Tax-Free, Not Drama-Free!

I have been troubled a bit about how poorly bonds in the tax-free universe have performed this year.  Tax-free municipal bonds usually make economic sense for investors with very high taxable net income, but this year “not so much”!

The math to understand the economic benefit of tax-free bonds compared to taxable bonds is straight forward.  If a tax-free bond pays tax-free income of 3%, then the pre-tax equivalent return for an investor in the highest Federal (37%) and State (VT, 8.5%) tax brackets is 5.5% (3% / (1-0.455) = 5.5%).  In other words, an investor in the highest tax brackets would need to earn more than 5.5% income yield on a taxable bond to prefer that bond EVERYTHING ELSE BEING EQUAL. 

Unfortunately, everything else has not been equal this year!  As seen from the table below, Taxable bonds like core bonds, investment grade corporates and others have all outperformed comparable tax-free bonds this year with higher total returns.  Most of the difference in performance is from the Price Return component since the Income Return aspect on an AFTER-TAX basis is mostly equivalent at around 2%.  Tax-free bonds have generated almost no Price appreciation on a year-to-date basis while other taxable bonds have moved up between 2-4%.

 What has caused this disconnect in price appreciation for tax-free bonds compared to taxable bonds this year?  And where do we go from here?

Some market commentators have posited that increased issuance of tax-free municipal debt this year has glutted the market putting upward pressure on rates (and downward pressure on price).  Others have commented that the political environment has caused uncertainty with some municipal tax-free issuers causing some weakness.  Interestingly, most of the largest issuers of tax-free bonds have maintained their high credit quality ratings so the decline in price appears to be mostly “technical” and less about weakening credit strength.

This has been one of those rare years when the usual math clearly favored tax-free income… and yet the market responded, “not so much.” But the disconnect looks more temporary than structural. Municipal credit strength remains intact, tax-equivalent yields are compelling for top-bracket investors, and recent price weakness may actually set the stage for better long-term value. When the technical headwinds ease, we expect munis to remind investors why they’re a core holding for the highest-taxed households.

The Market Dipped… Should You Care?

Hard to believe that the S&P 500 (IVV) was at its recent all time high only a few weeks ago on October 29.  Since then it has been very volatile and was down as much as -5.1% but is now down -4.1% off that high; not a lot (almost normal volatility), but notable.  My recent blog posts have posited some bullish aspects so now seems like a good time to regroup and look at the factors driving the recent weakness.

As I reported in my last blog post, corporate earnings were coming in quite strong and we are still looking at a +10-11% growth for the full year 2025.  Nothing to see there!  There was a bit of “strongish” employment data and some hawkish Fed-speak, but the markets are still pricing a chance of another Fed rate cut in December, but it’s no longer the slam-dunk base case it looked like a few weeks ago.  Also, long term interest rates and credit spreads have been mostly tepid, so the bond market is not sounding any alarms.

So, if corporate earnings and interest rates are key determinants of equity returns and all looks clear there, we should still be in “Bullsville”!

The only thing that reeks of pain is crypto currencies!  Bitcoin is down about -25% from its levels back on Oct. 29.  Maybe it is the chicken or maybe it is the egg, but both bitcoin and equities are down.

Despite the pullback, nothing in the fundamentals has really changed — earnings remain strong, rates are stable, and the bond market isn’t flashing trouble. This looks far more like a routine breather than the start of anything ominous, and D&A doesn’t try to time these short-term squalls anyway. As always, staying disciplined and ignoring the noise remains the smartest path forward.

Always Bullish!

I had lunch this past weekend with a peer in the industry (you know who you are!) and we, of course, discussed the markets.  The top topic was the great returns we have seen so far this year with the S&P 500 (IVV) up +15.6% to another all-time high, as well as great returns last year and the year before!!  Over some nice hot pizza, we ruminated over the many factors that are stacking the deck so far to date.

First and foremost, pressure on the Fed in mid-2025 to shift to an “easing” policy - that eventually led to easing statements in August - influenced market watchers to view this as an “all clear” to allocate funds to U.S. equities.  After all, most of the rest of the world had been easing almost all year so why not join the party!  The European Union, the U.K., and Australia, amongst others, all cut rates during 2025 prompting great returns so far for international developed markets (SCHF, +28.9%), as well as emerging markets (SCHE, +27.6%)!

But it is never just one thing!  Another big one is the AI (artificial intelligence) factor.  Since AI burst into the world in 2022, people have been talking about the impact AI will have on business productivity and profitability.  It is expected that the impact will be revolutionary, and we are still very early in its life cycle.

