Coronavirus & the Dow Down 1000+ Points: Time to Panic?

The new coronavirus, dubbed COVID-19, has led to 80,000 infections and over 2600 deaths since originating in Wuhan, China in December 2019. This outbreak which the World Health Organization (“WHO”) has said is a “public health emergency of international concern” is a true human tragedy. Pretty scary at first glance, but taken in context it’s not so different from the normal flu. According to Centers of Disease Control, this season through February 7, more than 19 million people just in the US had caught the flu of which 10,000 died from it.

While the flu is caused by any of several different types and strains of influenza viruses, COVID-19 is caused by one virus, the novel 2019 coronavirus, now called severe acute respiratory syndrome coronavirus 2, or SARS-CoV-2.  When looking at the symptoms of COVID-19, we find that they are similar to that of the influenza (flu) virus, i.e. cough, runny nose, sneezing, sore throat, fever, headache, etc. Symptoms for both COVID-19 and the flu can be mild or severe and can result in pneumonia which can lead to death. According to WHO, the infection has been fatal in 2-4% of cases within Wuhan, but in less than 1% elsewhere. Rates go up for the elderly and those without sophisticated health care providers. Again, pretty similar to the normal flu.

Both COVID-19 and the flu can be spread from person to person through droplets in the air from an infected person sneezing, coughing, or just talking. Neither virus is treatable with antibiotics. Good news is that there has been promising work in the drug and vaccine space against COVID-19 but those need to be tested. Prevention methods for both include frequent, thorough hand washing, staying home when sick and limiting contact with those infected.

It’s still unclear as to how this situation will unfold and how much spreading of COVID-19 will take place. Fortunately, the immediate health risk for the general American public is low at this time. Further, it appears that China is getting the disease under control as the pace of infections (as represented by the “daily tally of new cases”) peaked a few weeks ago and has since steadily declined. However, reports over the weekend showed that the coronavirus is not only just appearing in other countries but unfortunately accelerating in some like Iran, South Korea, and Italy. The Italy news has many worried that Europe could be in the first innings of the ballgame China has been stuck in.

We’ve talked before how the stock market doesn’t like uncertainty and a virus like this only compounds that. We know in China that business has been severely affected. Not only are people avoiding going out to the movies and having fun outside, they’ve been told to stay home to stop further contagion. Most factories have basically been shut down since the Lunar New Year. These Chinese factories help produce many goods needed by world-wide manufacturers. If XYZ Company in Canada can’t get that one particular China-made good that goes into its finished project, it’s stuck in limbo until things clear up. Thus, we basically have a global supply-side shock in the making. Not good for the global economy! And don’t forget that China now accounts for 15% of the whole world GDP. Talk about ripple effect!

The odd thing that happened is that when COVID-19 gained notoriety in January, the US stock market sold off only to quickly recover and just recently was trading at record highs. The market shrugged off the bad news, putting it into the “one-time” event category or figuring that the global central banks would turn more dovish on rates and thus come to the rescue.

But the weekend news about Iran, South Korea, and Italy as well as the warning that an extended Chinese shutdown could cost the world up to $1 trillion in lost output, brought the fear back. Which led to the DOW’s worst trading day in two years, down over 1000 points yesterday!

So is it time to panic? Of course not.

COVID-19 is a terrible disease outbreak. Unfortunately, it’s not the first and it won’t be the last. We’ve seen this happen before; just think of the following: Ebola, Zika, Swine Flu, SARS. Let’s take a look at the market reaction to some of these:

Market reacts during virus outbreaks

The stock market sold off in all of these cases indeed. But more importantly is to see how the market recovered.

market heals after disease outbreak

As you can see, in most cases, the market typically recovers within six months.

We come back to our old saying of: control what you can control and don’t get emotional from the things you cannot.

Moreover, don’t let short-term market events alter your long-term planning. Unfortunately, humans are not wired for disciplined investing and usually trade poorly based on fear. So avoid that mistake by staying invested and staying disciplined and focusing on things that can be controlled:

  • Create an investment plan to fit your needs and risk tolerance
  • Identify an appropriate asset allocation target mix
  • Structure a well-balanced, diversified portfolio
  • Reduce expenses through low turnover and via passive investments where available
  • Minimize taxes by using asset location, tax loss harvesting, etc.
  • Rebalance on a regular basis, taking advantage of market over-reactions by buying at low points of the market cycle and selling at high points
  • Stay Invested

If you’d like to further discuss how disease outbreaks affect your portfolio and/or long-term financial planning, don’t hesitate to contact us.

 

https://dwmgmt.com/

Women in the Workplace

As a female in a modern day workplace, my experiences have been mostly positive, although I am still in shock of things said to me, or how I have been previously treated in professional settings. Since coming to Detterbeck Wealth Management in November I have felt comfortable, respected, like I fit in, but I can’t help but imagine what it was like in the 1960s when women were first entering the workforce. After the feminism movement, and women getting the opportunity to vote, they began to have access to ‘paying work’ in coed environments. At first, they were only allowed to work in poor status or low paid occupations, and earning much less than men doing the same line of work. As the 20th century progressed, the labor market shifted and women moved into longer-term jobs like education, banking and office work that doesn’t require manual labor. And now during the 21st century, labor intensive jobs are populated by both genders! 

