Sometimes we feel like we need to be the watchdogs for financial reporting, and this week we have a classic example. Pulled from the Sunday, October 28, 2018 online headlines in Yahoo! Finance(Yahoo! only reported it, they did not author the piece), was this lead:
That seems like an innocuous statement on its face, but anyone with sufficient training in economics understands that it is blatantly incorrect. In Macroeconomics, we learn that GDP, or Gross Domestic Product, is a measure of the economy output of a country over a defined period. Changes in GDP are used to illustrate the health of the economy by measuring growth or contraction in GDP. Presidents are measured, in part, by the health of the economy during their tenure. In 2018, we have experienced a very healthy growth rate, as measured by the GDP, which was 4.2% in Q2, and has been estimated to be 3.5% in Q3. The Q3 number is subject to a couple revisions, but it is likely to be fairly accurate at 3.5%.
Apparently, some of the President’s critics are not terribly happy about this revelation, as evidenced by the above-captioned headline. One of Trump’s main economic targets is to narrow the trade deficit (see definition below). In Q3 that did not happen, as imports outpaced exports by an increased margin. Ipso facto, they imply that Trump is failing in his attempts to balance international trade.
For definitions of terminology in finance and economics, we highly recommend the website Investopedia.com, from which we pulled this explanation of the effect of trade imbalances on GDP:
“Impact of the Balance of Trade: The balance of trade is one of the key components of a country’s gross domestic product (GDP) formula. GDP increases when the total value of goods and services that domestic producers sell to foreigners exceeds the total value of foreign goods and services that domestic consumers buy, otherwise known as a trade surplus. If domestic consumers spend more on foreign products than domestic producers sell to foreign consumers – a trade deficit – then GDP decreases.”
Simplified, this means that the author has it exactly backwards; increased imports produce reduced GDP. We can think of only two possible reasons for erroneous reporting such as this. The first is that the authors and publishers have such a limited understanding of economics that they should probably seek a different focus for their journalist talents. The second, and more likely, scenario is that their political bias causes them to put out misinformation in hopes that voters will buy their hype. Either way, we are here to assist in revealing “fake news” wherever we can.
Van Wie Financial is fee-only. For a reason.
Despite his naysayers and critics, President Trump managed to “herd the cats” in Congress in late 2017 in order to pass the Tax Cuts and Jobs Act of 2017. Many among us were trepidatious, not truly believing the political hype about “tax cuts for the Middle Class.” We were (thankfully) wrong, and the tax cuts went through as promised.
Having now had time to digest the tax changes, and to incorporate them into our work as financial advisers and planners, we are able to offer suggestions for clients with varying financial goals. More than ever before, income planning has become a forefront issue. This is due mostly to two factors; reduced tax rates, and expanded tax brackets.
Not only are these changes important to working people, but they play a large role in estate planning. Think about this; would you rather pay more taxes today and leave more tax-free assets to your heirs, or leave the heirs with more eventual taxes by paying less today? The answer is not always easy, and is dependent on the legacy you choose (or, can afford) to leave.
Under the new tax law, an expanded range of planning techniques is available for both earners and retirees. My focus here will be on retirement years, and how to explore income to maximize the trade-off between taxes today and taxes later. Possibilities expand with the number of forms of income available to the retiree. For today’s retirees, these can include, but are not limited to:
- Pension income
- Annuity income
- Interest and Dividends from investments
- Required Minimum Distributions from IRAs, 401(k)s, TSP Accounts, and 403(b) Accounts
- Social Security income
- Disability income
- Qualified Longevity Annuity Contracts (QLAC)
- Part-time work
- Real estate rentals
- Inheritance
Some of these items are fixed, but others are variable and under control of the retiree. Some assets receive a “step-up in basis” at the death of the owner, and others do not. Some items go to zero upon the death of the retiree, but others don’t. Some receive Long-Term Capital Gain or Qualified Dividend tax treatment, but others don’t. Understanding the way taxes are levied on various forms of income is important for planning a managed tax bill and an optimized legacy at death.