My favorite mass media “perma-bull”, Tom Lee of Fundstrat, is an AI disciple and is quite bullish.  He does not view this as a “bubble” since forward P/E’s are still quite low compared to P/Es during the dot com crash.  He thinks that factor could be driving most of the market froth; he sees companies expanding spending into this sector since they are starting to see some payoffs.

Not to be overlooked, of course, is strong growth in business earnings that is the main driver of stock returns.  Consensus estimate for the full year 2025 are coming in at about a 10% growth – a strong number that complements the strong growth rates of 2023 and 2024.  There are a multitude of other quantitative and qualitative factors including some broadening market depth, stronger corporate balance sheets, and strong momentum.

So, no need to fear this rally, so far.  Most D&A clients are fully invested  in their target strategies with a bit of overweight to equities to help gain some extra return.  When people ask me where I think the market is going I always say, “Beats Me!”  But, like Tom Lee, I am always bullish since I expect the market to always go up over time.  Best to stay fully invested to your target strategy to help achieve your goals.

2025 Q3: New Highs, Same Playbook

This may sound like a broken record, for those who remember what a broken record sounds like, but after the “Tariff Tantrum” of Q1 we have seen almost nothing except market strength into the end of Q3.  The primary impetus has been a sound economy, strong earnings, secular enthusiasm for AI and a “dovish” Fed that appears to be on an easing path to head off potential employment troubles.  International and emerging market equities continued with muted positive returns while fixed income was mostly tame as a stable cushion, geopolitics notwithstanding.

Per the chart below, small cap equities once again regained their spotty glamour with a quarter-leading return of +10.6%, but if it is anything like previous quarters, its luster may be short-lived in the face of the competitive attractiveness of the mega-cap tech sector.

It was a busy quarter with blog posts highlighting some notable market dynamics.  For example, the continuation of almost daily new all-time market highs prompted some deep thought on how to proceed.  From my August 23 blog post, All-Time Highs, What Now??, I pondered,

 And while today’s headlines celebrate new market highs, true financial success comes from discipline, purpose, and perspective.  A liquidity event is both an opportunity and a responsibility—and with the right plan, it can become the foundation for security, generosity, and peace of mind.

Likewise, during my travels this quarter I ruminated over the different “stories” that we all have as we continue our journeys.  From my July 24 blog post, Everyone Has a Story - What's Yours?, I recounted the D&A investment philosophy,

Everyone’s journey is different—but with the right plan, you can enjoy the ride. Whether you're flying to Paris or planning for the decades ahead, the key is having a strategy that fits your story. At Dattilio & Ash, we’re here to help you build that strategy—bucket by bucket, step by step.

What this means for portfolios:

• Stay balanced and cautious: respect the AI-driven secular growth leadership, but don’t overconcentrate. 

• In fixed income: keep a quality bias and barbell duration to cushion rate path uncertainty.

• Remain true to your strategy to achieve your goals, but be flexible when needed.

Muni Misery

In last week’s blog post, Curve Appeal!, I reviewed the strategy to diversify fixed income investments along the short-, medium- and long-term parts of the yield curve.  We saw that over the past few years, the shorter parts of the yield curve have outperformed the longer parts.  That blog post focused on the taxable universe of fixed income investments, but the principle also applies to the tax-free universe, as well.

The tax-free bond universe is made up mostly from state and local governments and also include special authorities or school districts.  The tax code in some states and the Federal government give these issuers special privileges to issue bonds on a tax-free basis that the markets price at a lower interest rate than if they were taxable. 

As seen from the table below, the past 5 years have not been kind to the municipal bond market.  The top part of the table shows that longer term municipal bonds have barely posted positive returns with the largest municipal bond ETFs ($39 billion Vanguard Tax-Exempt Bond Index Fund ETF, VTEB and $39 billion iShares National Muni Bond, MUB) both producing 0.8% annualized return over this 5-year horizon.  Not surprisingly, consistent with the taxable universe, the shorter parts of the municipal yield curve shown by iShares Short-Term National Muni Bond (SUB) and Fidelity® Massachusetts Municipal Money Market Fund (FMSXX) have outperformed (just barely!) the longer parts over most time frames and overall.

 Obviously, these past results are no comfort to investors looking for a long term conservative investment strategy to provide growth and income since it has produced little of either!  Fortunately, over the past few years most of the return has come from the tax-free income component instead of the price component.  This will benefit those investors most interested in generating income to spend, even though it has not been large.

Investors cannot generate more return without taking more risk.  The ideal situation is to have a split strategy with a conservative “bucket” to satisfy the investor’s desire for safety and other riskier “buckets” to meet growth and aspirational desires.  In that way the investor is not forfeiting all growth prospects at the expense of lower returning conservative strategies.  D&A always works with its clients to ensure that they have the appropriate strategy mix.

