Did You Ever Dream That You Forgot Your Pants? No Problem.

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Have you ever dreamed that you are walking into a college final exam and you have done no studying for it?   Better yet, in the dream, have you walked into the exam and forgotten your pants? I can tell you from personal experience, I have had dreams where both events occur. Fortunately, I’m pleased to report, this has never happened in real life and likely and hopefully never will. More importantly, though, I now know that my dreams have served an all-important psychological function-working out my anxieties in a low-risk environment and preparing for the future.

Most of the emotions we feel in dreams are negative; including fear, helplessness, anxiety and guilt. Yet, this night-time unpleasantness may, in fact, provide an advantage during the day.

All sleep is not the same. Dreams typically occur in REM (rapid eye movement) sleep, when our brains are more active. You cycle between REM and non-REM sleep. First, comes non-REM sleep followed by REM sleep and then the cycle starts over again. Babies spend 50% of their sleep in the REM stage, compared to only 20% for adults. Deep sleep which is non-REM is known for the changes in your body, not your brain; when your body repairs and regrows tissues, builds bone and muscle and strengthens the immune system.

REM sleep is crucial for mental and physical health, yet we generally slough off the dreams as being silly, juvenile, and self-indulgent and simply get on with our day. Because dreams seldom make literal sense, it can be easier to discard them than to try to interpret them. In fact, according to Alice Robb, author of “Why We Dream,” dreams can help us “consolidate new memories and prune extraneous pieces of information.” Further, they may provide a time for the brain to experiment with a wider array of associations of the facts and outcomes and sometimes help solve problems.

Finnish evolutionary psychologist Dr. Antti Revonsuo studied the perplexing question of why our minds subject us to something so unpleasant. He reasoned that if our ancestors could practice dealing with dangerous situations, perhaps battling a mastodon, as they slept, they might have an advantage when they had to confront them in the next day. Research on animals fits into this theory. REM deprived rats struggle with survival-related tasks such as navigating a maze, while rats with REM sleep apparently dream about this upcoming challenge and perform better.

In 2014 researchers at the Sorbonne interviewed a group of aspiring doctors about to take their medical school entrance exam. Nearly all of the 719 students who replied had dreamt about the exam at least once beforehand and, understandably, almost all of those dreams were nightmares. They had dreamed that they got lost on the way to the exam facility, that they couldn’t understand the questions and that they had written their answers with invisible ink. Ouch. But, when the researchers compared the results of the exam with dreaming patterns, they found that students who dreamed more often performed better in real life.

Ms. Robb suggests that, while we tend to focus on and discuss dreams that are strange, most dreams are less bizarre than we think. A study in the 60s by psychologist Frederick Snyder of 600 dream reports showed that “dreaming consciousness” was, in fact, “a remarkably faithful replica of waking life.” He found that 9 out of 10 dreams “would have been considered credible descriptions of everyday experience.”

In another study, Dr. Revonsuo and Dr. Christina Salmivalli, analyzed hundreds of dreams from a group of their students and discovered that the emotions in the dream were usually appropriate to the situation, even if the situation itself was unusual. “The dreamer’s own self was ‘well preserved.’” Effectively, even in dreams, we know who we are.

So, go ahead and get a good night’s sleep tonight and look forward to the REM dreaming phase. It may feel negative and not be all that comfortable. However, it just might give your brain some time to work through some important matters and find solutions.

ECONOMY CELEBRATES 10 YEARS OF GROWTH: IS IT TIME TO PARTY?

Next week will mark the 121st month of the current bull market- the longest business cycle since records began in 1854. Based on history, a recession should be starting soon. Bond rates now form an “inverse yield curve” with shorter term rates above longer term, which typically signals a downturn. Business confidence is down. However, 224,000 American jobs were created in June and equities continue to soar, rising 16-20% year to date. Is it time to party or not?

The business cycle appears to be lengthening. The current expansion, coming after the worst financial crisis since the Great Depression, has been unusually long and sluggish. Average GDP growth has been 2.3% per year, as compared to the 3.6% annual growth in the past three expansions. The workforce is aging. Big firms invest less. Productivity has slipped. And, Northwestern Economics Professor Robert Gordon continues to assert that American’s developments in information and communication technology just don’t measure up to past achievements including electricity, chemicals and pharmaceuticals, and the internal combustion engine.

