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Whitaker-Myers Wealth Managers is an SEC-registered investment adviser firm. The information presented is for educational purposes only and intended for a broad audience. The information does not intend to make an offer or solicitation to sell or purchase any specific securities, investments, or investment strategies. Investments involve risk and are not guaranteed. Whitaker-Myers Wealth Managers reasonably believes that this marketing does not include any false or misleading statements or omissions of facts regarding services, investment, or client experience. Whitaker-Myers Wealth Managers has a reasonable belief that the content will not cause an untrue or misleading implication regarding the adviser’s services, investments, or client experiences. Please refer to the firm’s ADV Part 2A for material risks disclosures.

Past performance of specific investment advice should not be relied upon without knowledge of certain circumstances of market events, the nature and timing of the investments, and relevant constraints of the investment. Whitaker-Myers Wealth Managers has presented information in a fair and balanced manner.

Copyright (c) 2023 Clearnomics, Inc. and Whitaker-Myers Wealth Managers, LTD. All rights reserved. The information contained herein has been obtained from sources believed to be reliable, but is not necessarily complete and its accuracy cannot be guaranteed. No representation or warranty, express or implied, is made as to the fairness, accuracy, completeness, or correctness of the information and opinions contained herein. The views and the other information provided are subject to change without notice. All reports posted on or via www.clearnomics.com or any affiliated websites, applications, or services are issued without regard to the specific investment objectives, financial situation, or particular needs of any specific recipient and are not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. Past performance is not necessarily a guide to future results. Company fundamentals and earnings may be mentioned occasionally, but should not be construed as a recommendation to buy, sell, or hold the company's stock. Predictions, forecasts, and estimates for any and all markets should not be construed as recommendations to buy, sell, or hold any security--including mutual funds, futures contracts, and exchange traded funds, or any similar instruments. The text, images, and other materials contained or displayed in this report are proprietary to Clearnomics, Inc. and constitute valuable intellectual property. All unauthorized reproduction or other use of material from Clearnomics, Inc. shall be deemed willful infringement(s) of this copyright and other proprietary and intellectual property rights, including but not limited to, rights of privacy. Clearnomics, Inc. expressly reserves all rights in connection with its intellectual property, including without limitation the right to block the transfer of its products and services and/or to track usage thereof, through electronic tracking technology, and all other lawful means, now known or hereafter devised. Clearnomics, Inc. reserves the right, without further notice, to pursue to the fullest extent allowed by the law any and all criminal and civil remedies for the violation of its rights.

  • Writer's pictureJohn-Mark Young

The Market Based Argument for Dave Ramsey's Four Categories

For those of us with children, we've lived through the "why" phase. That period in our child's life where they need to have a rational or understanding of everything they do or that happens in the world. My desire was that I never squash that curiosity, even though, at times, it seemed redundant to have to explain to our kids, for the hundredth time, why they needed to wash their hands before eating. In the same way, as Financial Planners, we have to be the greatest critical thinkers in the world. Thus, we must be the greatest inquisitors of why someone should or should not do something. So, when I was first introduced to Dave Ramsey in my church Financial Peace University class, I wanted to understand and potentially critique Dave's investment recommendations if there was anything to critique. Heaven knows there are thousands of Financial Advisors (many of the insurance agents in Financial Advisor clothes) that have an opinion, and not in a good way, about Dave. To refresh, Dave tells folks that they need to invest into four basic categories: Growth, Growth & Income, Aggressive Growth and International. Obviously, every person's situation is unique and someone who is close to or in retirement needs to hedge their assets using some form of non-correlated asset class(es) to diversify their risk when they enter retirement or come to a close proximity to using the money they've saved and invested. But why these four categories? His basis for these four categories is the same basis any Financial Advisor, Planner or Investment Professional would have. Don't put all your eggs into one basket; diversify your portfolio to reduce risk and smooth out returns (as much as possible) and have exposure to parts of the market that are counter-cyclical to each other. Essentially, he is trying to help you live out. Ecclesiastes 11:2, which says, "Give a portion to seven, or even to eight, for you know not what disaster may happen on the earth." So, let's dive into the more technical argument for what Dave is trying to teach us. For a more baseline understanding of what we mean by growth, growth & income, aggressive growth, and international read this article here. For patient investors with time horizons of years and decades, the primary drivers of portfolio returns are not day-to-day market fluctuations but the business cycle and other longer-term trends. One reason that questions around inflation, the Fed, and geopolitics have resulted in market swings is that they shed light on where we might be in the cycle. Additionally, the business cycle impacts not only the broader stock market and interest rates, but individual sectors as well. And individual sectors are what comprise each of the four categories Dave speaks about. Check out this chart below to see how, in an individual year, each sector can fluctuate from top to bottom.


