Exchange-Listed Fixed & Adjustable Rate Preferred Securities Index is a modified market capitalization weighted index composed of preferred stock and securities that are functionally equivalent to preferred stock including, but not limited to, depositary preferred securities, perpetual subordinated debt and certain securities issued by banks and other financial institutions that are eligible for capital treatment with respect to such instruments akin to that received for issuance of straight preferred stock. An investor cannot invest directly in an index. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor.

The MSCI ACWI ex U.S. Index captures large and mid-cap representation across 22 of 23 Developed Markets (DM) countries (excluding the United States) and 24 Emerging Markets (EM) countries. The index covers approximately 85% of the global equity opportunity set outside the U.S. An investor cannot invest directly in an index. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor.

The Russell 2000 Index is a well-known, unmanaged index of the prices of 2000 small-cap company common stocks, selected by Russell. The Russell 2000 Index assumes reinvestment of dividends but does not reflect advisory fees. An investor cannot invest directly in an index. The volatility of the benchmark may be materially different from the individual performance obtained by a specific investor.

The S&P Mid Cap 400 provides investors with a benchmark for mid-sized companies. The index, which is distinct from the large-cap S&P 500, is designed to measure the performance of 400 mid-sized companies, reflecting the distinctive risk and return characteristics of this market segment.

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