Mortgage rates remain near all-time lows, real estate prices are escalating, and the stock market has been on fire for the past few years. Inevitably, an age-old question has resurfaced, “Should I borrow against the equity in my home to invest in the market?” Seems like a no-brainer, with cash-out refinancing and Home Equity Lines of Credit (HELOCs) carrying interest rates in the 3% range.
One of Van Wie Financial’s foremost suggestions (read: rules) for investors is to never expose money to the stock market unless you have a minimum of 5 years before needing to touch the funds. Risk is a function of time, and market risk is not tolerable to many people. In any single year, the probability of loss is about 37%. Even after 5 years, the probability of loss is about 22%, and in ten years the risk of loss shrinks only to 14%. It is critical to note that these numbers apply to a theoretical diversified portfolio; 100% stock portfolios are even riskier.
How long would you be willing to pay interest on your borrowed money before realizing a positive return? Six months, one year, two, five, ten, or more? Sizing up market risks, then adding the cost of borrowed money, most investors get a bit queasy if they don’t show a positive return for several months or years. Here are just a few pertinent forms of risk:
Stock Market Risk is always present and unpredictable. Ten-year periods ending in 1999, 2000, 2001, and 2002 produced sequential S&P500 Index returns of -3.8%, -3.4%, -0.9%, and 0.4%. So that readers might breathe a little easier, there has never been a 15-year period in which the broad U.S. stock market lost money.
Credit Rating Risk results from borrowing against a home, which could lower your credit score. Excellent credit scores are hard-earned and easily “dinged.” Credit scores impact everything from credit card and loan interest rates to insurance premiums. For people with marginal credit scores, the loss of a few FICO points could be costly.
Real Estate Market Risk is real. “Recency Bias” is an observable phenomenon that causes people to believe that the future will emulate the present and recent past. House prices have been rising for some time now. When the country undergoes another real estate Bear Market, and prices begin to fall, investors who borrowed could get caught in a cash crunch.
We have no philosophical bias against the “borrow-to-invest” concept. Our arguments, both pro and con, are practical, based on decades of experience, and reflective of a deep understanding of people and their relationships with money. Generally, as we discuss risks with clients or potential clients, enthusiasm for the “borrow to invest” concept wanes.
Anyone considering tapping home equity to risk investing in the market should be financially stable, educated, and mentally prepared. And, did we mention patient?
Van Wie Financial is fee-only. For a reason.
Inflation is saturating national news these days, which should come as no surprise to anyone. Blatant examples of rising prices are everywhere, exemplified by gasoline, where prices are announced on the marquee before you even reach the pump. Driving past the same station day after day, you have likely noticed the price change from under $2.00 to over $3.00, and more in some areas.
Some inflation is more subtle and difficult to assess without taking time to analyze. A classic example came to light this week when our private Medicare Supplemental Prescription Drug insurance provider sent a 12+ page booklet itemizing changes for the coming year. A dive into the paperwork revealed a collection of increases that together will add significantly to our 2022 out-of-pocket medical expenses.
Our basic monthly premium increase is the “face value” of prescription drug insurance. In this case, the increase was “only” 4.88%, or $43.20/year (each). However, that is just the beginning. Our Annual Deductible increased by $75.00 (again, each), piling an additional 8.48% onto the inflationary impact. Think I’m done yet? Not at all, because our Tier 1 – Preferred Generic Drug $0.00 copay will suddenly be $3.00. Due to the rules of math, there is no percentage increase calculation, as we can’t divide by zero. We could go through our 2021 records to see how often this might apply, but it is simpler to say that each $3.00 charge adds to our inflation-adjusted cost.
Tier 2 – Preferred Generic Prescription Drug copay will rise from $11.00 to $13.00 each, again adding to the inflating cost of our insurance. There may be other subtle inflation indicators hidden from view. Sometimes meds get changed from Tier 1 to Tier 2 or higher, increasing out-of-pocket expenses for repetitive prescriptions. Whatever other increases are looming remain as yet unidentified.
Putting it all together, it appears that we will be experiencing about 15% inflation in this single budgetary item. When the national Social Security COLA is released later this year, along with the increased cost for Medicare, we will update the inflationary impact. Meanwhile, study your own costs and watch for changes. Shop relentlessly for better deals. It’s all up to you to control expenses to the degree possible.
Remember, the government is lying to all of us regarding inflation. If you doubt that, Senator Rick Scott of Florida recently proffered a Bill to require Senate Committees to include an inflationary impact statement for every Bill passed out of committee. Senate Democrats voted him down. Why?
Van Wie Financial is fee-only. For a reason.