However, the changing economy may now be less volatile for a number of reasons. 1/3 of American’s 20th century recessions were caused by industrial declines or oil-price plunges. Today, manufacturing is only 11% of GDP and its output requires 25% less energy than in 1999. Services are now 70% of our GDP. Furthermore, the value of the housing market is now 143% of GDP, as compared to a peak of 188%. Banks have lots of capital.

Finally, inflation has been very low, averaging 1.6% in the U.S. (and 1.1% in the euro zone) per year during the current expansion. In earlier business cycles, the economy would surge ahead, the jobs market would overheat, causing inflation to rise and leading the Federal Reserve to put on the brakes by raising interest rates. Today, it’s different. Even though the unemployment rate is at a 50 year low of 3.7%, wage growth is only 3%. As the Economist pointed out last week in “Riding High,” American workers have less bargaining power in the globalized economy and are getting a smaller percentage of company profits, keeping inflation down. The Fed recently announced that it is less concerned about rising prices and more concerned about growth slowing and, therefore, will lower interest rates at its meeting next week.

Changes in the economy to slower growth, more reliance on services and lower inflation all contribute to longer business cycles. Yet, the changing economy, particularly globalization and technology, has also produced new risks.

Manufacturing that was formerly done in the U.S. is now outsourced to global producers. These chains can be severely disrupted by a trade war. This could produce a major shock- imagine if Apple was cut-off from its suppliers in China. Also, take a look at the impact that the prolonged grounding of Boeing’s 737 MAX is having on the U.S. economy. It’s hurting suppliers, airlines, and tens of thousands of workers, while $30 billion of the MAX sit grounded. Global supply chains are extremely interconnected these days.

IT is significantly linked as well. Many businesses outsource their IT services via cloud-computing to a few giants, including Alphabet (GOOGL).  85% of Alphabet’s $100 billion annual sales comes from advertising, which in the past has been closely correlated to the business cycle. GOOGL invested $45 billion last year, 5 times more than Ford. In fact, the S&P 500 companies invested $318 billion last year, of which $220 billion was spent by ten tech companies. The big IT companies are now facing regulatory issues worldwide. What would be the worldwide impact if GOOGL, Facebook or others get their “wings” clipped?

Also, finance issues could disrupt the expansion. Although housing and banks are in decent shape, private debts remain high by historical standards, at 250% of GDP, or $50 trillion. And, if the prime lending rate continues to decline, banks’ profits and balance sheets will likely weaken.

Lastly, politics is a big risk. There are the threats of trade wars with China and physical war with Iran. The big tax cut that pushed markets up in 2017 could now produce lower year over year earnings for companies. On Monday, July 22nd, Congressional leaders and White House negotiators reached a deal to increase federal spending and raise the government’s borrowing limit. This would raise spending by $320 billion, at a time when the annual deficit is already nearing $1 trillion, despite the continuing expansion.

Conclusion: Changes in the economy have produced reasons why business cycles are longer, yet more sluggish. Those changes have also added new risks for a continuing expansion and bull market. No one can predict the future. Focus on what you can control: Make sure your risk level is appropriate for your risk profile. Make sure your portfolio is prepared for the next downturn. And, yes, stay invested.

Real Estate: Time to Sell that Large House?

American homes are a lot larger than they used to be.  In 1973, the median size of a newly built house was 1,500 square feet.  In 2015, that figure was 2,500 sq. ft. – 67% more. Plus, with smaller families, there is lots more room per person: 507 sq. ft./person in 1973, and, almost double, 971 sq. ft./person in 2015.

In addition, Americans aren’t any happier with bigger houses.  A study by PhD Clement Bellet found that “house satisfaction in the American suburbs has remained steady for the last four decades.”  His reasoning is based on the premise that people compare their houses to others in the neighborhood-particularly the biggest ones.  The largest homes in the neighborhood seem to be the benchmark.  Dr. Bellet tracked the “one-upmanship” by owners of the biggest homes from 1980 to 2009.  He found that the size of largest 10% of houses increased 40% more than the size increase of median houses.  Apparently, the competition never ends.

Fifty years ago, a one bathroom house or a bedroom that slept 3 siblings might have felt cramped- but it also probably felt normal.  Today, many Americans can afford more space and they’ve bought it. They just don’t appear to be any happier with it.