Curve Appeal!

In my prior life as Head of U.S. Portfolio Management at Sun Life Financial in Wellesley, MA, I helped manage $37 billion in investments backing the insurance company liabilities.  In that role we were always faced with interest rate risk and tried to forecast the path of interest rates.  That is an oftentimes humbling activity since it is very easy to be right for the wrong reasons and vice versa.  Luck plays a large role due to externalities that cannot be forecast.

This is especially relevant for clients who are looking for a “conservative” strategy to serve as a place to hold long-term money that they can count on to conserve principal and generate somewhat stable income over time.  This separate account can serve as a comfort blanket and is consistent with the “bucket” approach that is often used to simplify an overall investment strategy.

But, what makes up a “conservative” long-term investment strategy?  Certainly money market investments like short-term bank certificates of deposit, money market mutual funds or Treasury Bills are “conservative”, but depending on the business cycle returns can be close to zero over an extended period like after the COVID pandemic.  Likewise, long-term Treasury bonds are “safe” because they guarantee a return of principal at maturity, but can generate periodic negative returns if rates rise during their term to maturity like in 2022 when core bonds were down -13% as the Fed was tightening monetary policy.

When a client of D&A needs a long-term conservative strategy, we typically look to 100% fixed income investments with exposure to different parts of the yield curve, i.e., short-, medium- and long-term.  There are many ETFs we can select from to get the exposure we are targeting.  For example, iShares Ultra Short Duration Bond Active (ICSH) with a 0.6 duration, iShares Short Duration Bond Active (NEAR) with a 2.2 duration, iShares Core U.S. Aggregate Bond (AGG) with a 5.9 duration, and iShares iBoxx $ Investment Grade Corporate Bond (LQD) with a 8.0 duration cover the major parts of the yield curve.  Other ETFs are often used to help fill in the very short or intermediate parts of the yield curve.

Per the table below, you can see that the periodic returns for these fixed income ETFs targeting different parts of the yield curve had significantly different return profiles.  Overall, the very short and short strategies outperformed the longer strategies over the total time horizon, but not in each year.  Certainly, over this selected time horizon, it was best to be diversified and tilted “short” to capture the best return profile for a conservative strategy.

All-Time Highs, What Now?

As some of you may have noticed, I have taken a 3-week hiatus from my “weekly” blog posts.  During this time, equity markets crept higher while bonds largely marked time. But on Friday, August 22, stocks rallied strongly to yet another all-time high after dovish comments from Fed Chair Powell hinting at a potential September rate cut.

So, what should investors do with this information?  After two years of +20% U.S. equity market returns, can this pace continue?  Is it time to go all-in or, as you might guess, stay the course?

This conundrum is especially difficult for those with new found wealth either from the sale of a business, a legal settlement, employment stock participation, or an inheritance.  This sudden “liquidity event” presents a unique challenge:  how to plan and invest wisely when it feels like you’ve already missed the runup.

Pause Before You Act

First things first - don’t confuse urgency with opportunity. A major liquidity event is emotionally and financially complex. The temptation is to do something—put the money to work, make long-deferred purchases, respond to family requests.

Instead, consider doing almost nothing at first. Park the funds in short-term, stable instruments. Give yourself the space to reflect on what this money means to you and what it’s for.

Markets at Highs—Should You Wait to Invest?

This is a common question. When markets are at all-time highs, it’s natural to worry about buying in at the top. But long-term planning doesn’t hinge on perfect timing—it hinges on purpose, structure, and discipline.

Dollar-cost averaging can be a valuable tool here. Rather than trying to call a market top or bottom, you gradually put your money to work over a defined period. It's a strategy that balances participation with prudence.

Build a Plan Before Building a Portfolio

Liquidity is powerful, but aimless money often evaporates. Use this time to:

• Clarify your goals—retirement, gifting, education, philanthropy.

• Understand your risk tolerance (which may change post-event).

• Coordinate with professionals—a financial planner, tax advisor, and estate attorney.

When you connect wealth with purpose, investment decisions become much clearer.

Avoid the Usual Pitfalls

Big cash events tend to bring out behavioral biases:

• FOMO (fear of missing out)—especially in a rising market

• Lifestyle inflation—easy to justify in boom times

• Family friction—requests often come faster than plans

 Stay grounded. Structure beats spontaneity when it comes to financial longevity.

At Dattilio & Ash, we partner with clients to navigate these pivotal moments. With Tony Ash, CFA providing investment expertise and Dave Dattilio, CPA delivering tax insight, we work together to craft solutions tailored to your situation.