Unfortunately, women in the workplace aren’t as equal as some people think. In the finance industry, women make up 15% on the executive level. In 2014, women made up about 33% of the legal profession while men made up 67%, per the American Bar Association. In major technology companies, 70% of the workforce is men, says TheMuse. According to healthline, in 1965, 1 in 10 US medical school students were women, and in 2016 they reported it was up to 51%, as most physicians nowadays are women. But why are these stats important? Because women are pivotal in the workplace! 

One of the biggest advantages women bring to the workplace is communication skills. Women are known to be easier to talk to, listen better, and bounce positive ideas off of coworkers in meetings, therefore boosting brainstorming and morale. Since women usually have more of a nurturing appearance and tone, people are drawn to opening up to them resulting in a comforting bond. This also creates a well-rounded workforce when women use intuition, sensitivity and emotional intelligence to read verbal cues and body language that can help solve problems and make team productivity excel. 

Another advantage of having women in the workplace is that women are recognized to handle their emotions better than men. They can remain calm and keep composure when an unexpected situation makes things tough. Being able to have employees and partners that are not phased when anything goes awry is crucial in maintaining consistency in a workplace. 

Women are also known to be incredible managers from their analytical skills of being detail oriented, which comes in handy for negotiation too, alongside great communication skills. 

Lastly, but certainly not the final reason, women are great in the workplace because of their strong morals and ethics. From the treatment women receive daily, not just in work, women strive to be in environments that are fair and just. Having people on your team that want to do the right thing, and treat people the right way, will reduce unethical business by making appropriate decisions more often. This mindset will have companies taking steps forward constantly, rather than taking avoidable steps back.

As Payscale researched, the gender pay gap difference has shrunk in the last decade, but still remains. In 2019, women made $.79 cents for every dollar men made, and race and job descriptions can still affect that $.79 cents. Women have proven to increase rapport, create positivity in environments and motivate others as they continue to persist themselves. Equal opportunity and perception towards women is essential and can only progress society, the economy, the business world, and is all women want. With the examples above, women create a togetherness in bonds and strong team spirit that no one should miss out on, ever!

https://dwmgmt.com/

A Heart for Splurging: How Budgeting and Expense Tracking can Free Up Your Time & Money

With love in the air on Valentine’s day, endless amounts of consumers will pile into stores, buying up cards, chocolates, or mega-sized teddy bears to share with the ones they love. In fact, on average Valentine’s Day participants will spend $196.31 according to a recent report. With that decent dent coming in each February, Valentine’s Day can help us softly return our eyes to a very important and relevant topic: Budgeting.

I know, that dreaded B-word, and on the most lovey-dovey day of the year! While it may bring a more serious and somber mood associated with the connotations of it, budgeting can and should be viewed in a much lighter and friendly way! Using modern-day technological and analytical methods, we can more easily wrap our arms around what can seem to be an extremely tedious and cumbersome process.

As with so many an established method, modern analysis has found unique and interesting ways to innovate classic solutions. One great example of such innovation is a theory coined as “zero-base budgeting”. In essence, this idea conjectures that all expenses in a set period should be categorized in advance such that each dollar earned should go towards a specific category. For example. If you made $4,000 per month, in a zero-based budget you’d allocate $2,000 for mortgage payments, $500 for food, and let’s say $500 for savings (wouldn’t it be nice if all budgets were this simple?). Now we have each expense labeled out and our income allocated towards them. But wait! We still have $1,000 left unallocated! Instead of leaving this piece out, we need to find a home for this cash to get back to our zero-based goal. So why not allocate this extra funding we found towards a great goal of paying down debt, or if we don’t have any debt, let’s shoot for an emergency fund or perhaps some extra cash for a romantic weekend getaway! Or, let’s say we don’t end up spending all $500 for food at the end of the month. We could roll this forward, or…go out for a nice date night! Using this technique, you’ll have a purpose for each and every dollar, which ensures you put your money to work for you and weeds out those unnecessary expenses that rears its head along the way!

An even simpler and more general rule to work with that incorporates the same principle is the 50/30/20 rule. Essentially, it’s a zero-based budget with your categories capped to three distinct classes: fixed expenses, discretionary spending, and savings/debt payments. Knowing this, our aim with this method is to re-organize and cut down expenses such that each month, your after-tax income is split between the three with the following, intuitive guidelines: 50% of your income goes towards fixed expenses (think insurance or mortgage payments), 30% goes towards discretionary spending (think entertainment or gifting), and 20% is used to pay down debt or build up savings. This last 20% category may be the most important factor to future financial success. By “paying yourself” i.e. saving on a regular basis, you start in motion the power of compounding. Once again, following these guidelines will also give your earnings a direct usage, which builds a baseline for proactive monitoring, instead of looking back and seeing where you overspent or having a non-distinct spending goal. Now you can move through the month and monitor where you are for each category using each method, and be able to adjust your spending accordingly!