Dr. Robert Shiller, the noted Nobel Prize winner and co-author of the Case-Shiller index of housing prices, was interviewed recently by the WSJ for an article titled “The Biggest Ways People Waste Money”.  Dr. Shiller opined that “Big houses are a waste.”  He believes that modernization has reduced our space needs.  However, he recognizes, that for some, a big house is a symbol of success. Your neighbors may not know about your finances and achievements, but they can see your big house.

Dr. Shiller suggests books such as “The New Small House”- that talk about designing houses to look impressive as well as function on a smaller scale. Living smaller can be easier on the pocketbook, the owner’s time and the environment.  He concludes: “Just like Uber and Lyft and Airbnb, using resources more efficiently, we can also build houses that are better at serving people’s needs without being big”.

As a result, we’re seeing that fewer people want to buy large, elaborate dream houses.  We know that in the high-end suburbs of Chicago that prices today, in some cases, are ½ of what they were 10-15 years ago. In the Southeast and the Sunbelt, McMansions are sitting on the market, enduring deep price cuts to sell.  For example, Kiawah Island currently has 225 houses for sale, which is a 3-4 year supply.  Of these, the largest and most expensive are the hardest to sell, especially if they haven’t been renovated recently.

The problem is expected to get worse in the next decade.  Baby Boomers currently own 32 million houses, 40% of all the homes in America, and many of these homes are big ones. As the Boomers advance into their 70s and 80s, many will be looking to downsize and/or move to senior housing and therefore will attempt to offload their big house.

When we at DWM talk with clients about housing, we generally ball park a figure of 5-7% of the market value of the house as the annual net cost.  The costs include interest, if there is a mortgage, the opportunity costs of not investing the equity in the house, real estate taxes, insurance, and maintenance and repairs. From this total we subtract the expected appreciation.  For example, a $500,000 house with a $200,000, 4.5% mortgage, might have $9,000 in interest, $18,000 in opportunity costs, $5,000 in real estate taxes, $3,000 in insurance and $5,000 in repairs. Total costs of $40,000 less 2% appreciation of $10,000 nets $30,000 in annual net costs or 6% of the market value.  Of course, values differ across the country and by house. Furthermore, there are some sections of the country experiencing excellent appreciation and some that are experiencing deprecation in value.

As we look at our spending, it’s always good to compare the value received to the cost and, if the cost exceeds the value, a change might be in order.  In our example, if the couple owning the $500,000 house feels they are getting $30,000 or more per year of value from the house, that’s great.  If they are not, particularly if they have a bigger house that may not be appreciating and may be hard to sell in the future, they may want to think about a change now.  Give us a call if you would like to discuss this very important topic.

IT’S SUMMERTIME! LET’S TALK BASEBALL: IT’S MORE THAN JUST A GAME

First, full disclosure. I love baseball. I was born 2 blocks from Wrigley Field and walked to Cub games alone when I was 7 and sat in the bleachers. As a lifetime Cub fan it’s a mixed blessing- a life of both affection and affliction. Happily, the Cubs are having another good year and the White Sox are resurging. Baseball is a fun game for sure, but it’s more than just a game. This week’s Economist’s article “Baseball and Exceptionalism” examines how our national pastime reflects America’s desire to be different and successful.

You may have heard that a young man named Abner Doubleday invented baseball in 1839 in Cooperstown, New York. Doubleday later was credited with firing the first shot for the Union at Ft. Sumter and became a Civil War hero.

Actually, that story is untrue. Doubleday was at West Point in 1839 and he never claimed to have anything to do with baseball. The Doubleday myth was created by A.J. Spalding, a sporting goods magnate. In the 1930s the National Baseball Hall of Fame was established in Cooperstown. However, if you visit Cooperstown today, you’ll see a plaque admitting that the Doubleday myth is untrue.

The real history of baseball, like many things, is more complicated than that. References to games resembling baseball in the United States date back to the American Revolution. Its most direct ancestors appear to be two English games; cricket and rounders. However, American promoters in the 19th century, including Mr. Spalding, saw political and commercial profits to be gained from promoting a uniquely American game that was both different and exceptional. Actually, no surprise, American baseball teams raided cricket clubs (Philadelphia for example had 100 such clubs) for players, while the great American poet Walt Whitman proclaimed “Baseball is our game- the American game.”