And while today’s headlines celebrate new market highs, true financial success comes from discipline, purpose, and perspective. A liquidity event is both an opportunity and a responsibility—and with the right plan, it can become the foundation for security, generosity, and peace of mind.

Small Cap, Big Drag

Readers of this blog are well aware of my frustration with the performance of small- and mid-cap equities.  The overwhelming dominance of the S&P 500 (IVV) over the past 15 years has dwarfed the middling performance of the small- and mid-cap universe (see chart below).  Also, note that the S&P 500 has been relatively less volatile with less maximum drawdown than other diversifiers like U.S. small- and mid-cap equities and international developed and emerging market equities (SCHA, SCHM, SCHF and SCHE).

The investment press is abuzz with many reasons for this lengthy drought of underperformance.  They include:

• growing share of small cap (~40%) have no profits versus less than 10% in the S&P 500

• a sustained drop in the number of publicly listed small firms over the past two decades (from ~8,000 in 1996 to ~4,200 by 2019) reduced the opportunity set and the ‘migration’ of winners into large-cap status

• many attractive small-cap candidates remain private longer delaying when they impact small-cap indices

• passive flows have increasingly favored large‑cap indices, especially with megacap tech leadership, reducing small‑cap demand

• Market concentration—S&P 500’s “top 7” firms driving much of its gains—has reinforced large-cap dominance

In the academic world, some investment factors have been identified that overtly influence investment performance.  Some of these factors include momentum, low volatility, quality, and, of course, small cap equities.  Though there is a continuing debate on the validity of this phenomenon, stocks with these factors have been shown to tend to outperform over long horizons and market cycles; except when they don’t!

Certainly, the past 15 years has been a long horizon across many market cycles.  Based on some of the structural changes identified above, the small cap factor may no longer offer the same return advantage it once did—at least in today’s environment.

Clients of D&A may have noticed a small bit of trading the last few weeks as we have trimmed small cap equity exposures from some client accounts.  We expect that this reduction in a market sector that appears to be structurally impaired will help smooth portfolio returns relative to the broad global markets.  We remain diversified across a range of global assets and will continue to adapt as markets evolve.

Everyone Has a Story - What's Yours?

Everyone has a story!  I recently went to Paris and while travelling on my Jetblue flight I wondered what they were for some of my fellow travelers.  How many were retirees taking that long-awaited visit to the Louvre, how many were pre-retirees anxious to visit the newly-restored and re-built Notre Dame cathedral, and how many were young couples looking to explore the “foodie” scene.

As I thought about those situations, being an investment professional, I also thought about their likely investment profiles!  Some could have enough wealth to easily afford the trip while others could have skimped and saved to get on a plane and spend some hard-earned money on the experience.  Everyone has a different story and requires a personalized approach to their wealth management.

The portfolio of Dattilio & Ash clients is quite diverse ranging from young professionals to those late into retirement.  For some clients with more complicated situations, we often try to simplify their investment strategy with something called the “Bucket Approach”. 

The Bucket Approach looks at short-, medium- and long-term horizons and specifies the potential cash flow needs in each.  For example, if there is a short term need to fund something like college expenses we will allocate enough funds from their investment portfolio into a conservative strategy for that bucket, thus ensuring that there are enough funds available to fund that goal.  Whatever is left over goes into the medium- and long-term buckets to help grow investments for pre-retirement and retirement horizons.

This strategy helps our clients avoid selling investments in down markets to fund shorter term goals - something that’s especially helpful in years like this one.  As of today, the S&P 500 has already hit 13 new all-time highs in 2025.  That’s a remarkable run, but also a reminder that markets move in cycles. With a thoughtful approach, you can take advantage of the good times while also being prepared for the inevitable bumps along the way.

Another version of the Bucket Approach looks at a client with a desire to generate some spendable income from their taxable account while still growing assets in their tax-deferred IRA account.  In this case, we can manage an account to generate monthly income directly deposited into their checking account, while also providing some growth, and also manage their IRA account separately strictly in a growth strategy.

Everyone’s journey is different—but with the right plan, you can enjoy the ride. Whether you're flying to Paris or planning for the decades ahead, the key is having a strategy that fits your story. At Dattilio & Ash, we’re here to help you build that strategy—bucket by bucket, step by step.

Track Markets, Not Mania!

From our website, the investment philosophy of Dattilio & Ash Capital Management centers on long-term strategic asset allocation as the primary driver of portfolio returns, and diversification across asset classes as the key method of managing risk.

We actualize this philosophy by building risk-managed, diversified portfolios primarily composed of low-cost, passive exchange-traded funds (ETFs).