For a married couple filing jointly, the marginal tax rate (the rate at which 1 more dollar of income will be taxed) was 25% over a taxable income of $75,300. With passage of the Tax Cuts and Jobs Act of 2017, the marginal rate is less than 24% all the way to $315,000, and is only 12% up to $77,400. This opens up significant possibilities when doing income planning.
Planning for income and estate taxation is part of the service of Certified Financial Planners operating in a fee-only Registered Investment Advisory (RIA). Van Wie Financial is fee-only. For a reason.
October 11, 2018: Yesterday was not much fun on Wall Street, Main Street, nor on Your Street. The Dow-Jones Industrial Average (DJIA) lost 831 points, closing at 25,598. Moreover, the previous couple days weren’t that much fun, either. What’s up with that?
I took a little stroll in the financial park today, just to regain some orientation, and was intrigued by my findings. The first tidbit came from a 1-year look-back on the DJIA, which yielded an interesting number – 22,779. A little simple math shows that the index has gained 2,819 points (12.37%) in exactly one year. That is above the average annual performance for the past 100 years.
So why does it feel so bad, you might ask? Several of you have actually done just that, and we felt that a response was warranted. After all, we are in the market personally, just like you are.
Let’s look at some of the media hype surrounding this normal market pause. How many of you think that DJIA 26,000 is a brand new phenomenon? Would you believe that we first achieved that milestone on January 17, 2018? Look it up if you need to, in order to feel better.
Further, how many remember that in a span of two weeks (January 26 through February 7, 2018) the DJIA fell 2,756 points? This was a drop of over 10%, which is called a “correction.” The average number of “corrections” over time is one per year. We didn’t have one in 2017, so are we due for another one in 2018? We have no idea. It could happen, but this is not 2007, a year when the economy was in ruins.
Why, you might ask, is this happening? There are reasons, and there are excuses, both in abundance. None of either can be shown to have caused the sell-off. The market does what it does, without regard to our feelings, our insight, or our analysis. What matters is the driving force of market performance – the economy. Right now, we challenge anyone to find a better time in the nation’s economic history.
Logic dictates that this is a temporary, normal condition, which will soon end. Neither fun nor profitable, it is normal and healthy for the market. We suggest you take in a good movie, go for a walk on the beach, or otherwise bide your time for a while. Let the current outstanding business environment create the turnaround we need in order to feel better. It will come. We can’t say if it will be one day, one week, or longer, but we are confident that it can’t take long in this economy.
Van Wie Financial is fee-only. For a reason.
(Update – This letter was written and sent on October 11, and on that day the DJIA fell another 500+ points. On the 12th, a Friday, the DJIA rebounded nearly 300 points. This Blog is being written on Saturday, October 13, and we have no idea what next week will bring.)
Market watchers, investment managers, financial advisors and investors everywhere constantly seek new, current, and comprehensive information. In our 24/7/365 news cycle, data is everywhere, but we are left to ourselves to find raw data, and then to interpret that information to guide policy.
Jobs reports are released during the first week of each new month. The first report is an analysis of changes in private sector payrolls, as compiled by ADP, the large payroll processing company. ADP reports are produced from ADP’s internal numbers of actual payroll employees, and tend to be very timely. They are released on the first Wednesday every month, and precede the government reports, which come out on Friday. In the Financial Media, ADP reports are generally ignored.
On the first Friday of the new month, the U.S. Government Bureau of Labor Statistics (BLS) releases their reports, starting with a “Headline Number,” which is what the media touts as “The Jobs Report.” That, of course, is nonsense, as many reports must be taken together in order to get a clear picture (one worthy of affecting policy).
Here are the steps to a more thorough analysis:
- ADP (payroll processors) releases their monthly private sector jobs changes at www.adpemploymentreport.com
- BLS releases their “Establishment Survey” at www.bls.gov, detailing job additions or losses among large employers
- Each monthly BLS report also details revisions to their prior 2 months of reports
- BLS also releases their “Household Survey,” which is developed from actual household sampling
- The Household Survey varies from the Establishment Survey, as it is picks up people who are self-employed
- Finally, BLS also publishes the “CES Birth/Death Adjustment”at www.bls.gov/web/empsit/cesbd.htm, estimating jobs created or destroyed through business startups and closings
Individually, these reports provide bits of data. Together, they form a picture of the overall jobs market in the country. Individual statistics cannot provide a comprehensive picture of the national economy, but jobs and unemployment are among the most meaningful indicators. Our economy is 70% consumer-driven, and a growing job market translates into creation of new consumers.