Now, I know what you’re thinking: “This is great in theory, but I still have to come home from a long day and tally up all my various receipts, statements, etc. to create this budget, let alone monitor it constantly”! Well, fear not, as this is where the technological advancement pieces become so handy, and make budgeting a breeze! Nowadays, there’s an app for everything, and budgeting is certainly no exception! For example, a small indie firm called Intuit (yeah the same people who make that obscure tax software, what was it called again? NitrousTax?) has a free app for your phone that can help you tackle this project quite a bit. With Intuit Mint, you can create a link to any number of checking or savings accounts, debit or credit cards, or even straight to billing sites! Once all these accounts are linked, transaction data from each will start pouring in, and are automatically categorized for you into several different arenas which fit nicely with the zero-based budgeting plan we discussed! Within the app, you can also set goals for each of these categories and reallocate existing transactions that might have been mislabeled. Now each month, you’ll get a summary of how much you spent in each division, and Mint can also send you a notification when you’re close to exceeding your goal, to keep you right on track. (Additionally this app has some other cool features like credit score sampling and bill pay reminders, all for free!)

Some other apps that work in a similar capacity include EveryDollar, created by the zero-based budget guru Dave Ramsey, which has a free version that performs the same function with a slightly more intuitive user interface, but will require you to manually enter your transactions each month. There are also several others out there on the app market including Monthly Budget Planner & Daily Expense Tracker, BudgetBakers’ Wallet, Spendee, and many others. Each of these have their own unique setup and categorization but accomplish the task of simplifying your budgeting process!

All in all, budgeting is one of the biggest pieces of one’s financial puzzle. Most of the time, our income levels, investment performance, social security or any number of other inputs are not 100% in our control. But one important area, in which we do have total control is our spending, which makes monitoring this area a key to long-term financial success. By using analytical ideologies like zero-based budgeting or software aimed at making the whole process easier to follow-along with, we can take out the stress and time that used to be associated with budgeting, and instead create our own steps to reaching our financial goals whether those are getting out of debt, building long-term wealth, or just buying that rose bouquet for our significant other.

For further advice on budgeting and its ties to our financial planning process, please reach out to us! Happy Valentine’s Day!

https://dwmgmt.com/

The Art of the Notebook

What’s your favorite organizational system? How do you stay up to date with the important items in your life? Maybe you don’t even have a system. We all juggle a lot of information on a day-to-day basis. From time to time, everyone could use a little help on their daily tasks, planning their next big trip, or even ensuring their bills are paid on time. There are numerous ways to approach organizing these elements. The Bullet Journal Method: Track the Past, Order the Present, and Design the Future by Ryder Carroll introduces an inventive way to attack these key issues we all face.

The Bullet Journal Method (BuJo for short) is an ingenious organizational system that many people use as an alternative to a journal, or a traditional planner. The best BuJos feature a symbol format that allows you to easily customize your own page layouts, similar to below. The symbols are the syntax that makes this method so useful. By simplifying tasks, notes, and events into a bullet point format, the BuJo method allows you to focus on only that which is essential. Writing effective bullets is the key to success for a productive and mindful journal. Too much information and your mind may lose sight of the goal. Too little information and your bullet may be ineffective.

In college, one of the most popular ways to retain information is by writing the information out or using flashcards. Like flashcards, the Bullet Journal is solely a handwritten process. It allows you to customize your organizational habits as much or as little as you see fit. Many experts suggest that by writing things down you may improve your memory. Carroll offers that by writing out your day to day life and actively organizing your future, you are creating an archive to look back on and learn from. See what worked and what didn’t work. That is essentially the main point, no pun intended, of the bullet journal method.

Why use a notebook? According to a New York Times article titled “Why is Productivity so Weak?” every year from 1950 to 2000 Americans increased their productivity around 2.3%. However, per the Bureau of Labor Statistics, not until 2005 did we start to see productivity decrease on a year by year basis. Carroll attributes this decrease in productivity to an increase in technology, information overload, and other online distractions. He goes on to suggest that when you are forced to write, you are also forced to unplug and, hopefully, bring more clarity to your thoughts.

You may be wondering “Why not use a software or a phone application instead of a notebook?” Flexibility. Today’s organizational applications have a tendency to do one task extremely well, or many tasks not so well. With a notebook, you are in control, and you can customize as little or as much as needed.

Although your Bujo can be a place of combining several important aspects of your life, not everything is to be included. Things not to be included in your journal: passwords! Passwords and other potentially sensitive information shouldn’t live in your handwritten notebook. Much like a checkbook from your bank, your BuJo is something you likely would not want to lose. For a list of potential ways to store your password, you may review our previous blog on this.

At DWM, we have several organizational tools and processes to assist us in servicing our clients. Our core software for relationship management and consistent workflows is Junxure, the leading Client Relationship Management (CRM) software in our industry. In addition to Junxure, our monthly, weekly and daily checklist enables us to make sure we never miss a beat when it comes to assisting our clients with their long-term goals and adding value on a continual, proactive, basis.