Most portfolios begin with a core allocation to large-cap U.S. equity indices like the S&P 500. We then broaden diversification by adding small- and mid-cap equities, as well as international developed and emerging market equities. Depending on a client’s risk tolerance, most portfolios also include exposure to fixed income, such as investment-grade corporate bonds, to help smooth out volatility and balance risk.

This approach is designed to track the performance of broad diversified markets, both up and down. While it may reduce the likelihood of dramatic outperformance ("home runs"), it also reduces the risk of dramatic underperformance ("strikeouts"). For most clients with a long-term horizon, this consistent and disciplined approach is preferable.

However, current market conditions present an unusual dynamic. Some mega-cap tech stocks have grown to occupy oversized positions in the major indices, which means that even well-diversified portfolios may have higher-than-usual exposure to just a few names.

For example, Nvidia, Microsoft, Apple, and Amazon currently make up 24.4% of the S&P 500 index. That means a portfolio with a 30% allocation to the S&P 500 effectively has a 7.3% exposure to just four companies—a level of concentration that highlights the importance of broader diversification.

As seen in the YTD chart below, these stocks have produced mixed results, which can introduce unintended volatility into client portfolios.

When markets rally on the strength of these tech leaders, that concentration is helpful. But no one knows when the rally might end—or when leadership might shift. That’s why Dattilio & Ash will continue to manage portfolios based on each client’s target risk profile, using broad diversification to help smooth returns across their investment horizon.

This Too Shall Rally

The markets this year remind me of a few old-time phrases like “Good things come to those who wait” and “Time heals all wounds”.  As I’ve noted in several blog posts over the past year,

Though no one likes losses, long term investors have ALWAYS been rewarded with market returns reaching new all-time highs by ignoring volatility and holding through tough times.  Though “they all seemed like the end of the world at the time”, markets have always recovered.

2025 Q2 unfolded under the shadow of geopolitical tensions and shifting policy landscapes. Investors faced a volatile quarter marked by U.S. policy uncertainty, global monetary easing, and diverging economic signals across regions.

U.S. market anxiety surged in April amid tariff hikes, deregulation efforts, and tighter immigration policies. Equity valuations dipped but remained elevated, while fixed income yields hovered near long-term averages until easing late in Q2.  The S&P 500 hit an all-time high on June 30, eclipsing its previous all-time high hit on February 17.

While the U.S. showed signs of mid-to-late cycle dynamics, Europe leaned on fiscal stimulus to counteract trade headwinds. Emerging markets benefited from a weaker dollar and rising commodity prices.  Consequently, the long-awaited global equity rally finally showed its hand with a strong rally beating the U.S. handily.

The chart below shows both familiar patterns and a few surprises. Once again, U.S. small- and mid-cap equities (SCHA, +8.3% and SCHM, +7.5%) delivered solid returns but lagged its large cap brethren (IVV, +10.8%).  The standout this quarter?  International developed and emerging market equities (SCHF, +12.5% and SCHE, +9.5%) surged!  Fixed income was up and down but ended on a strong note with low single-digit returns.

As I am wont to say,

In a world that often feels unstable, D&A remains committed to building portfolios that can weather the storm. Our globally diversified approach, combined with strategic risk management and a focus on long-term goals, is designed to keep clients on track, no matter what challenges the world throws their way.

Storm-Proof Your Portfolio

The world seems to deliver breaking news every day, much of it unsettling, and it can disrupt the normal lives most of us want to live. Geopolitical crises like the ongoing conflict in Ukraine, the Israel/Hamas/Iran situation, and now tensions involving the U.S. are destabilizing. On top of that, political turmoil only adds to the noise. So, how does all of this impact the development and management of investment strategies?

At D&A, we are committed to globally diversified portfolio management designed to meet our clients' goals. Diversification—selecting investments with relatively low correlations to each other so that when some zig, others zag—is central to our approach. However, as many readers of this blog know, over short- to medium-term periods, diversification can sometimes be sub-optimal, especially when asset classes like U.S. large-cap equities have outperformed all other asset classes over the past decade.

For clients with a lower risk tolerance, D&A often leans into equities that exhibit less volatility compared to larger baskets of stocks. Exchange-traded funds (ETFs) targeting a carefully selected group of less risky equities are one such strategy. For example, while the S&P 500 (IVV) carries a 17% annual standard deviation of return, ETFs like the iShares Minimum Volatility ETF (USMV) have a 12% standard deviation, offering a smoother ride.

Bonds also play a defensive role in protecting against risky environments. However, D&A recognizes the interest rate risk embedded in longer-duration fixed-income assets. When interest rates rise, their impact on bond prices can devastate a portfolio if not properly managed. For instance, in 2022, core bonds (AGG) with long durations posted a -13% return, whereas shorter-duration bonds, such as the iShares 0-5 Year Investment Grade Corporate Bond ETF (SLQD), had a more manageable loss of just -4%.