Millions of Americans remain unemployed, while even more millions of job openings remain unfilled. One of the most unusual sights today is a business’s door front without a “Help Wanted” or “Now Hiring” sign. Amazon is adding 125,000 jobs during the Holiday Season, starting wage $18.00/hour. Restaurants are so desperate for help that some are closing an extra day or two each week. Car sales are through the roof, despite scarcity due to semiconductor shortages. Face it, the economy could be booming, right here in the Homeland. In fact, a recent email that is “going around” says:
To Whom it May Concern: This entire country is hiring! If you don’t have a job….you just don’t want one! The End!!!
Yet, our Federal Government ruling class is demanding more economic stimulus, under the guise of infrastructure investment. Do we really need it? True infrastructure, which is limited to a tiny proportion of the overall spending plans, would be helpful. That can, and should, be a stand-alone proposal.
Reasons for avoiding further stimulus include the following:
- Start with GDP or Gross Domestic Product. GDP is used to measure the total value of goods and services produced in the USA. GDP has been rising consistently and quickly, following last year’s setback due to COVID-19. From the plethora of available jobs listed nationally right now, I’d argue that not increasing our debt is a higher priority than injecting additional stimulus through excessive spending.
- Government Revenues are currently the highest in history, up 13% year-over-year. Raising more revenue, whether from adding make-work jobs or raising taxes, would likely slow our current economic recovery. Filling current job openings, while at the same time reducing outlays for Unemployment Compensation, results in higher net revenues.
- Arguments for new stimulus programs are not based on solid economics. Proponents of new social programs generally favor additional taxation over job creation. My view is completely at odds with theirs. To me, as the old saying goes, “If it isn’t broken, don’t fix it.” In fact, far from broken, our economy is right now in the “Goldilocks” comfort zone, neither too hot nor too cold.
- Congress has a never-ending supply of perceived and reported problems to solve, with a concurrent undeniable urge to “do something.” The best policy for right now is to do nothing.
Van Wie Financial is fee-only. For a reason.
Behind closed doors and protected from average Americans by a newly reconstructed fence around the Capitol Building, Joe Biden, Nancy Pelosi, and Bernie Sanders recently hammered out their Taxation Wish List. In true Washington style, the euphemism American Families Plan, or AFP, was bestowed upon their List. The plan is to implement AFP in a single-party Budget Reconciliation Bill that will be rejected by every elected Republican. I’m experiencing ObamaCare déjà vu.
“Progressives” claim to need vast new Government Revenues to cover their underestimated $3.5 Trillion spending boondoggle, while supposedly living up to Presidential Candidate Biden’s promise to not increase taxes on anyone earning under $400k annually. A simple look at reality, plus a reading of the proposal, suggests a miserable failure.
Taxes have already been raised on all Americans through government-imposed inflation. Largely based on restrictive Energy Policy, items such as gasoline and food have already risen sharply. This is essentially a regressive tax on Americans, as lower-income people spend a larger share of their income on necessities. So much for limiting new taxes to “the Rich.”
As to revenue projections, Congress uses a “Static Budgeting” process that does not reflect human behavior. We have already read stories from high earners, who will be working, producing, and earning less, should their marginal tax rates rise. Over time, actual Government Revenue collections will disintegrate.
For average Americans, most AFP provisions will not directly affect Income Tax Returns. Long-term, AFP will suppress economic viability nationwide, and we will all be hurt. Punishing success by taxing larger income taxpayers to an even higher degree has never worked, and never will.
Each of AFP’s provisions applies mostly to higher-income people, with no immediate effect on the rest of us. Long-term negative effects on the economy will impact every American. Producers will produce less, manufacturers will manufacture less, and service providers provide less service. The Administration is incorrectly claiming that AFP, which would cost a minimum of $3.5 Trillion, is totally paid for by taxing rich people and corporations. They are wrong.
Van Wie Financial is fee-only. For a reason.
May 17, 2021, is long gone, and many of you probably forgot why it was an important date. Due to COVID-19 and other factors, the usual IRS April 15 tax filing deadline was extended for 2020 Tax Returns. Today, except for those taxpayers who filed for an Automatic Extension, 2020 Returns have been examined. Now, large numbers of taxpayers are receiving dreaded mail with the IRS logo in the return address section of the envelope. For those who have never found the IRS logo on their incoming mail, it is never a good feeling. No exceptions.
This year, the largest group of taxpayers receiving IRS correspondence are receiving math-error letters. IRS has sent more than 14 times more math-error letters than were sent last year. The good news is that math-error letters are not audit notices but rather requests to correct information that doesn’t match IRS records. Most math-error letters for 2020 Tax Returns are due to economic stimulation payments made following the beginning of the coronavirus pandemic in early 2020.