In a world where 5-year-olds now know how to use an iPad better than some Millennials, it may not hurt to go back to the basics. For some, these organization pieces come as second nature, but for others, it does not. For your personal life and day to day activities, you may consider the addition of a Bullet Journal (BuJo).

https://dwmgmt.com/

At 80, “Successful Ager” Jack Nicklaus Remains As Relevant As Ever

Golfing great Jack Nicklaus turned 80 last week. His drives aren’t as long anymore- Gary Player can now outdrive him.  Jack stepped away in 2018 from day-to-day operations of his companies which build golf courses all over the world.  You might think Mr. Nicklaus is slowing down.  But to hear Jack tell it, he got rid of the things he was tired of doing and is focusing on all the activities he likes; including public speaking engagements, occasional golf exhibitions, course design and fundraising with his wife.

Nicklaus started designing courses in 1969.  He’s completed over 300. He’s become a grandfather to the “kids” on the PGA tour such as Rickie Fowler and Justin Thomas. Rory McIlroy says that Nicklaus “has the best advice on how to play golf- not how to swing but how to play the game.”  Jack’s wife of 60 years, Barbara, is chair of the Nicklaus Children’s Health Care Foundation and together they have raised over $50 million for pediatric care in Ohio and Florida.  They just pledged to raise another $100 million over the next five years.  Yes, Jack Nicklaus remains relevant as ever and, by any definition, is successfully aging.

Much has changed since Social Security was started in 1935.  Back then, the average life expectancy was 61 years old.  In 1947, the poet Dylan Thomas encouraged the elderly: “Do not go gentle into that good night, old age should burn and rage at close of day.” It’s starting to happen. With greater longevity and medical advances, it’s no surprise that the term “successful aging” has grown in popularity over the past few decades.  Back in 1987, John Wallis Rowe and Robert Kahn published a book entitled “Successful Aging.”  They felt there were three key factors: 1) being free of disability or disease, 2) having high cognitive and physical abilities, and 3) interacting with others in meaningful ways.

Now comes a new NYT bestseller; Dr. Daniel Levitin’s “Successful Aging; a neuroscientist explores the power and potential of our lives.”  Today more people who are in the last quarter of their lives are engaged with life as much as they’ve ever been, immersed in social interactions, spiritual pursuits, hiking and nature, charitable work and even starting new professional projects.  Dr. Levitin remarks:  “They may look old, but they feel like the same people they were 50 years ago and this amazes them.”

Successful aging involves focusing on what is important to you, and being able to do what you want to do in old age. While successful aging may be one way to describe how well we age, the concept of meaningful aging might be another important way to consider how to age well.   Certainly, some of our faculties may have slowed, yet “seniors” are finding strength in compensatory mechanisms that have kicked in – positive changes in mood and outlook, punctuated by the exceptional benefits of experience.  Baby boomers and their elders may process information more slowly than younger generations but they can intuitively synthesize a lifetime of information and make smarter decisions based on decades of learning, often from their mistakes.

Combining recent developments in neuroscience and psychology, “Successful Aging” presents a novel approach to how we think about our final decades. The book demonstrates that aging is not simply a period of decay but a unique time, like infancy or adolescence, which brings forth its own demands, surprises and happiness.

Until about thirty years ago, older people in the workforce were forced/encouraged to retire; a tremendous economic and creative loss.  However, since the 1990s, the tide has been turning for seniors. Employers and organizations are awakening to the eastern idea that the elderly may not only be of some value but may provide superior enhancements to a group.   New medical advances and positive lifestyle changes can help us to find enhanced fulfillment that previous generations may not have been able to do.

Research now shows, for example, that fending off Alzheimer’s disease involves five key components:  1) a diet rich in vegetables, 2) moderate physical exercise, 3) brain training exercise, 4) good sleep hygiene, and 5) an appropriate regimen of supplements.  In addition, research shows that social stress can lead to a compromised immune system. We don’t need to be victims; we just need to take advantage of modern medicine and make some lifestyle changes.

When older people look back on their lives and are asked to pinpoint the age at which they were the happiest, what do you think they say? The age that comes up most often, according to Dr. Levitin, as the happiest time in one’s life is 82. And, that number is rising.

At DWM, we work with clients from 0 to 96.  As total wealth managers, we understand life cycle planning, financial and investment strategies and proactively provide value-added services.  Of course, we focus on making sure our clients have enough money for their entire lives.  In addition, and as important, we pay particular attention to helping them experience the best life possible with the money they have.  Their fulfillment is our fulfillment. Their happiness is our happiness.

Jack Nicklaus’s longtime PR man Scott Tolley says Jack still only operates at two speeds, “go and giddy-up.”  Gary Player calls retirement a death warrant.  It doesn’t need to be.  Successful aging is getting easier and more fun and fulfilling.  C’mon baby boomers- let’s giddy-up.

https://dwmgmt.com/

MLK Would Have Loved Finland

We hope everyone enjoyed the Martin Luther King, Jr. holiday on Monday. We hope you spent at least a few minutes thinking of Dr. King and his legacy. His stirring words and writings remain as relevant today as they were 50 years when he was alive. I am always moved by his comments, particularly on equality, such as:

  • “We may have all come on different ships, but we’re in the same boat now,”
  • “We must learn to live together as brothers or perish together as fools,”
  • “The time is always right to do what is right,” and
  • “In some not too distant tomorrow the radiant stars of love and brotherhood will shine over our great nation with all their scintillating beauty.”