Anglophobia, stirred by Britain’s trade with the Confederacy during the Civil War, pushed the issue. Alarmed by the persistent claim that baseball was invented by the English, Spalding bankrolled a commission, fueled by “patriotism and research” to produce a better explanation. The Doubleday myth was the result.

For Spalding and many Americans then and now, baseball was (and is) more than just a game. It reflects the triumphs, defeats and tensions of our nation. American baseball is the story of our country over the last 150 years. A common endeavor, yet with periodic problems and disputes between communities, owners and workers, and cultures. Mexicans, Irish, Jewish and African Americans saw baseball as a point of entry to American culture. Author Philip Roth called baseball “this game that I loved with all my heart, not simply for the fun of playing it…but for the mythic and aesthetic dimension it could give to a boy’s life in participating in a core part of America.”

The Economist makes three very good points about Americans creating, and in many cases still believing, the untrue Doubleday myth about our national pastime. First, America is often less exceptional- because, like baseball, it is more of a “European- accented hybrid”- than it considers itself to be. Second, there are costs to self-deception such as isolation in sport and otherwise. For example, right now 2 billion people are avidly watching the Cricket World Cup while baseball remains basically an American game. Third, our country’s belief in our exceptionalism may be at the core of our achievements. Believing you are different and exceptional increases your confidence and that can produce greater success.

Henry Ford is known not only for his fantastic success with his automobile empire but also for his great quotes. I really like this one: “Whether you think you can, or you think you can’t- you’re right.” Henry Ford inspired Americans to be more confident-exceptional and different- and therefore more successful. Spalding’s myth about Abner Doubleday inventing baseball isn’t true, but certainly has helped Americans believe that we are exceptional and different and this had helped lead to many of our successes.

And, now, “Take Me Out to the Ballgame.”

Ask DWM: Should We Invest in Real Estate?

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Great question.

 

Let’s start with some basic concepts.  Real estate is an illiquid investment. You can’t buy or sell it in a day or two like liquid investments. It is somewhat uncorrelated to the stock market returns- which is good.  While it is smart to consider adding real estate as a portion of your overall investment portfolio, you don’t want to have too much in illiquid investments. We suggest a rule of thumb is that real estate, excluding your house, should be at the very most 40% of your overall investment portfolio.  So, if your investment portfolio (both liquid and illiquid) is $1 million, real estate should at most be $400k.

Location. Location. Location. Appreciation in value over time is key. This will impact the ultimate sales price when you sell your investment property and the rental income amounts while you hold it. Historically, US real estate has increased, on average, about 3% per year, similar to inflation. However, location can produce tremendous differences. Charleston real estate has done very well in the last ten years, though some areas of the Lowcountry haven’t done so well. Chicago’s market overall has been flat for the last ten years, yet there are areas that have done very well and areas in the suburbs that have lost significant value.  Investing in a piece of real estate is not like buying shares in an S&P 500 index, where your investment will rise as the market will rise. Rather it is a singular investment in one piece of property, subject to both the general market risks and the specific risks of the property.

Would you be prepared to self-manage the investment property? Do you have the skills, time and patience to handle phone calls or texts, perhaps in the middle of night, from an upset tenant?   If you decide to have someone else do the property management, it won’t be cheap- likely 10% of your rental income.

Let’s look at the key metric- your likely return on investment. We start by calculating the “net operating income” (“NOI”), which is the cash flow of the property, assuming there is no financing, and compare this to the purchase price.  For example, let’s say you think you can buy a property for $500,000 that will rent for $3,000 per month. You need to include an amount for estimated vacancies/rental commissions- let’s use 8%. So, the hypothetical annual net rent would be $33,120. Now, let’s look at expenses- taxes might be ½% to 1% or more of the property value. There may be homeowner association fees and/or repair costs. And, there will be insurance-perhaps an amount equal to the real estate taxes. Just for simplicity, let’s say all of those expenses combined are 1 ½% of the value of the property. Based on a $500,000 property, expenses might be $7,500, assuming you do the property management yourself. Therefore, in this example, NOI would be $25,620 ($33,120-$7,500) or 5% of the investment.

The hypothetical total return on the investment is NOI + expected appreciation. Let’s say this property would be sold in 6 years for $650,000. Assuming you sell it using a broker, there would be a 6% commission. So, net proceeds of $610,000. This would represent a 3.5% annual appreciation on the property. Therefore, your total expected return in this example would be 8.5% (5% net operating income + 3.5% appreciation).

