Ah, winter…colder temps, snow (even in the Carolinas)…it’s a good time for the annual ski trip. But if there are words for caution when skiing, it’s always: “Don’t get too far out over your skis!” Something for investors to think about as we talk about how the markets fared in 2017 and where they might go in 2018.

Equities: “Fresh powder!” In concerted fashion around the globe, equities rallied in 2017, thanks to strong economic fundamentals and friendly central bankers. Almost like Goldilocks’s time, where the porridge is not too hot nor too cold, so is the pace of this economic expansion: fast enough to support corporate earnings growth, but slow enough to keep the Fed from putting the brakes on too quickly. This led to a magic carpet ride for equity investors, with returns of 5.1% for 4q17 & 18.3% YTD for the average diversified US stock fund* and a 4.1% fourth quarter return and a hearty 26.8% YTD for the average international stock fund*. “Gnarly!” Growth outperformed value, with a handful of tech stocks (Apple, Microsoft, Alphabet, and Facebook) leading the way. But it should be noted that this won’t last forever. In fact, a 2016 study** showed that the average annual price return for growth stocks to be only 12.8% vs 17.0% for value stocks. Another reason to be diversified.

Fixed Income: It was also a positive time for bond investors, as evidenced by the Barclays US Aggregate Bond Index gaining 0.4% in the fourth quarter and 3.5% for the year. The inclusion of global fixed income assets led to better results with the Barclays Global Aggregate Bond Index registering +1.1% for 4Q17 and +7.4% YTD. Yields on the ten-year bond pretty much finished the year where they started, with investors content with the Fed’s pace of raising rates.

Alternatives: The Credit Suisse Liquid Alternative Beta Index, our chosen proxy for alternatives, was up 1.7% for 4q17 and 4.6% YTD. Two of the most well-known alternative exposures, gold and real estate, had solid showings for both the quarter and the full year. Gold***: +1.6% and 12.9%, respectively. Real Estate****: +3.5% and 7.8%, respectively.

2017 proved to be another rewarding year for the balanced investor. But how do the slopes look for 2018? Will it be another plush ride up the mountain again? Gondola, anyone?!?

Indeed the same items – low interest rates, low inflation, accelerating growth, strong earnings – that propelled the global economy in 2017 should remain in 2018. The risk of recession seems nowhere in sight. Furthermore, the Republican tax overhaul is also expected to be a boost, at least in the near-term. But not sure if that represents “eating tomorrow’s lunch”. Moreover, two key drivers of economic growth, productivity gains and labor force expansion, have been on the downtrend. So is now the time to be thinking about the “vertical drop”???

With the bull market in its ninth year, many areas of the stock market at record highs, and volatility near record lows, it can be easy to become not only complacent but overconfident. Now is not the time to get too far out over your skis and take on more than you can chew! At some point, the fresh powder will turn into slush. Don’t be a “hot dog” or a “wipe-out” may just be in your future.

At DWM, we see ourselves as ski instructors, helping our skiers traverse the green, blue, and even black diamond runs by keeping them disciplined to their long-term plan, including the allocation and risk profiles of their portfolios. Rebalancing, the act of selling over-weighted asset classes† and buying underweighted asset classes in a tax-conscious manner, is part of our ongoing process and prudent in times like these. There are few signs of financial excess like ten years ago, but the market can only be predictable in one fashion: that it’s always unpredictable.

In conclusion, may your 2018 be a ‘rad’ one, with fresh powder on the slopes and fireside smiles in the cabin. Don’t hesitate to contact us if you want to talk or ‘shred’ the nearest run.

Brett M. Detterbeck, CFA, CFP®

DETTERBECK WEALTH MANAGEMENT

*according to Thomson Reuters Lipper

**study by Michael Hartnett of Merrill Lynch

***represented by the iShares Gold Trust

****represented by SPDR Dow Jones Global Real Estate

†versus your initial investment target

TAX REFORM: THIS YEAR’S CHRISTMAS GIFT OR A FUTURE CHRISTMAS COAL?

On top of the regular holiday season’s festivities, this year we’re watching the proposed “Tax Cuts and Jobs Act” likely making its way to the President’s desk for signature. The “joint conference committee” announced yesterday that they have a “final deal” and Congress is scheduled to vote on this next week.  Before we review what we specifically know about the bill (not all details have been released as of this morning) and provide some recommendations concerning it, let’s step back and review it from a longer-term perspective.