Sectors can be cyclical or defensive relative to the business cycle

Stock Market Sector Performance
Stock Market Sector Performance

At the moment, there seems to be little agreement among investors and economists about where we are in the business cycle, just as there is little agreement about whether there might be a recession. Are we experiencing late-cycle dynamics in which the economy overheats, policy rates are too restrictive, and growth begins to slow, signaling an impending recession? Or are there early-cycle dynamics in which inflation stabilizes, financial conditions improve, and demand accelerates, all of which set the stage for future growth? While it remains uncertain, recent economic data are consistent with an economy that is robust but slowing, alongside improving inflation. This matters not only for the broad market but for sectors as well. Sectors are defined by the types of activity that businesses perform. There are many classification systems including the North American Industry Classification System (NAICS) used by the federal government, but most investors tend to use the Global Industry Classification Standard (GICS) from Standard & Poor's. This divides the S&P 500 (or any index) into 11 sectors ranging from Information Technology to Real Estate, which can then be broken down further into Industry Groups, Industries, Sub-Industries, and finally to individual stocks. Sectors many times are what dominate certain categories of funds. For example, a growth fund like the QQQ has 49% of its portfolio in technology, 16% in communication services and 14% in consumer discretionary. Additionally, a growth & income fund like the Schwab US Dividend ETF (SCHD) has 18% of it's portfolio in industrials, 16% in healthcare, 13% in consumer staples, and 10% in energy. Each of those funds are buying a different type of stock and those stocks can be allocated into: cyclical versus defensive sectors. Cyclical sectors are ones that perform well in the recovery and expansion phases of a business cycle, sometimes referred to as being pro-cyclical. For example, Consumer Discretionary businesses benefit from growing consumer spending and confidence which, in turn, depends on the health of the economy. Amazon, Netflix, Walt Disney, Nike and Ford would fall into this category. In contrast, defensive sectors are those that perform well relative to the broader index when the economy is slowing or contracting. Consumer Staples, for example, have relatively stable demand and tend to have higher dividend yields, two attributes that make them attractive when the economy and market is uncertain. Procter & Gamble, Coca-Cola, Walmart and Nestle are some examples of these companies.


The business cycle is near its pre-pandemic trend

U.S. Business Cycles
U.S. Business Cycles

The first chart above, which shows the performance of each sector ranked from best to worst each year since 2008, highlights some of these dynamics. Focusing on individual years and sectors, we can see that in 2008, during the global financial crisis, the best-performing sectors were defensive ones such as Consumer Staples, Health Care, and Utilities. In a year like 2019 during which the S&P 500 index experienced a total return of 31.5%, the best-performing sectors were cyclical ones such as Information Technology, Communication Services, and Financials. In between, sectors may experience specific factors that add or detract from performance. One of the key takeaways from any chart of sector performance is how difficult it is to predict how any group will do in any given year. In 2020 and 2021, Energy stocks outperformed by a wide margin after struggling almost every year since 2014. This year, technology-related sectors have outperformed due to trends such as the enthusiasm for artificial intelligence, but this is a sharp reversal of last year's dynamic. Given this history, it makes sense for disciplined investors to stay diversified across sectors in order to take advantage of trends across all areas. In other words, the principle of diversification is as true across sectors within a market as it is across broad asset classes. When considering what a growth fund is accomplishing for your portfolio (grabbing access to sectors like technology and consumer discretionary), it needs a mate to fully compliment your portfolio during different market cycles. Hence, growth & income with its consumer staples and healthcare. The same applies to international markets and smaller and mid-sized companies (aggressive growth). Small and mid-sized companies tend to perform well during the beginning of an economic cycle and lag near the end of a cycle. Recently, we've seen a large dispersion between large companies (growth/growth & income) and small to mid-sized companies (aggressive growth). International markets can perform very differently than the US market, however we would argue that specific country selection is the key, considering the MSCI EAFE (the index for the international market) has only returned 4.38%, on a ten-year basis (ending 8/31/2023).