Finally, although not directly managed by D&A, we emphasize the importance of an emergency fund to cover any unforeseen financial needs. It’s also highly valuable to "bucket" investments—keeping two to three years' worth of annual expenses in low-risk bond strategies. This helps avoid the need to sell equities if the market dips.

In a world that often feels unstable, D&A remains committed to building portfolios that can weather the storm. Our globally diversified approach, combined with strategic risk management and a focus on long-term goals, is designed to keep clients on track, no matter what challenges the world throws their way.

SCHF Happens!

My most recent blog post discussed the amazing resurgence in international developed equity markets, including regions like Japan, the Eurozone, Canada, South Korea, and Australia.  Through May 30, 2025, an index of equities domiciled in those countries (represented by the SCHF exchange-traded fund) generated year-to-date returns of +16.6% compared to +0.9% for the S&P 500 in the U.S.  When we see something like this, we ask the question: What is driving this outperformance? Let’s examine some of the underlying factors worth considering.

This ETF is heavily weighted toward equities domiciled in Japan, the U.K., France, Canada, and other Eurozone countries, and is mostly allocated to the financial, industrial, and health care sectors. So, aside from a much lower allocation to the technology sector compared to the U.S. (9% versus 32%), this ETF is somewhat similar to U.S. exposures.

Just like the U.S. tech sector, with names like Microsoft, Amazon, Meta, and Nvidia driving equity markets over the past 5+ years, there are some notable individual stocks in this international space that have come alive over the past year.

The top 10 holdings of the ETF include SAP SE, a German software provider that is up +20% YTD; Nestlé, up 17%; Novartis, up +13%; Roche Holdings, up +9%; and HSBC, up +15%. Surprisingly, other large holdings—like ASML, Novo Nordisk, AstraZeneca, and Toyota—have delivered middling or negative performance this year, which has capped overall fund returns. Fortunately, this ETF is broadly diversified, so a few laggards only have a limited impact on total performance.

D&A is committed to globally diversified portfolio management, including exposure to international developed markets in most client portfolios. That said, we’re mindful of risk and prefer not to overweight these markets to the degree that some global benchmarks do. So, in years when international markets outperform significantly, D&A portfolios may lag slightly behind those naïve benchmarks—but that’s a tradeoff we accept in favor of balanced, risk-aware management.

The Global Catch-up

If you look at a table of best returning equity markets over the past 3-, 5- , 10-year and longer horizons, it is impossible to ignore the amazing outperformance of the S&P 500.  I have commented on this fact many times in my blog posts over the last few years.  In fact, I have often lamented that this amazing string of good fortune for the S&P 500 has hurt every portfolio that chose to diversify away from it!

This year, however, we have seen a persisting trend of outperformance from markets outside the U.S.!  Per the table below, you can easily see the longer term strength of the S&P 500 (IVV), but also note how strong international and emerging market equities have done so far year-to-date in 2025! 

Most of the longer term outperformance in the S&P 500 is from the amazing performance of large growth (IVW) that was comprised primarily of technology (XLK) while large value (IVE) pulled returns down.  Tech and large growth have been less of a factor recently after their phenomenal run.

Most all D&A client portfolios have some exposure to international and emerging market equities.  However, because those markets are historically more risky, D&A typically underweights them in favor of more U.S. equity exposure.  D&A will maintain good allocations to global markets consistent with our belief in globally diversified portfolios to help clients achieve their goals.

AI vs. ROI?

Readers of these blog posts should be aware that I have a great interest in artificial intelligence (AI) and have been intensely following it for a few years; even before ChatGPT!  Most moderately aggressive client accounts had a small exposure to the first AI-driven investment strategy way back in 2019; now named Amplify Ai Powered Equity ETF (AIEQ). 

Unfortunately, this strategy did not have persistent repeatable risk-adjusted performance in the early days of its launch so it was sold from all client accounts during 2023.  This ETF continues to struggle over the past year with its risk-adjusted return lagging the S&P 500 (IVV) over multiple time frames.

So, when does AI become a factor in investment management?  Will it ever replace a living breathing human and outperform on a consistent basis (excluding luck)?  To answer these questions I am planning to attend a series of seminars sponsored by the CFA Society Boston over the next few months. 

The first seminar is on June 3, 2025 and covers how AI will interact at each intersection of the investment value chain and explore the technologies used to get there with case studies.  Speakers from Google, Amazon and quant investment firms are scheduled to participate.

Stay tuned!  D&A will stay focused on cutting-edge technology and ensure that we are fulfilling our fiduciary duty by staying up to date on industry best practices!