Since last year’s election, stock markets have been on a tear- up over 20%, mostly driven by increased corporate profits, both here and abroad.  U.S. GDP is growing and unemployment is close to 4%.  Most economists believe that now is not the time for a tax cut, which could heat up an already expanding economy to produce some additional short-term growth and inflation. The Fed reported yesterday that the tax package should provide only modest upside, concentrated mostly in 2018 and have little impact on long-term growth, currently estimated at 1.8%.  So, tax cuts now will not only likely increase the federal deficit by $1.5-$2 trillion over the next decade, but will take away the possibility of using tax cuts in the future, needed to spur the economy when the next recession hits.  Certainly, we would all like lower ta

xes and even higher returns on our investments, but we’d prefer to see longer-term healthy economic growth with its benefits widely shared by all Americans and steady investment returns, rather than a boom-bust scenario and huge tax cuts primarily for the wealthy that may not increase long-term economic growth.

As of this morning, December 14th, here are the current major provisions:

Individual

  • Income Tax Rates.  The top tax rate will be cut from 39.6% to 37%.
  • Standard deduction and exemptions.  Double the standard deduction (to $24,000 for a married couple) and eliminate all exemptions ($4,050 each).
  • State and Local Income, Sales and Real Estate Taxes.  Limit the total deduction for these 

    to $10,000 per year.

  • Mortgage Interest.  The bill would limit the deduction to acquisition indebtedness up to $750,000.
  • Limitations on itemized deductions for those couples earning greater than $313,800.  Repeals this “Pease” limitation.
  • Roth recharacterizations.  No longer allowed.
  • Sale of principal residence exclusion.  Qualification changed from living there 2 of 5 years to five out of eight years.
  • Major items basically unchanged.  Capital gains/dividends tax rate, medical expense deductions, student loan interest deductions, charitable deductions, investment income tax of 3.8%, retirement savings incentives, Alternative Minimum Tax, carried interest deduction (though 3 yr. holding period required.)
  • Estate Taxes.  Double the estate tax exemption from $5.5 million per person to $11 million.

 

 

Business

  • Top C-Corporation Tax Rate.  Reduce to 21% from 35%.
  • Alternative Minimum Tax.  Eliminated.
  • Business Investments.  Immediate expensing for qualified property for next five years.
  • Interest Expense.  Limit on expense to 30% of business interest income plus 30% of adjusted EBITDA.  Full deduction for small businesses (defined as $25 million sales by House, $15 million by Senate).

Another key issue, the top rate on pass through organizations (such as partnerships and S Corps), is yet to be determined. However, it appears that a reduction of 20% to 23% will be available to pass-through income, subject to W-2 minimums and adjusted gross income maximums. This would produce an effective top rate of 29.6% on pass through income.

If all of that see

 

ms confusing, you’re not alone.  Lots of moving parts and lots of details still to be clarified. Even so, if the bill passes, you will have been smart to consider the following:

Recommendations:

1) Because the bill would limit deductions for local income, sales and real estate taxes, you should make sure that you have paid all state income tax payments before December 31, 2017. If you are not sure, pay a little extra.

2) Also, make sure you pay your 2017 real estate taxes in full before 12/31/17. Because Illinois real estate taxes are paid in “arrears” it will be necessary to obtain an estimated 2017 real estate tax bill (generally due in 2018) by g

 

oing to your county link and then paying this before 12/31/17.  Let us know if you need help on this.  In the Low country, while our CPA friends indicate that paying 2018 real estate taxes in 2017 should be deductible, as a practical matter, there appears to be no way to get an estimated tax bill for 2018 and prepay your 2018 real estate taxes in 2017.

3) Meet with us and/or your CPA in early 2018 to review the impact of the Act, assuming it becomes law, on your 2018 income tax planning. It will be important to review the various strategies that may be available to make sure you are paying the least amount of taxes. 

Yes, tax reform may be here before Christmas. Not sure what it will be: a wonderful gift for this year’s holiday or perhaps a lump of coal in our stockings for Christmases to come.  Stay tuned.