As I thought about these quotes, it made me think of Finland, recently deemed a “Capitalist Paradise” by the NYT and lauded by the Economist for slashing homelessness while the rest of Europe is “failing.”

As many of you know, my maternal grandmother was Finnish and Elise and I spent a wonderful homecoming in Finland this past summer, meeting relatives and experiencing life first-hand in Finland. Dr. King certainly would have loved a country like Finland that provides a real-life example of a system that works to provide equality and happiness to all.

Finland hasn’t been operating independently all that long. Located between Sweden and Russia, Finland was under Swedish rule from 1250-1809. In 1809 it became a Grand Duchy in the Russian Empire until it declared its independence in 1917. In 1918, Finland experienced the Finnish Civil War; the “whites” were primarily Swedish descendants who were anti-socialists and the “reds” who supported Russian socialism. The whites won and established a republic. World War II saw Finland under attack from Russia and ultimately joining forces with Germany.

After WW II, Finland did not want to become a socialist country. Its capitalists cooperated with government to map out long-term strategies and discussed these plans with unions to get workers on board. Finnish capitalists realized that it would be in their best interests to accept progressive tax hikes. The taxes would help pay for new governmental programs to keep workers and their families healthy, educated and productive. Fast forward to today, the capitalists are still paying higher taxes and outsourcing to the government the responsibility of keeping workers healthy and educated.

The NYT article “A Capitalist Paradise” was authored by a couple who moved from Brooklyn to Helsinki two years ago. Both are US citizens, experienced professionals and enjoyed a privileged life in the States. However, they were both independent consultants with uneven access to health insurance, and major concerns about funding for day-care, and education, including college. What may come as a surprise to some, is that they have experienced since the move an increase in personal freedom.

In Finland, everyone is covered by taxpayer-funded universal health-care that “equals coverage in the U.S. but without piles of confusing paperwork or haggling over huge bills.”   Their child attends a “fabulous, highly professional and ethnically diverse” public day-care that costs about $300 per month. If they stay in Finland, their daughter will attend one of the world’s best K-12 education systems at no cost to them, regardless of the neighborhood they live in. College would also be tuition free.

Many Americans may consider the Finnish system strange, dysfunctional or authoritarian, but Finnish citizens report extraordinarily high levels of life satisfaction. The World Happiness Report announced recently that Finland was the happiest country in the world, for the second year in row, leading Norway, Denmark, Switzerland and Iceland in the poll.

Finland has also become one of the world’s wealthiest countries and, like other Nordic countries, home to many highly successful global companies. A spokesman for JPMorgan Asset Management recently concluded that “The Nordic region is not only ‘just as business friendly as the U.S,’ but also better on key free-market indices, including greater protection of private property, less impact on competition from government controls and more openness to trade and capital flows.” “Furthermore, children in Finland have a much better chance of escaping the economic class of their parents than do children in the U.S.”

Finland’s form of capitalism has worked for businesses and citizens alike. Since Independence, Finland has remained a country and economy committed to free markets, private businesses and capitalism. Its growth has been helped, not hurt, by the nation’s commitment to providing generous and universal public services that support basic human well-being. Finland and the Nordic countries as a whole, including their business elites, have arrived at a simple formula: “Capitalism works better if employees get paid decent wages and are supported by high-quality, democratically accountable public services that enable everyone to live healthy, dignified lives and to enjoy real equality of opportunity for themselves and their children.”

This system works. Over the last 50 years, if you had invested in a portfolio of Nordic equities, you would have earned a higher annual real return than the American stock market according to Credit Suisse research. It’s not a surprise since Nordic companies invest in “long-term stability and human flourishing while maintaining healthy profits.” We made a similar point in our September blog “Reinvent Capitalism?”

Dr. King’s quotes resonate loudly today. We Americans are a country of immigrants- “We came on different ships, but we’re in the same boat now.” In a time of tribal politics- “We must learn to live together as brothers or perish together as fools.” However, since “The time is always right to do what is right,” let’s keep optimistic that “In some not too distant tomorrow the radiant stars of love and brotherhood will shine over our great nation with their scintillating beauty.”

https://dwmgmt.com/

DWM’s 4Q19 Market Commentary & A Look Into 2020

Happy 2020! No doubt you have heard the term “20/20 vision” over the last several weeks as we enter this new decade and all of the imagery that comes with it. As you probably already know, 20/20 vision is synonymous with perfect vision. As financial Sherpas, we are always striving to provide our clients with that – to observe, to envision, to help foresee, to project, and to be on the lookout! We can’t guarantee that our outlook will be spot on, but we certainly can help our clients plan and make projections for what’s next on the horizon.

But before telescoping ahead, let’s look back on fourth quarter 2019 (“4Q19”) and calendar year 2019 and the bedazzling year it was! We’ve put the magnifying glass on this investment landscape panorama so you can visualize the details!