AI, Markets and Me!

I am expecting that everyone who reads my blog posts knows that every word comes from me—not from some algorithm or artificial intelligence (AI).  I don’t outsource my views to machines, and I certainly don’t let AI write my investment commentary.  Frankly, I’m growing tired of AI showing up in unexpected places, from “deep fakes” to the algorithms behind product recommendations and even in some marketing copy.

That said, I did something unusual this week: I asked AI to summarize the posts I’ve written since the beginning of the year—not to replace my thinking, but to help sharpen it. After all, there’s been a lot of noise since the S&P 500 hit its all-time high on February 19, followed by a meaningful market pullback.  Looking back, three clear themes emerged—each one still relevant as we navigate the months ahead.

Here is the feedback I received from the ChatGPT artificial intelligence large language model:

Based on the investment commentary and blog posts you’ve shared since the beginning of 2025, here are the three main themes you've consistently covered: 

1. Cautious Optimism Despite Market Highs

• You acknowledged the S&P 500’s all-time high on February 19, but your tone remained measured rather than euphoric.

• Your posts suggest an awareness that strong gains, particularly in tech and AI-related sectors, may be running ahead of fundamentals.

• You emphasized that valuation discipline still matters, especially as concentration in a handful of mega-cap stocks grew.

2. The Repricing of Risk as Markets Pulled Back

• As the market corrected after February, you pointed out that investors were adjusting to stickier inflation, slower Fed cuts, and some geopolitical unease.

• You contextualized the pullback as a normal and healthy reversion following an exceptional 2023 and early 2024.

• Several posts urged clients to stay focused on long-term strategy, not short-term volatility—essentially reinforcing a behavioral anchor.

 3. Focus on Fundamentals and Broadening Market Participation

• You frequently discussed earnings resilience, with an eye toward sectors and companies that are still delivering under higher rates.

• Recently, there’s been a slight shift in tone toward broadening leadership, including mentions of small caps, value stocks, or international stocks.

• Throughout, you've pushed the theme of staying diversified.

Markets will do what they do.  Recent strength and recovery from April’s downturn have certainly stirred a rollercoaster of emotions.  At Dattilio & Ash, we stayed the course with fully invested client portfolios mirroring the market’s ups and downs.  Over the long term, we aim to deliver returns that help clients achieve their goals.

As always, I’ll keep doing what I’ve always done—cutting through the noise, thinking independently, and focusing on what really matters for investors.  AI may summarize my posts, but it can’t form judgment, weigh nuance, or draw on decades of experience. That’s still human work—and it always will be (at least for now?!)

"Look to the Bubble!"

Trust is a universal truth when it comes to investing.  Investors put trust in their advisors to manage their investments to the best of their ability to their agreed upon strategy.  A key component of this trust is communication.  What aspects of communication is D&A committed to and how is it executed?

D&A believes that quarterly investment reporting is critical to client communications.  Markets ebb and flow continuously, but at each quarter-end D&A sends to all clients a detailed quarterly report.  The quarterly report provides useful insight into how D&A has positioned their portfolios given their risk profile and other considerations and its performance.

One of our favorite charts to help communicate this information is our famous “bubble chart” (below).  As you can see from this actual client chart from last year, it highlights the asset allocation weightings (the bubble size) and the periodic returns (the y-axis).  This account targets a “moderate growth” risk profile including a 60% equity weighting and a 40% fixed income weighting.

Each holding in a client account is shown by its ticker symbol (e.g., IVV for the iShares S&P 500 ETF, SCHE for the Schwab Emerging Market Equity ETF, etc.) and the bubble size shows the relative weighting in the account (e.g., IVV is the largest bubble and Cash is the smallest bubble, etc.)

As I wrote to some clients for their 2024 Q3 reports,

Per the chart, all positions showed good positive returns during Q3 with small cap (SCHA), mid-cap (SCHM), international (SCHF), emerging markets (SCHE) and minimum volatility (USMV) leading the way. We are happy to see that these diversifying positions overtook the S&P 500 this quarter showing a broadening of market strength, though the S&P 500 still produced a strong return. Your fixed income investments performed well with positive returns as interest rates dipped and credit spreads narrowed during Q3.

This chart is useful because it summarizes in one chart the key leaders and laggards of return for the period studied with accompanying commentary.

At D&A, we believe that trust is earned not just through performance, but through transparency and consistent communication. Our quarterly reports—and tools like the bubble chart—are designed to give clients a clear, intuitive view of how their portfolios are positioned and performing. By combining data-driven insights with personalized commentary, we aim to keep our clients informed, confident, and engaged in their investment journey. Because when trust is built on clarity, it becomes the foundation for long-term success.