The Other Side of the Bitcoin

With the rise of new technologies, each one more advanced than the last, a new form of electronic payment has emerged.
Bitcoin is a decentralized digital currency created for efficient electronic payments. It is run and controlled by what is known as a ‘blockchain’, a public ledger of all transactions in the bitcoin network. A ‘blockchain’ is essentially a company-wide spreadsheet that can be accessed by all. The purpose of the ‘blockchain’ is to determine legitimate transactions and deter attempts to re-spend coins that have already been spent.
Bitcoin works similarly to a check in that there are two different numbers per transaction: your personal private key (or account number) and a signature that confirms your transaction on the above mentioned ‘blockchain’. The digital currency can be spent in a number of different ways, but can only be held in two forms. A bitcoin user can hold an electronic wallet (e-wallet) via a web wallet or a software wallet by using a downloadable software. An e-wallet is essentially an online bank account that allows you to receive bitcoins, store them, and send them to others. A software wallet is a downloadable software that allows the consumer to be the custodian of their bitcoins. Often the latter leads to more liability for the consumer.
It all sounds pretty enticing, and maybe you are wondering if you should jump into this next innovative technological trend. But the rapid growth of bitcoin has many people concluding that it’s just another bubble waiting to burst.
Markets have seen many different financial bubbles over the years, and none of them have ended particularly well. A financial bubble occurs when market participants drive prices above market value. This investment behavior can be attributed to herd mentality, where people think that because everyone else is investing in a certain entity and seeing short-term success, that means it’s a good investment. Inevitably, these financial bubbles can’t be sustained long term and they burst.
The first documented economic bubble in history occurred in the 17th century, when Dutch tulips were all the rage. The contract prices of the newly introduced and popular bulbs grew to an outrageous high, eventually leading to a dramatic collapse or “burst” in February of 1637. Today this is known as “tulipmania.” More recent examples include the dot-com bubble of the late ‘90s and the housing bubble in the 2000s. I’m sure we all remember how those financial bubbles ended, and the repercussions that followed those bursts.
Looking back on all of these events, it’s easy to see now how these bubbles formed, so we can use these prior experiences to better predict financial bubbles. Today, the cause for concern is bitcoin, and it’s more the question of when the bubble will burst rather than if it will.
Bitcoin got its humble start six years ago at $2. Three years later it was at $300 and last week it topped off at $11,000. With a 1000% increase so far this year alone, it’s easy to see why many people are raising the alarm or joining the frenzy, depending on the person!
With its frequent surges and sharp price moves, bitcoin is as volatile as they come. In other words, if you think you want to give bitcoin a shot, it’s best to assume that you’ve already lost that money. Everything we’ve learned about financial bubbles over the past four centuries points to an imminent burst in this digital currency’s future, and you and your money don’t want to be caught in a tight spot when it does.
There is also speculation that regulators will step in at some point because of the potentially disastrous economic consequences associated with the runaway bitcoin prices. The first concern is as we’ve outlined above, the bubble will burst and cause devastating losses. Additionally, future contracts are opening bets for bitcoin, and some funds are set to take form in early 2018 to pitch bitcoin to more mainstream investors. The more bitcoin gets wrapped up in our financial system, the worse it will be for everyone when it bursts.
The other major consequence presents the other side of the “bitcoin”: what if the bubble doesn’t ever burst, and bitcoin becomes an alternative, or worse, a replacement for standard U.S. currency? We cannot see regulators allowing what to happen, so it’s safe to say that even if this bubble miraculously doesn’t burst, it will most likely lose traction one way or another.
As many of you know, at DWM we don’t try to time the markets, and when it comes to speculative investments that require you to do so, it’s best to avoid them altogether.

Plant the Seed & Let It Grow: How DWM is Helping Emerging Investors

Coming out of college can be a very stressful time for an individual. One goes from the structured and carefree life of being a student to someone bewildered with what is often their first glimpse of responsibility, trying to grab the wheel and get some control on their future. For a lot of recent graduates, it’s not an easy transition.

Having graduated from Carthage College in Wisconsin last May, I understand what some of these sobering realizations feel like. Fortunately, my family relationship with DWM team member, Jenny Coletti, earned me an interview at Detterbeck Wealth Management and, fast forward a few weeks, I’m proud to be a new part of the DWM team!

Even though I majored in mathematics, as a young person fresh out of college, it is extremely daunting on how to get your hands around your financial wherewithal and start planning for your future. DWM is guiding me through that process and in the near future will be doing this for other “emerging investors”!