Equities: No, it wasn’t a hallucination… Equities, as evidenced by the MSCI AC World Index, rallied to close the year, up 9.0% for 4Q19 and an eye-popping 26.3% for the year! Domestic large cap stocks*, particularly the growth-oriented FAANG group**, kept outperforming, up 9.1% and 31.5%, 4q19 and YTD, respectively. International equities* also participated in the 4Q19 rally, +8.9% for the quarter, to finish the year +21.5%. Unlike the growth and momentum-driven environment of late, we and many other experts expect valuations to actually matter in 2020.

Fixed Income: Don’t get bleary-eyed just yet, as the positive readings keep coming! In a blink of the eye, the Fed went from a hawkish stance to a dovish one which amounts to massive liquidity support and lower rates, which in turn pushes bond prices up as evidenced by the Barclays US Aggregate Bond Index & the Barclays Global Aggregate Bond Index turning in a solid quarter, up 0.2% and 0.5%, and an eye-catching year-to-date (“YTD”) return of 8.7% and 6.8% respectively!  The Fed appears to be on hold for the foreseeable future, thus barring a setback on trade, we expect Treasury yields to move higher as recession fears fade.

Alternatives: Sometimes this asset class goes unnoticed or invisible, but not in 2019 as alts produced some very good returns. In fact, the Credit Suisse Liquid Alternative Beta Index, our chosen proxy for alternatives, showed a 2.2% gain on the quarter and finished up 8.1% for the year! Standouts include infrastructure*** (+2.9% 4Q19 & +27.8% YTD) and gold**** (+2.8% on 4Q19 & +18.0% YTD). Such spectacles!

Recall that in 2018 almost every asset class and investment style went down; 2019 was pretty rare in the sense that it was just the total opposite of that – virtually everything went up, i.e. no blind spots! In fact, the balanced investor – those with sizable allocations to equities, fixed income, and alternatives – should be seeing double-digit returns in the teens! Pretty amazing! The key is not to be short-sighted and getting caught up in recency bias. One needs to be realistic when planning for the future. If you are thinking that the environment is as pretty as the light prism above, you have blinders on. Alas, here is some near term darkness:

Investor sentiment is really high now with all the recent good news. That typically is a leading indicator of less-than-stellar times. And because of this high investor sentiment and recent stock market rally, valuations in certain areas, particularly the S&P500, are getting uncomfortably high. The market seems almost priced to perfection. So far the market has shrugged off scary news like the recent US killing of Iran’s most famous military commander. But it’s only speculation that that can continue. Further, manufacturing and business investment is still struggling, which will most likely continue until we get a more comprehensive trade deal, more than the vague preliminary one being discussed now. The good news is that it appears that US and China are both working on a resolution, but don’t be dazed and confused if talks fall apart. And, of course, we have an upcoming Presidential election which brings more uncertainty into the mix.

In conclusion, it’s a beautiful scene right now with most investors’ portfolio values near all-time highs. But like rays of light, the direction of the markets and portfolios don’t forever stay the same. We are here to help now and also when the light ray inevitably bends.

DWM enjoyed watching out and doing all it could for its clients in the last decade. And as we now start into this new decade, we continue to be on the lookout over our clients, their portfolios, and their wealth management needs. Serving our clients make us smile. On the flash of light, we say “cheese”!

Cheeky Smiles

As always, don’t hesitate to contact us with any questions or comments.

Brett M. Detterbeck, CFA, CFP®

DETTERBECK WEALTH MANAGEMENT

*represented by the S&P500 Index

** FAANG = Facebook, Amazon, Apple, Netflix and Google

***represented by the Frontier MFG Core Infrastructure Fund

****represented by the iShares Gold Trust

 https://dwmgmt.com/

Breaking News- How the SECURE Act Will Impact Retirement Plans

Happy New Year!! We hope everyone had a great holiday. Everyone at DWM certainly did. In late December, Congress’s year-end spending package was signed into law and it included the SECURE Act which has made some significant changes to retirement plans. It’s a mixed bag. Major items impacted are 1) “stretching rules” for IRAs, including Roth IRAs, inherited by non-spouse beneficiaries 2) age limits for IRA contributions and 3) Required Beginning Date (“RBD”) for Required Minimum Distributions (“RMD”) for retirees.

In the past, owners of IRAs and Roth IRAs could leave them to much younger heirs, including grandchildren, who could “stretch” the IRA by taking out the minimum distribution, typically until they were 85 years. This was particularly valuable for Roth IRAs, where the income tax had already been paid and the account continued to grow tax-free for 50 years or more. For example, a grandchild who received a $100,000 Roth IRA from her deceased grandparent at age 30, who invested the money and earned 6% annually and withdrew only the required amount each year, could eventually receive $741,000 in distributions over 55 years, all tax-free. The same applied to IRAs, except there would be taxes to be paid on the distributions each year. This was a great wealth succession strategy.

Now, the “Big Stretch” is gone. The distribution period has been reduced generally to 10 years for non-spouse beneficiaries. Surviving spouses are still covered by the old rules. However, a non-spouse IRA or Roth IRA heir can postpone any distributions until the end of the 10 years to maximize tax-free or tax-deferred growth. A surviving spouse who inherits a Roth IRA can put the account in his or her name, not take any distributions in their lifetime and then leave the accounts to younger heirs who get a 10 year stretch.