Market cycles have increased in length over time

Stock Market Bull and Bear Cycles
Stock Market Bull and Bear Cycles

This is especially relevant today given the uncertainty around the business cycle. Many investors who came into 2023 certain that there would be a recession likely focused on the defensive areas of the market that did well last year, only to then have cyclicals outperform. From a longer-run perspective, the pace of economic growth has slowed but is back to pre-pandemic trends. While the S&P 500 is still recovering from last year's bear market, history shows that bull markets can happen swiftly, often when they are least expected. This was true in both 2009 and in mid-2020. In all cases, having an appropriate set of sector exposures across both cyclicals and defensives can help investors to stay balanced regardless of what may come next.

The bottom line? The business cycle is what matters for long-term financial success. This directly impacts sector performance, which can be challenging to predict. Disciplined investors should continue to stay diversified across sectors and the growth, growth & income, aggressive growth, and international continuum, as the cycle unfolds.

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Whitaker-Myers Wealth Managers is an SEC-registered investment adviser firm. The information presented is for educational purposes only and intended for a broad audience. The information does not intend to make an offer or solicitation to sell or purchase any specific securities, investments, or investment strategies. Investments involve risk and are not guaranteed. Whitaker-Myers Wealth Managers reasonably believes that this marketing does not include any false or misleading statements or omissions of facts regarding services, investment, or client experience. Whitaker-Myers Wealth Managers has a reasonable belief that the content will not cause an untrue or misleading implication regarding the adviser’s services, investments, or client experiences. Please refer to the firm’s ADV Part 2A for material risks disclosures.

Past performance of specific investment advice should not be relied upon without knowledge of certain circumstances of market events, the nature and timing of the investments, and relevant constraints of the investment. Whitaker-Myers Wealth Managers has presented information in a fair and balanced manner.

Copyright (c) 2023 Clearnomics, Inc. and Whitaker-Myers Wealth Managers, LTD. All rights reserved. The information contained herein has been obtained from sources believed to be reliable, but is not necessarily complete and its accuracy cannot be guaranteed. No representation or warranty, express or implied, is made as to the fairness, accuracy, completeness, or correctness of the information and opinions contained herein. The views and the other information provided are subject to change without notice. All reports posted on or via www.clearnomics.com or any affiliated websites, applications, or services are issued without regard to the specific investment objectives, financial situation, or particular needs of any specific recipient and are not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments. Past performance is not necessarily a guide to future results. Company fundamentals and earnings may be mentioned occasionally, but should not be construed as a recommendation to buy, sell, or hold the company's stock. Predictions, forecasts, and estimates for any and all markets should not be construed as recommendations to buy, sell, or hold any security--including mutual funds, futures contracts, and exchange traded funds, or any similar instruments. The text, images, and other materials contained or displayed in this report are proprietary to Clearnomics, Inc. and constitute valuable intellectual property. All unauthorized reproduction or other use of material from Clearnomics, Inc. shall be deemed willful infringement(s) of this copyright and other proprietary and intellectual property rights, including but not limited to, rights of privacy. Clearnomics, Inc. expressly reserves all rights in connection with its intellectual property, including without limitation the right to block the transfer of its products and services and/or to track usage thereof, through electronic tracking technology, and all other lawful means, now known or hereafter devised. Clearnomics, Inc. reserves the right, without further notice, to pursue to the fullest extent allowed by the law any and all criminal and civil remedies for the violation of its rights.