  • Automated investment management utilizing DWM investment strategies via the Schwab IIP Platform

  • Emerging Investor On-Boarding – Financial assistance geared directly toward an Emerging Investor needs, which could include the following:

    • Budgeting/cash flow planning

    • Debt Management

    • Asset Allocation including assistance with your employer-based plan

    • Assistance with other work benefit options

    • Access to nifty financial tools

    • Educational planning (for those with kids or planning to have them soon)

    • Access to the DWM Emerging Investor Relationship Managers

      • In Charleston: Ginny Wilson & Grant Maddox

      • In Palatine: Me, Jake Rickord!

  • The ability to graduate to DWM’s Total Wealth Management (“TWM”) Platform – the one that our current clients benefit from – when their account value reaches a certain level

This platform can serve many needs, but Brett and Les are very excited about this being a nice spot for children of TWM clients and other select younger people looking to grow their portfolios, where they become their own investor and spread their own wings!

It should be noted that this Emerging Investor program is a different service package than our more sophisticated Total Wealth Management experience. Given that it is geared toward a younger audience, which have different – typically less complicated, but still important – needs, the areas of focus are much different. For example, my recently graduated college friends are more interested in cash flow/budgeting management and making sure that their 401k through work is getting the most bang for the buck, given the employer’s match and investment choices, and less interested in retirement, estate, tax planning, etc. The investment management portfolios are still constructed by the same team at DWM, but do not utilize the more sophisticated alternative investments. Also, from an administrative perspective, reporting is completely handled through the Schwab IIP Client portal – no custom Orion/DWM reports like our TWM clients receive. In fact, with this EI program, everything is on-line and paperless, which to a Millennial sounds fantastic, but may be daunting to the older generations. A co-browsing session between the new EI client and one of our team members can be scheduled to make on-boarding a piece of cake. And whereas this new EI program has many differences from our traditional TWM program, the main theme remains the same: we will help select investors make their money work harder by addressing the unforeseen landmines hidden within their financial plans by equipping them with education, knowledge, tools, and sound advice.

Overall, I am extremely excited to be a part of the DWM family. I’ve learned a great deal and met some great people since joining several weeks ago. I look forward to meeting all of the clients in due time. And I cannot wait to help roll-out this new Emerging Investors platform. We still have plenty of work to do, but stay tuned for the official launch!

Time for a financial caddie?

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“Pro Jock.” “Looper.” That’s what I strived to be in my early days of youth. Those that are familiar with the movie Caddyshack may recognize the reference and, yes, one of my first jobs was that as a caddie. And whereas the Caddyshack movie was quite whacky, in real life the lessons learned by growing up as a golf caddie were life lessons and things as a “financial caddie” I still exhibit today.

  1. Preparation / Guidance – a good golf caddie (“GC”) should arrive to the ball before the golfer and remove any surrounding debris and have yardage-to-the-green ready for the golfer. This is quite similar to how a financial caddie (“FC”) prepares his client for the next big shot in their life, by assessing the current investment environment and creating an Investment Policy Statement/target asset allocation mix and chart of course that can help the client navigate “all 18 holes”.
  2. Paying attention – a good GC needs to be paying attention to their golfer’s needs, i.e. is she cold and needs a jacket from the bag?, is her ball dirty and in need of cleaning?, is she familiar with what the next hole does? A good FC is one that is not only paying attention but being proactive with the client’s needs, i.e. running tax projections to make sure there are no surprises come tax time, running estate planning flow reports to make sure that the clients’ estate planning is in-line with their wishes, etc.
  3. Commitment – I remember some caddies that would quit – sometimes physically, sometimes mentally, sometimes both – out there. That’s bad caddying and a lack of commitment and perseverance. Some days will be beautiful, sunny ones but some will be stormy with difficult conditions. Like a good GC, a good FC makes you, the client, the priority and makes sure that our professional attention, focus and best efforts always have you in mind.
  4. Resourcefulness – Every “loop” is different, every golf shot is different, every round is different the same way in the financial world there are always new things being thrown at you. A good GC and FC will embrace change and always look for new possibilities to solve the problem, unravel the puzzle, and complete the task.
  5. Attitude – the good caddies know that they need to show up to the caddie shack early in the morning with a smile and a hard-working, respectful attitude if they want to earn the continual right of “toting the bag”. At DWM, one of our most valued qualities is a conscientious attitude used to apply diligence for the timeliness of project completion and adherence to punctuality in schedules in respect to the clients we gratefully

