Why Split a Mutual Fund?

I’m sure that most of you have heard of a stock split, which is a fairly common event. When a company decides that their stock price has gotten too high and therefore unattractive to small investors to buy in lots of 100, they often split the stock to lower the price. This does not affect the market cap of the company, which is simply measured by stock price times shares outstanding. For instance, a company that has 100 shares of stock trading at $100 each has a market cap of $10,000. If they do a 2 for 1 split, they would then have 200 shares of stock worth $50 each for a market cap of $10,000.

Stock splits are largely psychological in that there is no rule that investors have to buy stocks in groups of 100, but everyone likes to. Therefore, when a company splits their shares, they will often see a bump in buying activity after the split. However, many investors, traders, and finance professionals like myself and Warren Buffet think that splitting stocks is ridiculous and it has no benefit outside of the company’s marketing and investor relationship teams.

You may wonder why this move is even less valuable for a mutual fund than it is for a stock. Well, mutual funds don’t typically get traded in shares, but rather in dollars. You don’t buy 100 shares of Contrafund, you buy $10,000 of Contrafund, and that is represented by a certain number of whole shares and some fractional shares. So that might be 100.9564 shares of Contrafund, which is ticker symbol FCNTX. In fact, on our institutional trading platform for mutual funds at TD Ameritrade, it isn’t even an option to buy mutual funds by shares. They can be sold by shares, but the only purchasing option is in dollars. Therefore, does it really matter what the price of the shares of the fund are?

Have you ever considered financial advising as a career? The career path has never been more interesting, the opportunities more numerous, nor the prospects for success more evident, than they are now. Why do I say this? American demographics are poised to elevate the profession to new heights, both in quality and quantity.

In the next several years, a massive amount of wealth will be transferring hands, as Baby Boomers are inheriting assets from aging parents, and Boomers themselves are retiring. Financial advising and wealth management as a career should be viewed as an opportunity to participate in the orderly transition of an estimated $31 trillion of wealth between generations over the next few decades.

I have spent many years in the financial services arena, following decades in non-financial businesses, during which I was on the client side of the table. My perspective on the subject is well-rounded and seasoned.

After years of preparation and study, I have come to one simple conclusion. If you want to be successful as an advisor, be the one that you would like to hire for yourself. In order to do so, you need to think about what topics are important to people. Then, you should become competent in each and every one of them.

A good overview of relevant topics is on the Certified Financial Planner Board website, www.letsmakeaplan.org. From there, you can learn the areas of financial planning that make up a comprehensive financial life and/or career. A good advisor will have to know a good deal in each and every topic area.

What would your ideal advisor bring to the table? Education is important, and the least I would consider is an undergraduate college degree. A Masters Degree or higher would be even better. Likewise, certain certifications prove that the advisor respects the clients, and the CFP mark is the hallmark of certifications. Experience counts, as it does in all endeavors, and should be a consideration. Getting experience is perhaps the hardest part in a young advisor’s career.

What kind of advisor would you like to be? Are stocks and the stock market the only arena in which you care to dwell? If so, become a stockbroker, but become an outstanding stockbroker. Is insurance your thing? If so, become an excellent insurance agent. Are you interested in overall financial planning, touching on all aspects of clients’ financial lives? If so, consider becoming a Certified Financial Planner through a long process of education, experience and ethics. You will need to pass what will likely become the most difficult exam of your life.

Whatever you decide, work to honor your customers or clients (and yourself) by being as good as you can be. People who choose to specialize in only one area of financial services do not, in my opinion, qualify to be called true Financial Advisors. Only a broad-based, wide knowledge of financial topics, coupled with completion of the certification program, would be satisfactory to me as a client.

Remember the old commercial that said, “We are NOT your father’s stockbroker?” Now you should understand why that became popular.

Van Wie Financial is fee-only. For a reason.

In June of this year, I reported on some announced changes implemented by the Trump Administration in an effort to “fix” our Health Insurance industry. This was necessitated when his own party failed to honor their campaign promises to repeal and replace ObamaCare. Set back, but undaunted, the Administration is making badly needed changes.

President Trump ordered the first changes when he signed an Executive Order in October of 2017. The Labor Department recently finalized sweeping reforms in the group insurance arena. “Commonality Groups” are now able to be formed by individuals wanting to purchase group plans, but not belonging to another covered group. These Associative Groups can even purchase insurance across state lines.