The Big Stretch is gone but Roth conversions can still make lots of sense, in the right circumstances. Here’s a real life example of a program we are just putting into place with clients. A Roth conversion is where you voluntarily move all or a portion of an IRA to a Roth account and pay income tax on the amount transferred. The Roth account is tax-free thereafter. Over a 10 year period one of our client couples is converting $1 million of traditional “pre-tax” IRA money to Roth. We do an installment Roth conversion each year, with larger amounts in the beginning. At the end of the conversion, using a 6% annual investment growth, their Roth accounts total $2 million. It has cost about $250,000 of federal tax (they live in a state with no income tax) to do the conversion. At that point, our clients are 70 years old. They have no RMD requirements on their Roth accounts and, assuming the second to die of the couple passes away at 95 years of age, the $2 million would have grown to $8.5 million over those 25 years. After that, the beneficiaries can allow the money to grow for 10 more years under the new rules and then take tax-free distributions on the roughly $15 million of Roth money. The effective tax rate on the conversion and growth was less than 2% tax ($1 million of IRA money eventually became $15 million of Roth money). Conversions don’t work for everyone but for the right situation, it is a key part of the legacy and wealth succession strategy, even without the Big Stretch.

Under the SECURE ACT, savers can continue to make contributions to a Traditional IRA past the age of 70 ½ (the age limit of 70 ½ has been repealed). Roth contributions were never subject to an age limit. They still have to meet the requirements of earned income to make contributions.

Lastly, starting dates, or RBDs, have been revised from 70 ½ to age 72 for RMDs. Obviously, people are living longer and many would prefer to start their RMDs later. Again, traditional IRAs have RMDs so that the IRS can finally start collecting tax on the money. The initial withdrawal rate is 3.6% and the withdrawal rate increases each year to 16% at age 100, for example. Roth IRAs have no RMDs for owners and their spouses. Now, if the owner reaches 70 ½ after 12/31/19, the first RMD year is the year in which the owner reaches 72. The RBD is April 1 of the year that follows the year in which the owner reaches 72 ½. Here’s an example, IRA owner was born in April, 1950. She will be 70 ½ in October, 2020 (after 12/31/19). So, she can take his first RMD either in 2022 or by April, 2023 (under the old rules she would have had a RBD of 2020 or April 2021.) However, if the first RMD is taken in April 2023, then the 2023 RMD for her will be taken that year as well. Doubling up may not be advantageous, as it may push you into a higher tax bracket.

Those are the key issues in the SECURE ACT. If you have any questions, please let us know. We love working with retirement plans, traditional IRAs and particularly Roth IRAs. Even with the new changes in the SECURE Act, there are still some great planning opportunities available.

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Is “Free” Stock Trading Really Free?

Is “Free” Stock Trading Really Free?

 Press Release: On December 3rd, SC Public Radio Host interviewed Les Detterbeck. This message, that there is no ‘Free Lunch,’ is extremely important.

 Click here to listen to the audio, and or please read the transcript below.

Mike Switzer: Since 1975, when the U.S. Securities and Exchange Commission, SEC, deregulated stock broker commissions, rates have been falling. Recently several major discount firms have announced completely free stock trading, but our next guest says that you should beware of any offer of a free ‘lunch’. Les Detterbeck is a Chartered Financial Analyst in Charleston, South Carolina, and a member of the South Carolina chapter of the CFA society, we have him on the phone! Les, welcome back to the program.

Les Detterbeck: Thank you Mike it’s a pleasure to be here!

Mike Switzer: So let’s just dive right in. Do you have plenty of clients now who are taking advantage of this free lunch?

Les Detterbeck: Many of our clients use Schwab, in fact we use Schwab as our main custodian. The equity trades are now at zero, but Schwab and others have been offering Mutual Fund trades at zero for some time. To make the major announcement about stocks and exchange funds going to zero was a pretty major one in the industry, and we have been using that yes.

Mike Switzer: Are you expecting this to spread industry wide?

Les Detterbeck: Yes, we expect that it will. That’s what has been happening over the last decades as the cost of commissions went down from $50 to $20 dollars, then $10 dollars to $4.95, so it’s not a surprise that this area of income for the brokers for much of their business that the commissions are going to be down to zero.

Mike Switzer: Does this mean then that they are making money in other ways once they have you as a client, or are there hidden fees somewhere that you are paying and don’t realize?

Les Detterbeck: No, I don’t know that there are hidden fees but there are three basic sources of income from the brokerage firms. In the beginning 30, 40, even 50 years ago, the trade commissions were the majority of their income; now it’s a very small amount. The other area has been operating expense ratios that is on Mutual Funds that they trade. There are expenses included in there and there is a portion of that fee that brokers can obtain. The last major item would be in the area of uninvested cash, the cash that’s within brokerage accounts that is not invested in specific securities.

Mike Switzer: And so they are basically able to make enough then to drop trading costs for the consumer to zero?

Les Detterbeck: Yes, that’s exactly right. None of us can begrudge them the opportunity to make a profit. They’re doing a good job, we expect they need to make income, they’re just getting it from other sources these days.

Mike Switzer: So, is this going to stay in the discount broker arena, or spread to the full service brokerage firms?