P.S. Extra credit is given to all readers who identify the source of the title, “Look to the Bubble”. It is a reference to the Seinfeld episode where Jerry talks about the black and white “cookie” as a source of unity and understanding. We like to think of our bubble chart in the same way: a simple, visual tool that brings clarity and insight to something as complex as investing.

Harvard's Investment Shuffle

The world of investments is carved into many sub-sets of investors.  These include retail investors such as you and me (!) and institutional investors including insurance companies, banks, and endowments. Regardless of the investor type, it is important that the investor know all of their critical investment policy parameters such as risk tolerance, time horizon, liquidity needs, tax status and unique considerations.  The recent market dislocation has reminded us of this!

College endowments are used by colleges to support their current and future financial needs.  Consequently, a balanced mix of public and private investments generating a mix of cash flow for current needs and growth for future needs is a baseline approach.  However, when an external event occurs, the policy may need to be updated!

As reported in the Harvard Crimson, the Harvard University endowment is planning to liquidate nearly $1 billion (or 5%) of its illiquid private equity this year amidst turbulence in potential government funding cuts that could impact the university’s operations.  Previously, the endowment had held 39% of its asset mix in this illiquid asset class. 

Though the University is not publicly stating that its planned sale is directly in response to the need for liquidity due to potential government funding cuts, this action highlights the need for an investment policy statement to be fluid, adaptable and updated when situations warrant it.

D&A is in complete agreement with the need to keep investment strategies current and in line with client needs and D&A targets that the strategies be reviewed on at least an annual basis.  Moreover, if there is a major life event happening to you in the meantime, please be sure to give me a call so we can ensure that your investment strategy continues to be consistent with your needs.

How We Keep Clients Informed—Not Just Invested

Dear Clients, Potential Clients and Friends -

If you know a friend or family member who's hearing crickets from their advisor—or only getting cookie-cutter reports—send them my way!

At Dattilio & Ash Capital Management, we believe communication is just as important as performance.

That’s why our clients don’t just get market commentary — they get highly personalized quarterly letters that:

• Reflect their actual portfolio allocation and performance

• Include our signature "bubble chart" for a visual snapshot of their investments

• Translate market complexity into plain English

• Explain what we did, why we did it, and what we’re watching next

Here’s an excerpt from a recent actual (redacted) client letter:

“As you can see, most 'risk assets' in your account generated negative returns during Q1 while 'safe' fixed income assets were mildly positive. Positions generating positive returns were international and emerging market equities, while small- and mid-cap equities once again trailed. Fixed income investments were a shock absorber cushioning the fall.”

“We are scheduled to chat again in July but I am happy to get on the phone to chat again sooner if you want; just let me know!  As you will see below, Q1 was a tough period but (as you know) I am an advocate of long term strategic investing and will never try to time the market."

This kind of proactive, plainspoken communication builds confidence — and trust.  Are you getting this from your advisor?

If not, we’d be happy to offer a free second-opinion consultation — no pressure, no pitch.  Just a real look at your current strategy and how it could be improved.

Want to see the difference?  Request a sample (redacted) client letter and bubble chart.  You’ll see what clear, customized investment communication really looks like. 

Thanks,

Tony Ash, MBA, CFA®

Whiplash, Wall Street Style!

Certainly, Wednesday, April 9, was an extraordinary day.  In a sharp reversal from recent weakness driven by tariff concerns, the S&P 500 (IVV) surged +9.5%, small caps (SCHA) followed closely at +9.3%, while core bonds (AGG) held steady at +0.2%.  But markets giveth and markets taketh away—just one day later, the S&P 500 closed down -3.5%.

All D&A clients remained fully invested throughout this period, with portfolios aligned to target asset allocations and no idle cash.  Could we have sold something “rich” to buy something “cheap”? Sure—but good luck getting that timing right.  We chose not to make any reactionary moves.

While I was surprised by the velocity of the rebound, I wasn’t surprised to see a quick retracement. This kind of whiplash reminds me of the heightened volatility we experienced during the COVID era.  In times of deep uncertainty, behavioral biases surface as markets search for equilibrium.  We’re still on that journey.

As I noted in my April 1 blog, “Some are looking for Trump to roll back the tariff proposal to secure a soft landing, while others see him as ‘inflexible,’ leading to continued uncertainty.” So far, we’ve seen a little of both.

Despite the troubling headlines, I will reiterate what I said in my March 12, 2025 blog:

Though no one likes losses, long term investors have ALWAYS been rewarded with market returns reaching new all-time highs by ignoring volatility and holding through tough times.  Though “they all seemed like the end of the world at the time”, markets have always recovered.