Remember “catastrophic” insurance policies, designed to cover someone in need of medical insurance, but only for major problems? Inexpensive and readily available, their purpose was to protect people and families from becoming financially devastated. They’re Back! The Administration has now authorized short-duration plans with limited coverage. The cost? 50% to 80% lower than ObamaCare policies would be for the same people.

We are currently watching the daily rise of Socialism in America. I deem these advocates of collectivism the “Willfully Ignorant.” One has to choose to remain uninformed in these days of 24/7/365 news.

One of the main precepts of socialism is so-called “free” health care for everyone. Therefore, I assume that countering the wave of popular support for free health care is best done through education. Only when people truly understand that nothing is free might we have a chance to change minds, and hence to fix problems.

Americans have long enjoyed the finest health care in the world. For decades we also had much of the best insurance. Our insurance choices have deteriorated, and the goal of the Trump Administration, with or without other elected Republican support, is to restore our free will.

Without complaining how long it took to get here, I am thrilled by the announcement of a second wave of health insurance changes. We expect many more, regardless of the do-nothing Congress, because Trump is steamrolling changes over the trash heap of dead legislation. Expect more changes in coming weeks.

The importance of health insurance reform cannot possibly be overstated. Small businesses, which create the vast majority of new jobs in this country, must have affordable options in order to attract talent. Affordability was at an all-time low. The Trump Administration is attacking that problem, and we all need to get on board.

Van Wie Financial is fee-only. For a reason.

Over the past several weeks, we have written extensively on the topic of tax cuts, from Trump campaign promise through passage and implementation of the Tax Cuts and Jobs Act of 2017. As we stated recently, early results are in, the economy is booming, and more Americans are employed than at any time in our history. History tells us that tax cuts work every time they are tried.

According to the Administration, there is more help on the way. President Trump is proposing a follow-up tax cutting bill for 2018. With that refreshing attitude in mind, we have prepared a “wish list” for Round 2 of Trump-era tax cutting. (According to Grover Norquist of Americans for Tax Reform, the goal is for a subsequent tax cut in each year of the Trump Administration.) Here is how we think the Administration should approach cutting taxes in 2018:

1. Corporate Tax Rate. Originally, the goal was a 15% tax rate for all businesses, regardless of size. This was dramatically lower than the 35% rate in effect during 2017. The actual reduction to 21% represents a victory for tax cutters, but 15% should remain the long-term goal. We will be more likely to receive another 1% cut in the 2018 update.
2. Small Business Tax Rates. The 2017 Act nearly created a disparity in taxation that would have been burdensome for the smallest businesses, but an amendment prior to passage effectively equalized the rate for individual and small business. As large corporation rates continue to fall, small businesses must receive the same reductions.
3. Individual Tax Rates. Most individuals received a rate cut and broader income brackets, resulting in average tax savings of $2,700 for American families. Higher income Americans were not treated to significant reductions, and as such would make a good target for further cuts. Releasing more capital from high earners stimulates investment in the American economy. Also, for all individuals, the rate cuts are due to expire in the year 2025, and must be made permanent.
4. Itemized Deductions. The new, larger Standard Deduction eliminated the need to itemize for many Americans. The represents a good start, but there were some “holes” left in the allowable deductions list:
   1. Medical Deductions were phased out after two years, and we believe they should be restored and made permanent. In any year, this deduction affects very few people, but those affected are having a rough year, paying unusually large medical expenses. We could all help them a little.
   2. State and Local Tax (SALT) deductions were capped at $10,000 annually. This had a profound effect on taxpayers in high tax states. While those of us in Florida and Georgia were relatively unaffected, We are not without sympathy for the sudden shock to the budgets of people living and working in other geographic areas. Some phasing in of the reduction would be helpful to these taxpayers.
5. Estate Tax (including Gift Tax and Generating-Skipping Transfer Tax) were vastly improved by a doubling of lifetime exemptions. We continue to believe, as always, that these taxes should be totally and permanently eliminated.

Momentum for cutting taxes is high right now, and Congress should jump on this opportunity. Passage of another round of cuts prior to the election would be a catalyst for election turnout on behalf of Americans who are enjoying new-found or improved prosperity.