Les Detterbeck: It’s spreading although it’s going slowly that way, Mike. Obviously the big name full service brokerages have people and have brands that people love causing them to stay with them. So, we have seen some of that but it may still be a while before that changes.

Mike Switzer: Now are the firms that are offering this putting any conditions in place, like you have to have this level of account investment $100,000? 1 Million?

Les Detterbeck: We are not aware that they have that. In fact the general idea, one of the main areas as I’ve mentioned, is the uninvested cash and Schwab, that we know so well, one of their business strategies to collect more deposits, for example. A portion of those deposits will likely be in cash and they can use and invest that cash to make money there, so I think it will be something they will look at obtaining deposits in whatever size those might be.

Mike Switzer: And so Les, it sounds like that managing the cash portion of one’s portfolio might be becoming more important?

Les Detterbeck: Most definitely! Certain people may have cash; 5, 6, 7, or 10% of their portfolios, and that money is not working for them. So if the balance of their portfolio is earning 10% a year for example, but 10% of the portfolio is sitting in cash, their return is 9% under those circumstances. The result should be that investors should look at maintaining a small amount of cash, 1-2%, stay invested, stay with an appropriate asset allocation, and make sure your money is working for you.

Mike Switzer:  Well Les, as always, thank you so much for your time.

Les Detterbeck: Thank you so much, Mike.

https://dwmgmt.com/

The “Nastiest, Hardest Problem” in Retirement

Running out of money in retirement is, according to Nobel Prize winning economist William Sharpe, the “nastiest, hardest problem” in retirement. Professor Sharpe has spent his career thinking about risk. His work on the Capital Asset Pricing Model and systemic risk produced in 1966 the Sharpe ratio, which measures risk-adjusted returns. Now, he’s tackling a much broader subject, extremely important to everyone, about possibly outliving your money in retirement. Similar to the Monte Carlo analysis that DWM uses to provide a probability of success for your financial plan, Dr. Sharpe created a computer program with 100,000 retirement-income scenarios to calculate the probability of not running out of money. He’s published a free 730 page e-book “Retirement Income Scenario Matrices.”

In short, there are three key variables that impact your retirement income; your spending, your investment returns and your eventual age (when your plan “ends.”)

The first variable, spending, is the one you can most control. Your spending before retirement will generally determine how much money you accumulate while working. What you don’t spend becomes savings/investments and these annual additions and their appreciation increase your investment portfolio overtime. Your spending in retirement will determine how much you need to withdraw from your investment pot. As your earnings during the working years increase, you need to save a larger percentage of your income in order to accumulate an investment pot at retirement time that will support the lifestyle you’ve created. Withdrawals from your investment portfolio during retirement typically should not exceed 4% of the total investment pot. It’s an easy calculation. For example, if you determine you will need to withdraw $100,000 from the portfolio in your first year of retirement, you’ll need a portfolio of $2.5 million.

Now let’s look at investment returns. No one can predict the future. Historically, we know there is a relationship between inflation, asset allocation and returns. Hypothetically, let’s assume that a diversified fixed income portfolio over the long term would produce a return of 1% above inflation. The return above inflation is called the “real return.” Equities, because of their higher risk, have earned an “equity risk premium” of roughly 3 to 7% above the inflation rate over the long term. Again, hypothetically, let’s assume that in the long-run equities earn 5% above inflation. Alternatives have a shorter historical track record but are designed to produce returns comparable to fixed income returns over time. Therefore, a portfolio with 50% fixed income holdings and 50% equity holdings might hypothetically produce a 3% real return over time. If long-term inflation is expected to be 2.5%, the nominal return could be expected to be 5.5%. A larger allocation to equities will likely produce a larger real return and a smaller (more defensive) allocation of equities would likely produce a smaller real return.

Lastly, longevity. Certainly, we can look at actuarial tables, such as those used by insurance companies and social security, to calculate life expectancy. These charts show that a male age 60 might be expected to live another 22 years; a female age 60, another 25 years. However, we suggest you not use these actuarial tables. Harvard Professor David Sinclair‘s “Lifespan- Why we Age- and Why We Don’t Have To” shows that the increases in technology and medicine are going to give those individuals who want to live a longer and healthier life the opportunity to do so. It is very possible that many of our clients and friends will live a healthy 100 plus years and younger generations, such as millennials and Gen Z, may live to 110 or longer. Accordingly, we suggest using an eventual age of at least 100 when doing your financial planning.

Dr. Sharpe’s final section in the book is about advice. He indicates that many people will need help. He outlines the “ideal financial advisor” and compares a “good financial advisor” to a “fine family doctor” who has “deep scientific knowledge, can assess client needs, habits and willpower and is able to provide scientific diagnoses and can communicate results to the client in simple terms so that the best treatments can be applied.” We like the analogy, we use it all the time.

Yes, running out of money in retirement would be a nasty, hard problem. It’s doesn’t have to be that way. You need a solid financial plan based on realistic values for investment returns and longevity. You also need to focus on spending and savings.   And, you might need some help from a “good financial advisor” that operates like a “fine family doctor,” a firm like DWM.

https://dwmgmt.com/