Rather than accepting “Headline Numbers” and their chosen adjectives, learn to do a little more research, or listen to our monthly analysis on the Van Wie Financial Hour.
Van Wie financial is fee-only. For a reason.
You may have heard advertising lately claiming that “Wall Street 401(k)s have failed.” I’m not sure what a “Wall Street 401(k)” is, but I assume they mean those accounts invested in traditional stock and bonds.
Why is this claim being made, and on what is it based? It is a strange conclusion to draw here in the 10th year of the second-longest Bull Market in history. A recent report by the Federal Reserve (FED) highlighted some observations, and I believe that the insurance industry misinterpreted the FED’s findings. Among the FED observations were:
- A typical couple nearing retirement will receive only $600/month from their 401(k)s.
- The $600 payment is not indexed for inflation.
- 401(k) balances for the age group 45 to 54 have declined by an average of 3% during the past 3 years.
- People aged 35-44 have experienced balance declines on average of nearly 20% in three years.
- Reasons for the declines are “high fees and leakages.”
The insurance industry concludes that, “Continuing to Do Something that isn’t Working is INSANITY.” While no one could disagree with that statement, we wonder why the average account balance in these age groups is declining in an era of rampant market growth. Yes, 401(k) Plans have been subjected to high fees. However, since the Bush Administration’s Pension Protection Act, fees have been steadily declining. “Leakages” refers to people withdrawing money from their plans prior to retirement. I fail to see how that could be the fault of the 401(k) Plan itself.
So far, there is nothing I see that would render the 401(k) Plan a pariah. Blaming the 401(k) Plan itself for the failures of many 401(k) Plan participants is backwards. Problems with 401(k) accounts frequently rest with their owners, who far too often are taking early withdrawals, cashing in accounts when they leave an employer (failing to roll over their balances), and simply failing to contribute on a routine basis. Perhaps Plan participants are failing their own 401(k)s? If so, wouldn’t these people also draw funds from their life insurance policies? Who or what is to blame for many peoples’ failures? Draw your own conclusions.
Van Wie Financial is fee-only. For a reason.
Identity theft is more common today than ever before. Credit monitoring is great, but it only helps AFTER something bad has happened. How are we supposed to prevent identity theft?
Freezing your credit is a way to prevent anyone (including yourself) from opening new lines of credit with your social security number. If you know that you will not be opening any new credit cards or applying for any loans soon, freezing your credit is a way to give yourself peace of mind. You can also freeze your child’s credit if they’re under 16 to prevent anyone using theirs.
The issue with this is that there have always been fees to freeze and “thaw” your credit. This can go from being mildly irritating to not worth the expense. But President Trump just signed a law that removes fees from freezing your credit. All three reporting agencies must offer this service for free to anyone who needs it. This law also gives active military free credit monitoring in addition to this service. When you are ready to open a new line simply “thaw” your credit and apply for that new car. In some states thawing your credit can still carry a fee, anywhere from free to $10.
This service has NO effect on your credit score. It is a great way to protect yourself without having to pay for those expensive credit monitoring services.
You have all heard and read the market doomsday prophets, but lately they are taking their pitch to a new level. The headlines are enough to send chills down your spine. “Market Crash Inevitable, or “Next Market Meltdown,” or even “Trump Will End the Dollar as We Know It,” ad nauseum. What do they have in common? They profess to have “The Answer,” and for an annual fee (or a huge commission,) they will share their survival secret with you. Just send money.
What else do many of these dismal prophets have in common? They can be somewhat believable, as they cite examples, even if those examples date back to the 1920’s. Their claims are based on “logic,” and are derived from vast experience and education, otherwise known as “history.” They selflessly tout past successes. An old saying goes, “Economists correctly predicted 8 of the last 3 recessions.” Funny how we never seem to hold those prognosticators to account for their various failures. (They don’t, either.)