We haven’t talked yet about financing and taxes. If you get a loan at less than your NOI (5% in our example), your total return will increase slightly as you are benefitting from leveraging. If the rate is higher than NOI, the total return would be a little less. Depreciation is a non-cash expense that can reduce the taxable income on the property during your ownership. Any depreciation taken has to be “recaptured” (given back) when you sell the property. Depending on your personal circumstances, you may be able to take losses on rental property and you may be eligible for a 20% Qualified Business Income Deduction. Financing and taxes are generally not the key determining factors in deciding to buy the property, but may have some impact on the total return.

We generally suggest a minimum threshold for expected total return on real estate investments to be 9% or more. If a balanced liquid investment portfolio is expected, over a long-term, to have a total return of 5-7% net of fees, a real estate investment should be at least 3% more. Real estate investments are illiquid, riskier (due to lack of diversification) and, if you self-manage, will require time, skill and patience.

Under the right circumstances, investment real estate can be a nice addition for a portion of your investment portfolio. At DWM, we are very familiar with real estate. We understand the pluses and minuses for a portion of your investment assets. In 50 years of marriage, Elise and I have purchased and sold over 40 properties, some of which were our home and some were investment properties. Real estate investment has helped increase our income and net worth.

If you think you might like to invest in real estate, or, if you already own real estate and wonder if you should be adding more or subtracting some or all of it, give us a call. Once you’ve assembled all the facts (cost, income, expense, appreciation), we’re happy to help you review the NOI and total return and discuss how investment real estate fits into your overall investment strategy. We don’t do property valuations and we certainly can’t guarantee your future results, yet we’re happy to provide competent, independent and valuable input as you determine whether or not you should invest in real estate.

 

 

 

 

 

Not All Winners: Tax Refunds Down $6 Billion from Last Year

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At the end of March, 2019, the Treasury had issued $6 billion less in tax refunds than the same period a year ago. The refunds still have averaged around $3,000 each and the number of returns processed is similar to last year, but there are roughly 2 million fewer refunds so far in 2019. Many taxpayers are shocked- getting smaller refunds or having to pay, when seemingly nothing has changed in their situation.

We cautioned our readers about this a year ago (March 15, 2018), in “How to Avoid a 2018 Income Tax Shock.” We pointed out the Tax Cuts and Job Act (“TJCA”) brought about a number of changes. It reduced itemized deductions, lowered tax rates, eliminated exemptions, and produced new tax withholding tables in early 2018 that reduced withholding, thereby increasing net paychecks. So, for those families who have used their annual refund as a forced saving mechanism, it was a huge disappointment this year. They received little or no refund-yet, in fact, they had already received their refund money with each enlarged paycheck which, studies show, was spent, not saved.

Wealth Management magazine reported today that “Fewer RIAs (Registered Investment Advisers) See Client Benefits From Tax Act.” Craig Hawley, head of Nationwide Advisory Solutions, authored a recent study on TCJA which indicated that “the benefits of tax reform were not as widespread as originally expected.” This is no surprise to us at DWM- we anticipated winners and losers. We didn’t expect the benefits to be widespread and they haven’t been.

Our DWM clients represent a very diversified group. We are pleased to work with clients of all ages, from teenagers and others in our Emerging Investor program to Total Wealth Management clients in their 20s to their 90s. We work with lots of folks whose primary income is W-2 income and others whose primary income comes from their businesses and still others whose income comes primarily from their investment funds and retirement programs. While we don’t prepare any tax returns, we are very involved in tax projections and tax strategy for our many families. Here is the anecdotal evidence of the 2018 impact of the TCJA we have seen:

1)For younger people, their taxes were slightly less, but their refunds were down or they had to pay.

2)Those with significant personal real estate taxes, particularly those in IL, CA and NY, in many cases paid more in income taxes than 2017 due to the fact that most of the large real estate taxes they paid were not deductible.

3)Business owners, except for those in the excluded “Specified Service Trades or Businesses” (such as doctors, lawyers, CPAs and wealth managers), did exceptionally well under TCJA. They were able to qualify for a 20% “Qualified Business Income Deduction” from their income and get lower rates as well. For example, if a business owner’s share of the profit was $1,000,000, only $800,000 of it was taxed and that was at lower rates producing tax savings of over $125,000 as compared to 2017.