Van Wie Financial is fee-only. For a reason.

Early in 2017, President Trump announced his intention to introduce a package of significant tax cuts for all Americans. Despite the naysayers in Washington, D.C., along with most of the media, he did exactly that. Further defying “business as usual,” he got the package through Congress in time for a January 1, 2018 implementation.

It is now July, and the Tax Cuts and Jobs Act of 2017 has been law for over a half year. What actually passed, who was affected, and what have been the effects of the changes? Today we review the early highlights.

• Passage and Implementation. The Act was implemented at “Trump Speed,” and has reportedly affected 90% of Americans. New withholding tables took effect in February, so most people began receiving larger paychecks after the first few weeks of 2018. Results are in, and consumer spending is up nicely.
• Corporate Tax Rate Cut.The 2017 statutory federal tax rate was 35%. Originally, Trump’s proposal was for a 15% Corporate tax rate, but the end result was 21%, nonetheless significant. Corporate earnings are now rising, and businesses are thriving. This can be seen in both the job market and the stock market.
• Personal Tax Rate Cuts. The bottom individual tax rate was retained at 10%, and above the 10% bracket came three new brackets; 12%, 22% and 24%. No one has to pay above the old 25% rate until their taxable income rises above $315k (married filing jointly). Trump promised a middle class tax cut, and with these reduced rates, he delivered.
• 25% Tax Rate for Pass-through Businesses. Trump’s original proposal was that all businesses, great and small, would pay at the same tax rate. Since the 25% rate for small businesses exceeded the 21% rate for large businesses, this was not happening, and needed to be corrected. Fortunately, small businesses were saved before the bell by Sen. Ron Johnson (R-WI), who is himself a small business person. He successfully incorporated a new tax deduction for small businesses filing as “pass-through” entities. This leveled the effective tax rates between large and small business.
• One-time Overseas Profits Repatriation. All overseas profits from US-owned companies are eligible for repatriation (bringing the money back to the U.S.), to be taxed at a one-time lower rate. Companies repatriated over $300 Billion in the first quarter of 2018. I project the pace of repatriation to accelerate.

Overall, the Tax Cuts and Jobs Act of 2017 appears to be a success, as evidenced by the 4.1% estimate of 2^nd Quarter GDP growth. In our consumer-driven economy, more people have begun working, and spending power is increasing. How much more cash are Americans receiving? The numbers are now in, showing that the average American couple is currently receiving a tax cut of $2,917 annually. Strangely, recent research shows that many Americans remain unaware of their current windfall.

Next week we will look at developing proposals to further reduce our tax burden with a 2018 Tax Cut bill. Maybe that will get the attention of those remaining “in the dark.”

Van Wie Financial is fee-only. For a reason.

Simply put, inflation is on the rise. What are savvy investors doing to keep up during a period such as this? There are viable assets which help position a portfolio to respond positively as inflation marches along.

Generally, many assets that respond well to inflation are in the asset class called commodities, or alternative investments. These include food, energy, metals, real estate, and the less volatile inflation-protected bonds (TIPS). I consider real estate a commodity, and especially so if you are looking for real estate other than a primary residence. There is also one more surprise asset class, which is addressed near the end of this Blog.

Inflation-friendly asset classes are very risky, meaning the market price can and will change quickly, sharply, and often unexpectedly. Interested investors should keep only a small percentage of their portfolios in alternative investments.

Commodities. Most people do not want to invest directly in commodities. After all, how many pork bellies can one family consume? How about a train car load of corn being dumped on your front lawn? Not practical. Most investors prefer options, index funds, or some other form of ownership for commodities. Our amazingly flexible markets make this easy for all of us. General commodities index shares can be purchased in any of several Exchange-Traded Funds, or ETFs.

Real Estate is an often-misunderstood investment. Excluding your primary residence, do you really want to own real estate? Personally, I would prefer to avoid being called the “L” word – Landlord. How, then, can we buy real estate, hold it, reap the benefits, and eventually sell it?

As an investor, I prefer Real Estate Investment Trusts, or REITs, for fractional ownership interests in properties other than my home. REITs come in several forms, but the main ones are Mortgage REITs, which own mortgages on properties, Equity REITs, which own the actual properties, and Hybrid REITs, which are chartered to own either or both. I prefer the Equity REITs, as they have the ability to realize property appreciation in a rising market, while paying investors nice dividends during the ownership period.