That being said, I’d like to share a wonderful experience with you. Schwab & Co invited my father/business partner, Les, to play in the Schwab Cup Senior Pro-Am last week. Pros like Bernard Langer, Vijay Singh, Fred Couples, Lee Janzen, and our new favorite, Brandt Jobe were all there. These are golfers my dad grew up watching and idolizing. Les was able to share the course with these guys and, after a 20+ year break, I came out of golf caddie retirement to strap on the bag one last time!

“So, I tell them I’m a pro jock, and who do you think they give me?” No, not the Dalai Lama, but Les Detterbeck, himself. Third generation of the first Lester. The long putter, the grace, not yet bald… striking. So I’m on the first tee with him. I give him the driver. He hauls off and whacks one – big hitter, the Lester – long, into a one foot crevice, a couple miles east of the bottom of the desert, right on the fairway. And do you know what the Lester says? Gunga galunga…gunga…No, actually he says, “give me the 4 wood” and the Lester proceeds to put it onto the green and two putt for a gross par, net birdie to start our Pro-Am team off in the right direction.

Brett-Les.jpg

It was exhilarating day to say the least. We didn’t win the event, but we had a once-in-a-lifetime day, coming just a couple weeks before Les’ 70th birthday. And whereas I doubt I will ever caddie for someone in an official tournament ever again, I know that I will always strive to do my best as a FINANCIAL CADDIE to the wonderful clients we currently serve and future ones.

Of course, this was the first time I had officially caddied in over twenty years. I thought I did a splendid job, my gift to Les for his 70th. Back in the 80’s, I’d be happy to earn $20-$40 for the round to go blow at the local music shop on a few CDs. But this time… there was no money; only total consciousness. So I got that going for me, which is nice.

(*If you haven’t figured by now, Caddyshack is the author’s favorite move of all time. Happy BDay, Les! Gunga Galunga!)

Understanding Risk and Reward

Electronic Discovery Risk Assessment3-1024x664Mark Twain once said “There are three kinds of lies:  lies, damned lies and statistics”.  We are inundated nowadays with statistics.  Statistics are a scientific method for collecting and analyzing data in order to make some conclusion from them.  Very valuable indeed, though not a crystal ball by any means. 

When you study investment management, you must conquer the statistical formulas and concepts that attempt to measure portfolio risk in relation to the many variables that can affect one’s investment returns.  In the context of investing, higher returns are the reward for taking on this investment risk – there is a trade-off – the investments that usually provide the highest returns can also expose your portfolio to the largest potential losses.  On the other hand, more conservative investments will likely protect your principal, but also not grow it as much. 

Managing this risk is a fundamental responsibility for an investment advisor, like DWM.  You cannot eliminate investment risk. But two basic investment strategies can help manage both systemic risk (risk affecting the economy as a whole) and non-systemic risk (risks that affect a small part of the economy, or even a single company).

  • Asset Allocation. By including different asset classes in your portfolio (for example equities, fixed income, alternatives and cash), you increase the probability that some of your investments will provide satisfactory returns even if others are flat or losing value. Put another way, you’re reducing the risk of major losses that can result from over-emphasizing a single asset class, however resilient you might expect that class to be.
  • Diversification. When you diversify, you divide the money you’ve allocated to a particular asset class, such as equities, among asset styles of investments that belong to that asset class. Diversification, with its emphasis on variety, allows you to spread you assets around. In short, you don’t put all your investment eggs in one basket.

However, evaluating the best investment strategy for you personally is more subjective and can’t as easily be answered with statistics!  Investment advisors universally will try to quantify your willingness to lose money in your quest to achieve your goals. No one wants to lose money, but some investors may be willing and able to allow more risk in their portfolio, while others want to make sure they protect it as well as they can.  In other words, risk is the cost we accept for the chance to increase our returns.