Economic stimulus checks were authorized for Americans whose annual incomes were below certain specified limits. Determining who was eligible required IRS to use tax data from past years to prepare a list of 2020 recipients. For the majority of taxpayers, that information has not changed substantially. But, for a significant group of payment recipients, rising incomes eliminated all or part of their eligibility. As a result, many people received payments to which they were not entitled. Now, IRS wants to be reimbursed. Soon.
We should note that the result of any math-error letters correction may result in a lower refund, or a tax due, which must be paid in a timely manner. Unfortunately, IRS neglected to convey impatience by leaving out the 60-day deadline for responding to the math-error letters. Now, at taxpayer expense, they are sending follow-up letters to inform people that time pressure exists. Failure to comply may result in referring the Tax Return to the IRS Audit Department.
In case anyone believes that the current math-error problem is a one-off, next year’s math-error letters will likely be more numerous and more complicated. There are additional child tax credit payments being made to many people in 2021, which must be documented on Tax Returns filed in 2022. Rules for these payments are different and more complicated than last year’s payments. Further, many more people had rising incomes this year as they regained employment, and will end up ineligible for the child tax credits paid to them in 2021.
Eligibility rules are posted on the IRS website (www.irs.gov). If you have received a math-error letter and/or tax credit payments, it would be wise to visit the website and become familiar with the eligibility rules.
Van Wie Financial is fee-only. For a reason.
Financial giant Goldman Sachs recently released a dismal report regarding potential upcoming evictions of American renters. According to Goldman, in the absence of government action, about 750,000 American households are subject to eviction by the end of the year 2021. This group owes their collective landlords about $17 Billion in back rent. Landlords, whether individuals or corporations, are financially dependent on rental income to maintain investment properties. Further, they have contracts with renters promising rent payment.
Along came COVID-19 in 2020, and many renters lost their employment income. As much as I detest government expansion, some problems are so massive that only government is large enough to make the needed difference. Congressional reaction was swift, and assistance for almost every conceivable aspect of the economy began quickly.
Among many bailouts was a provision for renters, allocating nearly $47 Billion to 50 states and Washington, D.C. Local governments were charged with disbursing funds to affected renters, restoring their ability to pay rent. This was designed to circumvent a potential eviction crisis. But it has not worked.
Of the nearly $47 Billion allocated, only about 11% was actually paid to renters. Over $40 Billion remain in the coffers of the states. If governments worked efficiently, that money would be doled out immediately, landlords would get paid, tenants would have a secure a place to live, and the economy would carry on as before. Eviction problem solved. If only government worked like a private business.
Two problems are hindering this process. One is qualification standards set by the Federal Government, under which many renters simply don’t qualify for relief. The second problem is lax renters, who seized the opportunity to stop paying their rent. Together, these problems contribute to a potential human homeless expansion.
What to do about it? That is the dilemma. First, stop the giveaways, as the money is already in the hands of the state governments. Next, at the Federal and State levels execute an independent review, but one that employs objective and qualified consultants. Give them a short deadline and demand results. In other words, act like a successful private organization by changing the Regulations.
Color me doubtful about a timely fix. I want my money back.
Van Wie Financial is fee-only. For a reason.
Becoming a responsible Client is partly about your financial advisor, who must (but may not) be honest, but the onus is on you, the Client, who must remain alert. Looking out for Number One (that’s you, the Client) requires attention. While realizing an appropriate return on your investments over time is the important objective, not getting ripped off is critical. And avoidable. Learning how not to be ripped off is mostly up to you; how you handle your relationship with your advisor will determine your eventual outcome.
Your first responsibility is in selecting an appropriate advisor for your needs. If you are deeply involved in trading individual stocks, a stockbroker with a reputable Brokerage Firm may be right for you. However, if you are interested in comprehensively planning your entire financial life, you should seek an advisor with a broad knowledge of topics. Insurance Planning, Tax Planning, Investing, Estate Planning, Cash Flow Planning, College Funding, and Retirement Income Planning are important components of a lifetime financial plan. Advisors capable of participating in and coordinating all of these must-have special skills and credentials. To assure that you are dealing with highly a trained and knowledgeable advisor, look for the Certified Financial Planner®, or CFP®, credential.
Advisors are compensated through commissions and/or fees, and a good Client needs to understand the compensation formula for any advisor being considered. Fee-only advisors are fiduciaries, meaning that they must place Clients’ interests ahead of their own. Accepting the serious responsibility of becoming a fiduciary eliminates commissions from consideration. True fiduciaries are fee-only (not to be confused with “fee-based”). Potential Clients should be aware of the difference, and only interview advisors who actually operate within your desired business model.