Precious Metals. One of the most popular (and, likely the riskiest) commodity investment choices is precious metals, which range from the most common gold and silver, to exotic metals such as platinum. Again, these can be purchased several ways, but I prefer the ETF form for its marketability. Staying with gold and silver, we are inundated with advertising touting the ownership of the physical metals. I have no problem with people who prefer the look, feel and safety of gold and silver coins and bars, but in an investment portfolio, I prefer Exchange-Traded Funds.

TIPs. For the less speculative investor, there is another inflation-loving asset we frequently use in our portfolios. The Treasury Inflation-Protected Bond, or TIP, is a non-equity holding that is not closely correlated with the stock market. There are several ETFs that hold these inflation-indexed bonds, and each has its own objective. Potential investors should read the Prospectuses before investing.

General Market. Finally, the stock market itself is capable of helping us deal with inflation. Over time, inflation tends to drive the market up, simply because sales and profits numbers get larger. Investors holding the market index shares will generally benefit over time. In order to realize total market gains, broad-based index shares, such as the Wilshire 5000 composite tracking ETF, best reflect overall market rises.

Finally, we are fortunate to have most of our private homes appreciate over time in normal conditions. Granted, if your timing on the purchase proves to be horrible (e.g., 2006), it may take a long time to recover, much less to show a gain. But that isn’t the end of your financial world. Generally, the roof over your head, which may not be considered an investment, will prove to be an intelligent and rewarding lifestyle choice.

Understanding inflation can help investors cope with their otherwise declining standard of living, as income growth usually falls short of actual price level increases. If you need help with inflation planning, use a qualified, fee-only CFPÒ or call the show. We can help direct you through the investment planning process.

Van Wie Financial is fee-only. For a reason.

Inflation is generally portrayed as the rate by which prices increase over time. The U.S. Government measures the level of prices over time using the Consumer Price Index, or CPI. While there are several versions of the CPI, the most common measurement reports prices for “all urban consumers.” For years I have examined the truth and fiction of reporting on the topic of inflation. For as many years, I have known that we are being lied to by our so-called “leaders,” who consistently understate price level increases.

We have all seen inflation in action. Perhaps the most obvious day-to-day evidence is found at the grocery store, where prices have been rising steeply for years. Not only that, containers are getting smaller, and many are not filled to the top. “Shrinkflation” is the new word for reduced quantities of cereal, coffee, and various other household staples on the shelves. On the topic of food, have you checked out restaurant prices lately?

Inflation doesn’t stop there. Pay your health insurance premiums; check the increases in your deductibles and out-of-pocket medical expenses. Pay your homeowner’s insurance premium; what was it two years ago? Fill up your gas tank and check the numbers. Buy dog food, pay tuition bills, go to a movie, pay your cable TV and Internet services; they have gone up, and many by a LOT! Wages and salaries have not kept pace. Social Security recipients have been denied any COLA increase three times since 2010, with only small increases in other years.

Simply put, inflation is on the rise. In order to understand why, we need to look at the real definition of inflation. Nobel Laureate economist Milton Friedman said it best: “[Inflation is] always and everywhere a monetary phenomenon.” By this definition, rising prices are a symptom of inflation, or a result of inflation, rather than the definition of inflation.

Placing more money in circulation without proportionate increases in GDP results in less actual value per dollar. That is the true definition of inflation. Government printing presses have been running overtime for years. That encompasses both the physical printing press, plus the more clandestine electronic-entry money creator called the Federal Reserve.

Why does the government obfuscate truth with statistics? Simple; there would be an accelerating budget deficit and national debt if they acknowledged the truth in the CPI. Federal salaries and benefits, Social Security, indexed pensions, labor contracts, you name it – all are indexed to the CPI for annual Cost-of-Living (COLA) raises.

Today, the government has actually done something about it. Unfortunately for those of us who are collecting Social Security benefits, they “fixed it” on our nickel. Ushered in with the Tax Cuts and Jobs Act of 2017 is a concept called the “Chained CPI.” This measurement, which is used to calculate the annual COLA, takes into account human behavior.

The “Chained CPI” is explained like this. If steak gets too expensive, consumers will switch to hamburger. So, the Labor Department admits that we are rational, responsible citizens, who balance our personal budgets. Too bad they force us to do so by reducing our standard of living. What’s next, hamburger gets so expensive that we switch to Helper?