At DWM, when our clients first come in, we ask them to complete a “risk tolerance questionnaire”.  This helps us understand some of the client’s feelings about investing, what their experiences have been in the past and what their expectations are for the future.  We also spend a considerable amount of time getting to know our clients and understanding what their goals are and what their current and future financial picture might look like.  With this information in mind, we can then establish an asset allocation for each client’s portfolio.  We customize the allocation to reflect what we know about them, looking at both their emotional tolerance for risk, as well as their financial capacity to take on that risk.  We also evaluate this risk tolerance level frequently to account for any changes to our clients’ feelings, aspirations or necessities.  While we use the risk tolerance questionnaire to start the conversation, it is our understanding of our client that allows us to fine tune the recommended allocation strategy.

A Wall Street Journal article challenged how clients feel about their own risk tolerance and suggested that being afraid of market volatility tends to keep investors in a misleading vacuum.  The article suggests that investors must also consider the risk of not meeting their goals and, that by taking this into account, the investor’s risk tolerance might be quite different.

The WSJ writer surveyed investors from 23 countries asking this question:

“Suppose that you are given an opportunity to replace your current portfolio with a new portfolio.  The new portfolio has a 50-50 chance to increase your standard of living by 50% during your lifetime.  However, the new portfolio also has a 50-50 chance to reduce your standard of living by X% during your lifetime.  What is the maximum % reduction in standard of living you are willing to accept?” Americans, on average, says the article, are willing to accept a 12.65% reduction in their standard of living for a 50-50 chance at a 50% increase.   How might you answer that question?

So, bottom line, it is the responsibility of your advisor, like DWM, to encourage you to choose a portfolio allocation based on reasonable expectations and goals.  However, understanding your own risk tolerance and seeing the big picture of your investment strategy is also your responsibility.  Our recommendations are intended to be held for the long-term and adhered to consistently through market up and downs.  We know that disciplined and diversified investing is the strategy that works best for every allocation!

We want all of our clients to have portfolios that give them the best chance to achieve their financial aspirations without risking large losses that might harm those chances.  Through risk tolerance tools and in-depth conversations, we get to know our clients very well, so we can help them make the right choice.  After all, our clients are not just numbers to us!

Ready for a quick quiz?

financial-literacy-quiz

Two-thirds of the world can’t pass this financial literacy test.  Can you?  You don’t need a calculator, just 3-5 minutes of time.

 

Risk Diversification: Suppose you have some money to invest.  Is it safer to put your money into one business, piece of real estate or investment or to put your money into multiple businesses or investments?

a)One business, piece of real estate or investment

b)Multiple businesses, pieces of real estate or investments

 

Inflation:  Suppose over the next 10 years, the cost of things you buy including housing, food, taxes and health care and all others double.  If your income also doubles, will you be able to buy less than you can buy today, the same as you can buy today, or more than you can buy today?

a)Less

b)The same

c)More

Mathematics: Suppose you need to borrow $100 for one year.  Which is the lower amount to pay back: $105 or $100 plus 3% interest?

a)$105

b)$100 plus 3% interest

Compound Interest:  Suppose you put money into a bank and the bank agreed to pay 3% interest per year to your account.  Will the bank add more money to your account in the second year than the first year, or will it add the same amount of money for both years?

a)The same

b)More

Compound Interest II:  Now suppose you have $100 to invest in a (very aggressive) bank who will pay you 5% interest per year.  How much money will you have in your account in 5 years if you do not remove any of the principal or earned interest from the account?

a)Exactly $125

b)More than $125

c)Less than $125

 

Pretty simple, right.  The answer is b for all.  We’re sure our regular DWM blog readers got them all right.

Across the world, however, the 150,000 people who took the test didn’t do so well.  Two-thirds of them answered at least 2 of the 5 questions incorrectly.  The survey pointed out some key findings.  Norway has the greatest share of financially literate people worldwide.  Canada, the UK, the Netherlands and Germany also finished in the top 10. The U.S. didn’t.

downloadIn the Emerging Market countries, like China, India, Brazil and Russia, the young people, ages 15 to 35 were the most financially literate.  Apparently the kids in Shanghai “knocked the cover off the ball” (just like George Springer of the Astros).