Regardless of the type and style of a potential advisor, the second criteria for a good Client is to understand that they should never write a check to the individual advisor. The advisor’s Custodian (any of a number of large, well-known companies that are in business to hold assets and perform transactions) should be the recipient of all funds and will retain all accounts and assets. Accounts opened must be shown under your name on the custodian’s webpage, which must remain accessible by the Client from any web browser at all times. Monthly statements, confirmations, etc. should only come from the custodian and must be timely.
Not getting scammed is vital to success. Most scammers are not as sophisticated as Bernie Madoff, but some are pretty darn smooth. Don’t fall for obvious “sounds too good to be true” promises, which are all-too-often camouflaging fraudulent schemes. Stick with investments you understand and can monitor, watch for unusual transactions, and avoid getting stung by the handful of criminal so-called financial advisors. Remember, it’s your money. Treat it appropriately, and it will pay you back for a lifetime.
Van Wie Financial is fee-only. For a reason.
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Average American workers miss out on $1,336 annually of “free” money. According to Fidelity Investments, that is the amount that workers fail to receive in 401(k) employer matching funds every year. This is due to insufficient salary deferrals by working people, who are not contributing enough to reach the employer’s contribution matching limits. Failure to collect available free funds into your account means that your money is being underworked.
Leaving money on the table should be a last resort, financially speaking.
Many reasons, and several excuses, address this ongoing financial tragedy. Some people simply cannot make ends meet after increasing monthly deferrals, despite receiving current tax breaks. Others (we suspect an even larger group) are unaware that their retirement money is not working up to its potential.
Encouraging 401(k) participants to increase their contributions is largely a matter of education. Financial advisors illustrate that increased contributions result in much higher account balances at retirement. For example, increasing personal contributions, and receiving the extra $1,336 in matching funds per year, raises the expected retirement account value by at least $300,000 over 30 years.
Underworking your 401(k) through ultra-conservative investing is also common, and especially among young people. When getting started, young savers should try to be very aggressive, owning a high percentage of quality equities. A very low-cost S&P500 tracking fund is a good choice for younger investors. Diversification into other asset classes can be implemented with age and increasing account balances.
IRA investors don’t receive matching funds, but similar strategy applies. As recently as 2015, only 8% of eligible Americans contributed to an IRA. Of those, only about a third contribute the maximum every year. This is yet another example of underworking retirement funds. Just as with young 401(k) participants, young IRA owners should invest aggressively, adjusting the asset allocation over time to reflect age and account balance.
In economics, lost performance from underworking your retirement funds is called “opportunity cost.” Also in economics, we use the term “sunk cost,” which simply means that what’s in the past cannot be changed. Fully employing your 401(k) and IRA funds should begin immediately. Your future comfort depends on your actions today.
Van Wie Financial is fee-only. For a reason.
August’s release of the July Producer Price index (PPI) showed an increase of 1.0% for July, following an increase of 0.8% in June. The earlier Consumer Price Index (CPI) showed annualized gains of over 6% and accelerating. Gasoline at the pump is up about $1.01 per gallon since this time last year. Inflation is here, everyone is feeling it, and it is a shame.
That is the current economic picture, and it did not have to happen. Last week we wrote about poor energy policy in the U.S., which is at the core of the national inflation problem.
Energy is not the only component of rampant inflation. Economics 101 teaches us that there are four Factors of Production: Land, Labor, Capital, and Entrepreneurship. Each can contribute to inflation or deflation, depending on the overall economy, national policy, Americans’ expectations, and a host of other contributors. Unfortunately, politics is at the heart of many factors.
Land is plentiful and affordable, but our energy policy is taking millions of acres off-limits for energy exploration and drilling. This adds to the inflationary cycle by driving oil purchases offshore to competitors, many of which are not friendly to the USA.
Labor is in short supply, due to poor economic policy. Available jobs are now over 10 million, and people are reluctant to fill them until excessive Unemployment Compensation (U/C) benefits dry up (currently slated for September 6, 2021).
Capital is cheap, brought to us by poor FED policy. “Easy Money” is supposed to be a tool used by the FED when the economy is in bad shape and needing a jump start. While that was the case about a year and a half ago, today’s strong recovery requires raising interest rates to dampen inflation.
Entrepreneurship is a hallmark of the American experience, fueled by opportunity, education, and availability of the other three Factors. Today, Land is plentiful, Capital is cheap, but Labor shortages and expenses are problems for existing employers. Potential new entrepreneurs are aware of labor market conditions and are holding back new products and companies.
Economic policy is a large component of inflation. Yet another problem is active in the political class as we speak. Regulatory costs and threatened increased taxation are passed along to customers, fueling inflation.
Pay increases at the national level are running about 4% annually. Inflation at the current level exceeds labor increases, creating a lower standard of living. Thomas Jefferson famously said, “You get the government you elect.”
Is it 2022 yet?
Van Wie Financial is fee-only. For a reason.