Financial expert Ed Butowsky developed his own method of price change measurement. Dubbed the Chapwood Index, after his investment firm, this index measures prices of things we all buy, city by city, over time. Butowsky compares the same items over time, so all comparisons are valid and weighted consistently.

Jacksonville is one of 50 cities used to track the Chapwood Index. The results are startling, but easy to believe, as they mirror what we all see day-to-day.

For last year (2017), the Chapwood Index for Jacksonville increased 8.6%, and for 5 years it averaged 8.1% annually. That’s a far cry from the approximately 2% reported by the government.

By comparison, higher cost cities have increased even more. For example, San Francisco was up 12.8% last year, and New York City increased 11.2%. If you believe these numbers, as I do, you can probably imagine the damage that is being inflicted on Middle Class Americans, from rising prices and relatively stagnant wages. It is just plain wrong.

What does all this mean to today’s investors? I contend that the true rate of inflation is being masked, but I am not here to teach a class in economics. My interest lies in developing an investment strategy that reflects changing conditions around us, including inflation. What are the investment assets that respond positively to inflation? How should we purchase and hold those investments?

Understanding inflation can help investors cope with the declining standard of living experienced by far too many older Americans. If you need help with inflation planning, use a qualified fee-only CFP®. We can help direct you through the planning and investing process.

Van Wie Financial is fee-only. For a reason.

For years, politicians across the spectrum have touted “tax simplification” as one of their reform goals. Many have gone so far as to claim that most Americans should be able to file their annual tax returns “on a postcard.” For just as many years, I have laughed in their faces, but now they claim we will be able to do exactly that next year. I decided to grade myself on the various negative predictions I made about the possibility of a shortened Form 1040 resulting in tax simplification.

While nothing is finalized yet, a preliminary draft was released this past week, and today we are taking a look at the veracity of this “postcard tax form” concept. One of my first questions was, very simply, “People still file paper returns?” For years IRS has been encouraging Americans to file their annual obligations electronically, and most of us do exactly that. File size has become pretty much irrelevant. Complexity is what (still) matters.

For those taxpayers who still send paper returns to the IRS, my next question is simple; “Do you want to file your 1040 in an envelope, or would you rather let the world see your name, address, Social Security Number, and signature?” So, is a postcard placed in an envelope still a postcard?

What will filers of the new 2018 Form 1040 actually find? The 1040 itself, which is currently 2 pages long and single-sided, will next year be a 2-sided form, ½-page large. More than half of the current 78 line items on today’s 1040 are being cut for 2018. A good start, perhaps?

At this point, it may help to remember two changes from the Tax Cuts and Jobs Act of 2017. First, the new Standard Deduction is large enough that many people who were previously itemizing deductions will no longer do so. However, we also discovered that the 2017 changes actually increased complexity for taxpayers who are not able (for whatever reason) to use the new shorter Form 1040.

In Congressional zeal to make the new 1040 Form fit on a half-page, certain items were deleted from the form. These include a few so-called “above the line” deductions such as student loan interest and teaching supplies. What if you are able to claim any of these reductions to income? Not to worry, there are six additional accompanying worksheets, some or all of which you will also have to stuff into your envelope.

But wait – we’re not done yet. What about other forms of income besides wages, salaries & tips, Social Security benefits, interest, dividends, and retirement income? Never fear, there are supplementary forms and schedules for those, as well. The envelope is getting thicker.

What other items will require further forms to be filed? These include:

• Business income
• Capital Gains
• Sub-S business income
• Sole proprietorship income
• Partnership income
• Child care tax credits
• Retirement savings tax credits
• Retirement savings contributions

The new form is intended to replace the existing 1040, the 1040A, and the 1040EZ. That, in itself, does nothing to reduce complexity. Further, more taxpayers are expected to file paper returns for tax year 2018, delaying their refunds and increasing costs to the IRS (taxpayers).

What is the bottom line on my prognostications? First, I gave myself a B+ for calling the “postcard form” mostly smoke and mirrors. For taxpayers with uncomplicated financial situations, many will be able to use the new Form 1040 and claim the higher Standard Deduction. That, however, was brought to you by the Tax Cuts and Jobs Act, not through the form redesign. In short, I fail to see any benefit from the alleged “postcard-sized tax form.”