So, what’s the takeaway? Financial literacy for Americans could use improvement.  In addition, as we pointed out in our blog two weeks ago highlighting Nobel Prize winner Richard Thaler, people, even if they are financially literate, can make systematically irrational decisions.  This means you may need a financial coach and advocate.  That’s what we are for our DWM clients.  Whether it’s professional investment management, financial decisions and planning, income tax planning, insurance and estate planning matters, we provide our financial literacy, rational analysis and proactive solutions and suggestions.  It’s our expertise and our passion.  At DWM, this is how we hit home runs!

DWM SAYS THANKS – LAST WEEKEND AT THE SWEETGRASS PAVILLION

This past Saturday, many clients/family/friends attended our annual Charleston Friends of DWM Appreciation Event at Sweetgrass Pavillion in Mt. Pleasant, SC. Although the sun evaded us, the room was filled with bright faces!

A great time was had by all!

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Marilyn Dingle, the resident sweetgrass basket weaver, educated us on the history of sweetgrass baskets.

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And some even participated!

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Everyone learned a thing or two about Marilyn and the art of sweetgrass basket weaving!

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And had lots to talk about!

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Many thanks to all who waded through the rain and joined us for our appreciation event! And to both those that did attend and to those that couldn’t make it, let us reiterate that we are honored to have you all as our friends and look forward to a continued great relationship! Thank you!!!

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Nobel Prize Winner Helps Add $30 Billion to Retirement Accounts

Richard Thaler received the Nobel Prize in economics last week, principally by showing that people don’t always behave rationally and, in fact, we are systemically irrational.

Here’s an example: Two friends are given tickets to a basketball game in the Northeast.  The night of the game there is a tremendous snowstorm.  One friend calls the other and suggests there is no way they are going to the game now, in the snowstorm, and they don’t go.  But, he said “You know, if we had paid for those tickets ourselves, we’d be going.”

Studies by Dr. Thaler show that if the friends had paid for the tickets, they would likely driven through the snowstorm because they didn’t want to “lose” their money.  Classical economics would say that’s crazy, but it’s true.  People pay huge attention to “sunk costs,” often irrationally.

Because of Dr. Thaler and others, we know more about human biases and anomalies that impact our financial decisions. These include compartmentalizing (putting money in mental boxes), mental accounting (thinking differently about money in your pocket versus money in the bank) and the endowment effect (once you own something you value it more than before you owned it).

Dr. Thaler not only helped discover our biases but also identified ways to make irrational behavior work to our advantage.  Savings and retirement has always been a big area for him.  He applauds the fact that if we compartmentalize (have a “mental box”) for retirement savings we are doing a very good thing.  Putting money in a 401(k) plan makes it much “stickier” than other money and it stays there.

In 2004, Dr. Thaler and Shlomo Benartzi published “Save More Tomorrow.”  It is based on the idea that instead of asking people to save more now, ask them to save more in the future.   We tend to irrationally discount our future commitments.  Hence, we tend to put off savings because retirement is so distant, but we will commit to future savings because it is also so distant.  Dr. Thaler suggested that people save 50% of every raise.  No need to give up anything now.  And, this concept would mean that if you save 50%, then the remainder will be left for current spending, without any guilt.  Every raise therefore increases both spending and savings- a much more palatable idea than taking away some of our current income to save.

Over the past few decades, most company pension plans have been discontinued and replaced by company sponsored defined contributions plans, where employees needed to make contributions.  These voluntary accounts should have worked better.  Rational employees were expected to save and invest to meet their long-term goals.  But, it didn’t work that way-participation rates early on were very poor.   Dr. Thaler was asked about the problem and his response was that workers can be their own worst enemies- “without help, they’ll never retire.”

His solution: “Nudge” them into joining company retirement plans, using a concept known as automatic enrollment.  Rather than waiting for employees to complete paperwork, companies would automatically enroll them and workers, if they don’t want to be in, can opt out.

Last year, 58% of companies were automatically signing up workers. That’s up from 8% in 2000.  And some companies are automatically escalating the contributions or giving the employees the option to do so.  Thaler and Benartzi’s research shows, as compared to 2011 data, 15 to 16 million more people are saving.  Assuming an average contribution of $2,000 a year, that’s $30 billion a year in additional contributions.

Dr. Thaler, with his colleague Hersh Shiffrin, suggested that our mental accounting of money is often a battle in our brains between the “doer” (focused on short-term rewards) and the “planner” (focused on the long-term.)  How choices are presented to us (“the choice architecture”) makes a big difference in our decision.  Making enrollment in the 401(k) occur by default and requiring a worker to “opt out” will likely put the “planner” in control, not the “doer.”