Supporting predictions of imminent catastrophic losses has to be more difficult during periods such as this, while prosperity reigns. The usual gaggle of market naysayers is now turning to various “experts” to shore up their arguments. One recent example caught my eye for its sheer audacity by taking a pull-quote from Warren Buffet, then backing it up with a quote from a Hollywood movie producer. Really?
Most investors know of (and many are in awe of) Warren Buffett, who ranks high among the world’s most successful investors. In the article I read, the author explains that Buffett sees upcoming market losses of 50% or more. Deep into the article it is revealed that his remark was in reference to a future period the length his own past – a mere 53 years. Yet the article called this tragic upcoming(?) event “inevitable.” While not out of the question, the catastrophic claim is not supportable, even in the long run. Worse, though, is the wording, which is slanted to make it appear imminent. Adding insult to injury was the failure to reveal that Buffett used his periods of market decline to buy, rather than to sell.
Digging in deeper, the article’s author supports the doomsday claim with a quote from someone I had never heard about, so naturally I did the research. My findings were illuminating. The author supported a misused claim from Warren Buffett by quoting a Hollywood movie producer. Whoa, now I am impressed.
In my current example, the objective was to promote one of the many fully-funded life insurance products that pepper the airwaves these days. They are unsupported, vague, and overly-optimistic, but they do appeal to fear among many investors. I should also point out that claims regarding these products have been debunked by industry experts for as long as the sales pitches have been made.
Until government agencies assign the same regulatory standards to insurance and annuity averters as it does for fiduciary advisors, you will see outrageous claims made. You don’t have to believe the claims, and you should not believe the people making those claims.
Occom’s Razor states that the simplest answer is usually the correct answer. Under that premise, if something sounds too good to be true, you may want to trust your intuition.
Van Wie Financial is fee-only. For a reason.
On a recent Van Wie Financial Hour, and also in a recent Blog, we asked and answered the question, “Are we at the market top?” The simple answer was that no one knows. I volunteered to tell you the answer, but not until long after we are past that market top.
Judging whether or not we are at the top of the market is part of a practice called Market Timing. There are said to be three “conventional” contributors to success for investors; Securities Selection, Market Timing, and Asset Allocation. Market timers have no proven track record, any more than do the self-styled gurus who claim they can “beat the market” by selecting individual stocks. Most successful investors practice a much more sensible practice called Diversification. Asset Allocation is the process of diversifying a portfolio to optimize the risk/reward equation over time.
Researchers and statisticians have repeatedly shown, over the past 70 or so years, that Asset Allocation accounts for a minimum of 90% of success among similar portfolios. That leaves very little room for Market Timing and Securities Selection to make much difference. Given those circumstances, consider how you are spending your time and energy in your investing life. For instance, does it matter if Ford underperforms GM? Sure it does, if you are long either Ford or GM. What if you owned both in a mutual fund or an Exchange-Traded Fund (ETF)? The differential performance of the two stocks in the same sector becomes unimportant.
As Certified Financial Planners, one tool we use to design and implement diversified portfolios is called “Modern Portfolio Theory,” or “MPT.” MPT has been around since its original publication in 1952. We will be discussing this practice in depth on the Van Wie Financial Hour.
For now, I want to discuss one of the most unusual market timing methods to see if you will be impressed. It is called the “Hindenburg Omen,” which I assume reflects the inventor’s attempt to scare you. Here is the definition from my favorite website for this type research, Investopedia.com.
“The Hindenburg Omen is a technical indicator that compares the number of 52-week highs and lows to predict the likelihood of a market crash.” Investopedia goes on to explain all of the details required to establish that the Hindenburg Omen is possibly in play. The opening lasts for 30 trading days, and must be confirmed by something called the McClellen Oscillator, or MCO, being negative.
Confused? Me, too. All this in an effort to control one of two factors shown together to contribute 10% or less to your investing success. Life is too short to chase minimal potential returns at the expense of maintaining a good Asset Allocation plan.
Van Wie Financial is fee-only. For a reason.