Come to think of it, I should change my grade to A-.

Van Wie Financial is fee-only. For a reason.

Twenty years ago, California became the first state to legalize medical marijuana. From that foothold, despite being illegal at a federal level, the marijuana industry is working to become part of mainstream America. Because of the potential profits involved, it won’t be long before the industry is a part of Wall Street, too. The industry got a major boost in 2012 when Colorado and Washington both legalized marijuana for recreational use. Many people anticipate the market to grow exponentially with the pending legalization in Canada and even across the United States.

Even with 29 states legalizing medical use and 9 states legalizing recreational use, there is still a cloud hanging over the industry. Current federal laws make marijuana a class I drug, which is the same class as heroin, LSD, and cocaine. The federal government could decide to crack down on marijuana at any time, over-riding the state laws. The tax law also potentially prevents expenses incurred while participating in illegal activity from being deducted on taxes. This means that legal marijuana companies may get taxed on their income rather than their profits, resulting in higher effective tax rates. All of these factors hinder companies from being publicly traded, causing them to be sold as Over-the-Counter stocks, or penny stocks.

Still, even with all these hurdles, the marijuana market keeps forcing its way into the spotlight. From the creation of an index to track the North American marijuana industry to the first marijuana ETF to be included on the NYSE this year, the marijuana market is letting everyone know it’s here to stay. You may wonder what the best way to invest in this growing market is, and that is a great question for your registered CFP®. We aren’t ready to dive into this fledgling industry just yet, but it is very much on our radar. Don’t forget to tune into the Van Wie Financial Hour every Saturday at 10am to hear about more about this and other potential growth areas of our economy.

Van Wie Financial is Fee-Only. For A Reason.

Recent market volatility has been blamed on worries about President Trump’s proposed trade and tariff policies. That does appear to be an unsettling factor, but should that be happening? Truth is one thing, but logic and reason don’t always comprise the whole and complete truth. In my opinion, the market is overlooking common sense realities.

The first reality is the economy in general, which by virtually all metrics is in a period of stellar performance. To paraphrase “noted economist” Al Gore in the 2000 election cycle, “Everything that should be up is up, and everything that should be down is down.” GDP is up, unemployment is down, corporate earnings are up, wages are up, taxes are down, optimism is high, and investment is strong. That is a formula for an excellent stock market.

Why is the tariff discussion overriding all the economic data? There are a couple reasons, including historical legacy. Tariffs have been found to be mostly ineffective, and even destructive, in past generations. One classic example is the Smoot-Hawley Tariff Act from the 1930’s. It was a general and comprehensive protectionist tariff on everything we imported, and the results quickly proved to be negative, so the Act was repealed.

Did the death of the broad tariff bill result in free trade? Not by a long shot! In the intervening years, dozens of trade acts have been passed, resulting in about 12,000 tariffs that we currently impose on imports. This means that Americans pay more for all these imported goods. Who reaps the rewards? The Federal Government, which collects the tariff revenue. Who loses? American consumers, who lose by having to pay these taxes in the form of higher prices.

Interested to know what imported goods are taxed by the US Government? Here are just a small handful: brooms, cotton shirt fabric, chocolate, milk and cream, sugar of all types, avocados, peanuts, tobacco, T-shirts, ice cream, hotel/restaurant/kitchenware items, beef, tomato sauces, etc.

Similarly, our exports are frequently taxed by the receiving countries, and largely the tariffs (taxes) are higher on our exports than those on similar imported goods entering our country. A classic example is the 275% tax levied on dairy products we send to Canada. This hurts our dairy farmers by making their products unaffordable to Canadians.

I will be the first to defend free trade advocates who have a problem with Trump’s policies and actions, insofar as they desire a system of truly free and fair trade. The only acceptable tariffs, with the exception of countries whose governments are subsidizing their industries, are no tariffs in either direction. That is not the situation we are in today.

We elected a President on his policy positions, not the least of which was to correct bad trade agreements. Why not give him a chance? In Trump’s own words, “What the hell do you have to lose?” The stock market is acting like a petulant child. Try to ignore it in favor of the economics. The art of this deal is in its infancy.

Van Wie Financial is fee-only. For a reason.