One of our key jobs and challenges at DWM is to assist our clients by framing questions and choices in the appropriate way.  Like Dr. Thaler, we understand that wealth, health and happiness decisions are not always rational yet we do our best to find a way to “nudge” both your doer and planner parts of your brain in order to help protect and grow your assets and your legacy. We haven’t made a $30 billion impact yet, but we’re passionately working on it every day.

October: Halloween and National Cybersecurity Awareness Month

What a combo!  Ghosts and goblins seem pretty tame compared to the potential theft of our financial information.  146 million Americans got a big scare last month when Equifax announced that hackers had stolen their personal information.  Fast food chain Sonic just announced that customers’ debit and credit card information was stolen last week.  So, while Halloween costumes, haunted houses and trick or treats get put away on November 1st, cybersecurity issues cannot be put away in the attic trunk or tossed into the garbage.

We probably all wish we could just email Equifax a two word message:  “You’re Fired!”  Unfortunately, it’s not that easy.  For example, Fannie Mae, who sets the rules for most mortgages, requires information from all three credit “repositories.”   If you will never need a mortgage, you can try to delete your files from Equifax.  However, those who have tried have been put “on hold” for hours and then told that deletion of their files was impossible.  The “no” response to deletion was confirmed by Equifax former CEO Richard Smith last week to Congress. For now, the best we can do is freeze (not “lock”) our accounts at Equifax, Transunion and Experian.

New “cyber-vampires” are emerging from the darkness.  Did you ever watch the movie “Catch me if you can?” Great film.   It is the story of Frank Abagnale, Jr., played by Leonardo DiCaprio, a master of deception and a brilliant forger who stayed one step ahead of the FBI (Tom Hanks) for five years with his highly successful scams.  Once arrested, he spent five years in jail from age 21 to 26.  Since that time, Mr. Abagnale has put his unique skills to good use teaching FBI agents around the country about cybercrime, identity theft and fraud.    He also serves as an ambassador for AARP’s Fraud Watch Network and lives in Daniel Island, SC.  Here are some of Frank Abagnale’s (“FA”) recent warnings:

FA: “Stop writing checks- if you are still paying by check, you might be putting your life savings at risk.”  If you go into a grocery store and write a check, you have to hand the clerk the check with your name and address, phone number, your bank’s name and address, your bank account number, the bank routing number and your signature.  And then, the clerk may ask to write down your date of birth and driver’s license number as well.  You never get the check back, it goes to the store’s warehouse, where it may be destroyed thoroughly (or not) six months from now.  Anyone seeing the check has all they need to draft on your bank account tomorrow.

FA: “It is now 4,000 times easier to forge checks (with today’s technology).”  50 years ago, FA used a Heidelberg printing press, originally costing $1 million, to forge checks.  The press was 90 feet long and 18 feet high.  Now, one simply opens their laptop and says, “Who’s my victim today?”  In fact, FA indicates that forging checks is so easy these days that street gangs that used to deal in drugs and narcotics are forging checks instead.  FA: “It’s easier and you spend a lot less time in jail if you are caught.”

FA: “Technology breeds crime-whether it is forging checks or getting information.”  Facebook is a great source of information for the crooks.  One of the most common scams now is the “grandparents scam.”  The bad guys go on Facebook and find out who the grandparents are and see who the grandson is dating.  They easily manipulate their telephone caller ID to show a call coming from the NYPD or other police department.  The thieves place their call on a Friday night and tell the grandparents that the grandson is at the jail after being picked up for DUI/DWI and being held for bail.  If money for bail is not received in two hours, the grandson will have to spend the weekend in prison.  “Millions of grandparents have fallen for this scam.”

At DWM, we recognize that you have worked and continue to work very hard for your money.  Our goal, in every facet of providing Total Wealth Management, is to protect and grow your assets.  Cyber-safe practices are a key element of risk management.  Our first job is to educate our clients and friends about the importance of cybercrime, identity theft and fraud.  Charles Schwab & Company, the custodian for our clients’ money, is as dedicated as we are to keep you and your funds safe and help prevent attacks.

Watch for more blogs this month (and beyond) on cybersecurity.  It’s a tremendously important topic!!