4)Many retired couples with no mortgage and few itemized deductions were able to take advantage of the new $24,000 standard deduction ($26,600 for those over 65) instead of using their itemized deductions and this saved them taxes.

5)Overall, TCJA brought winners and losers. Generally, business owners (not in service businesses) and those in the highest tax brackets saw the biggest reduction in income taxes. Certainly, benefits have not been widespread.

At DWM, we regularly prepare tax projections for our clients and encourage everyone to know, at least by the 3rd quarter, what their 2019 tax status might be. It’s really important to go through this process to avoid tax shocks and, maybe, even find some opportunities to reduce your taxes for 2019. Please contact us if you have any questions.

Ask DWM: What is an Inverted Yield Curve and What Does it Mean to Me?

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Great question. Historically, an “inverted yield curve” has been a signal that recession was on the way. As with so many things these days, though, the old “rule of thumb” may not apply. Here’s why:

yield curve is a graph showing interest rates paid by bonds. The chart is set up with the horizontal axis representing the borrowing period (or “time”) and the vertical axis representing the payments (or “yield”).   We all would typically expect that loans over a longer period time would have a higher interest. That’s “normal.”  For example, if a 30 year mortgage rate is 4%, a 15 year mortgage rate might be at 3.25%.   A one year Certificate of Deposit might earn 1% or less and a 5 year C.D. might be 2%. The situation is referred to as a “normal” or “positive” yield curve in that interest rates are higher as the borrowing period gets longer and the curve slopes upward, see below:

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However, rates don’t always work that way. At the end of last week, the three-month Treasury bills’ yield 2.46% was higher than the yield (2.44%) for 10-year treasuries. This situation technically produced an inverted yield curve, since a shorter period had a higher rate. This also happened three months ago. Historically, “curve inversions” have tended to precede major economic slowdowns by about a year.

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Inverted yield curves are unusual because they indicate lenders (or investors) are willing to earn less interest on longer loans. This is most likely to happen when the economy is perceived to be slowing down and faces a meaningful risk of recession. Historically, curve inversions have occurred about a year before the each of past seven recessions in the last five decades, though a recession doesn’t necessarily occur every time we see a yield curve inversion.

The U.S. economy has slowed already from the average growth rate of 2018; mainly as a result of the 35-day government shutdown and reaction to the Federal Reserve’s (“Fed”) reports of slower growth and a moratorium on interest rate hikes. Some economists feel the economy may slow even more due to the tax-cut stimulus being only a one year spike, headwinds from trade tensions with China, political uncertainties and global polarization and fragmentation.

However, other factors point to strong economic growth. We do have a solid labor market which drives consumption. Average monthly job creation is well above what might have been expected this late in the business cycle. Further, more workers have been attracted back into the labor force and wage growth has been 3%; a rate in excess of inflation. Business investment should rise and government spending is higher.

In short, an inverted yield curve is not a perfect predictor of recessions. A different portion of the yield curve inverted three months ago in December and the markets in early 2019 have rebounded sharply as fears subsided. Also, many economists believe the drop in 10-year Treasury yields is due to non-U.S. economic headwinds, like Brexit as well as the unwinding of the Fed’s balance sheet after Quantitative Easing. They believe it’s not because of serious weakening of U.S. economic fundamentals.

The current inverted yield curve may or may not be the bellwether of a coming recession. These days, there is not a simple cause and effect relationship between an inverted yield curve and recession. More likely will be the resolution or non-resolution of uncertainties such as Brexit, trade tensions, political matters and global peace. Stay tuned and stay invested for the long-term.

Money and Time

 

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As the old saying goes, “Time is Money.” One of the great laws of business is that time equals money: The more time you can efficiently utilize, the less time you waste and the more money you make. Some may call this the opportunity cost of laziness. By being lazy you essentially give up the opportunity to make money. You’ve likely heard the phrase in some form or another a thousand times before, and it makes sense. However, have you ever considered it the other way around?

It may feel strange saying it out loud at first, but the saying can go both ways. Money is time. Time is one of the most valuable resources on earth. Thinking of money in terms of time is one of the best ways to adopt a healthy attitude about spending and stop splurge spending. If you know the true cost of your dollar you may be more inclined to save it.

To start, you must factor in all hours spent at or around the office, commuting, and at seminars over the course of a year. Once you’ve established the number of hours spent on work-related items, you will then have the denominator for your true hourly wage calculation.