Have you ever heard of Nationstar Mortgage? I had not either, and there might be a reason for this. In August of 2017, Nationstar mortgage underwent a large branding campaign to become known as, wait for it, Mr. Cooper. I am not kidding. Apparently Nationstar has a somewhat troubled past. They held a lot of mortgages that defaulted back during the housing crash, and haven’t exactly done much since then to improve their image. From 2011 to 2014, the State of New York found over 900 mortgage loans that Nationstar failed to fund in a timely manner, resulting in various consequences to their clients. They also opened branch offices with the proper authorization, did not maintain the proper documentation for client files, did not post their fee schedule, did not submit quarterly reports on time, and also failed to file 90-day pre-foreclosure notices with the DFS. This led to a $5 million fine, $5 million donated to a local nonprofit, and $7 million being refunded to their clients.
What was Nationstar’s answer to all of this? Well, they rebranded as a fictional character named Mr. Cooper. Mr. Cooper, according to Nationstar, is your friend. Mr. Cooper solves your problems. Mr. Cooper also collects your money, as Nationstar clients now write their mortgage checks to “Mr. Cooper”. Ironically, the fines I mentioned above were levied shortly after Nationstar rebranded as Mr. Cooper, so apparently Mr. Cooper is a friend who collects your money and also gets hit with large fines by the NYDFS.
As enjoyable as our day jobs can be, including dealing with successful, pleasant, interesting people, watching their financial dreams take shape, and sharing the recent market boom, it is not all fun and games. Because of our approach to total personal planning, we need to cover topics that are, by their very nature, uncomfortable. These topics include illness, disability, and death, and are not confined to the clients themselves. Family relationships play a huge role in financial planning, and properly documenting clients’ wishes is critical.
About half of Americans are intestate, simply meaning that they have not prepared a Last Will and Testament. This demographic includes lawyers and other professionals at about the same rate as the general public. Not directing your asset distribution during your life can lead to problems, in even the simplest estate.
There is an old saying in our business that goes like this: “If you’d like to see the worst come out in people, simply attend the reading of the Will.” But that is likely not even the worst scenario. I suspect you’d see even more of the dark underbelly in people if there were no Will to read! (We use “Will” and “Trust” interchangeably for this discussion.)
How do you know when you should hire a competent Certified Financial Planner™? Here are a few items deserving of consideration. Do any of these common situations apply to you?
- You do not have a Last Will and Testament, or it is many years old (and maybe from another state and/or a prior marriage)
- You do not have a Health Care Directive in the event you can’t make important medical decisions for yourself
- You do not have a valid Durable Power of Attorney for a trusted person to help with your finances, should you become unable to do it yourself
- You own real properties other than a primary residence, either in the same state as your residence, or perhaps in other places
- You do not have a Living Revocable Trust (not everyone needs one, but there are increasing numbers of reasons to do so, and especially in Florida)
- You have outdated Beneficiary Designations on 401(k) accounts, IRAs or life insurance policies
- You have been through a divorce and have blended families
- You are starting to plan for retirement
- You have some intended beneficiaries that are poor at handling money
- You own investments and/or annuities, but you aren’t sure why you own them
- You have received “sudden money” from an inheritance, lottery, insurance policy, or lawsuit settlement
- You woke up one morning and suddenly realized you haven’t started planning for your future
- You have experienced a changed relationship with a family member
- You have been managing your own investments and are unhappy with your performance
- You have too many accounts in too many places (our term is “financial clutter”)
- You have changed jobs several times, but never bothered to roll old 401(k) plans into a self-directed IRA (see financial clutter above)
- You are still working, but approaching age 55, 60 or so, and want to start taking charge of your own investments (possible “in-service distribution” available to roll some funds into a self-directed IRA)
- You are starting a family and beginning to think about insurance and other boring but critical topics, like funding college educations, getting a mortgage, buying life insurance, managing cash flow, and asking, “How can we possibly do all this?”
Whatever the reason(s) you may be considering seeking professional help with your finances, look for a fee-only Registered Investment Advisor (RIA), owned and operated by Certified Financial Planners™ (CFPs®). They (we) can steer you in all the right directions.
Van Wie Financial is fee-only. For a reason.