The next step will be establishing any costs associated with your work. There are a lot of people who are unaware their job may actually have costs associated with it. Aside from the amount of time spent at work, most spend a considerable amount in preparation for their job. The cost associated with job preparation includes gas and care repairs for daily commuting, daycare costs, coffee, work clothes, and some may even include the occasional happy hour after work. Once you’ve established the amount of money you spend on your job on a weekly or annual basis, then subtract this number from your weekly or annual salary. Now subtract taxes to arrive at your net salary.

Now we are ready to calculate your true hourly wage. Take your net salary, add back any retirement plan contributions you may have been making, and divide this by the number of hours spent on work-related items to arrive at your true hourly wage.

Example:

Let’s assume an employee works 40 hours per week, spends 10 hours on work-related items. This employee gets paid $40,000 a year, spends $8,000 per year on work-related items, and pays about 20% ($8,000) in taxes between state and federal per year. The true hourly wage of this employee would be $9.23 per hour ($24,000 divided by 2,600 work hours per year). Compare this to a naked eye analysis of this employee’s salary, $19.23 per hour, and you will notice a $10 per hour difference for this employee. This means each dollar this employee spends costs him or her more than 6 minutes at work.

Knowing the true cost of your dollar, you may find yourself reluctant to splurge on that next big item. It’s important to remember that the relationship between your money and your time isn’t always that straightforward. While you can certainly calculate the cost per hour of use for a given splurge item, (a $160 chair used for 480 hours a year and used for five years will have a cost per hour of $0.06), this should not be the only consideration in spending. For both spending your time and your money, there is always at least one item we can all spend it on: That which makes you happy.

“The Two Most Powerful Warriors are Time and Patience”- Leo Tolstoy

 

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Good investing can be boring, yet effective! Specifically, investors with a long investing timeline should build a diversified, low-cost portfolio with an appropriate asset allocation and stick with it. Rebalance regularly to sell high and buy low. Don’t try to time the markets by getting in and out. Yes, this is boring, particularly with the volatility we are enduring, but it’s what it takes to generate solid returns over the long haul. Patience and time are powerful warriors and our friends.

Take a look at the average risk and returns for various asset styles over the last 20 years, which includes the 2008-09 financial crisis and 2018. The best performers, with higher returns and lower risk, are in the upper left hand corner:

 

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Bonds have relatively low risk and have produced decent returns over the period, particularly the first 15 years. Small cap and mid cap stocks have outpaced large cap stocks (e.g. Dow Jones and S&P 500) over time, with better returns and similar volatility (risk). Non-US stocks have trailed US stocks. Emerging markets stocks have produced very good returns, but with larger volatility swings. REITs have produced a 10% annual return with a risk factor about equal to U.S. stocks. The diversified composite “12 Index Portfolio” has produced a nice return of 6.8% annually (better than large cap stocks with 5.6%) with about 2/3 the risk of stocks.  Please note that during this 20 year period, the inflation rate was 3.2% per year. So, the 12 Index Portfolio produced an annual “real return” of 3.6% over the last 20 years.

Investors get in trouble when they lose faith in the markets and their allocation, react to the current market pain and go all cash or move to the “hot” asset classes for better returns. That approach generally ends badly for investors as the markets will correct themselves over time (as we have seen December 2018 losses recovered in January 2019) and hot asset classes go “cold” as the pendulum swings to the next “hot” asset style right after they jump in.

The 12 Index portfolio in this chart is composed of all the asset styles shown, equally weighted. Overall, this allocation is 50% equities, 33% fixed income and cash, and 17% alternatives; what we would term a “balanced asset allocation,’ appropriate for a “balanced risk profile.”

This balanced allocation will never be the top performer in any year. And, it won’t be the worst. It is designed to deliver middle-of-the-road, steady returns. Patience and time produce the results.

Investors need to also understand that time is their friend. “Time in the market beats timing the market.” Here’s another chart showing the growth of $1 since 1990, all invested in the S&P 500:

timing_the_market.png

 

The black line represents an investor who stayed in the market every day and turned her $1 into $14. The red line represents the investor who missed the 25 best days (roughly one a year) and turned her $1 into $4. The gray line represents the return an investor could have received by simply investing in five-year treasury notes, turning $1 into $4.

Getting out of the market is easy; getting back in at the right time is very difficult. In the last couple of months, for example, the equity markets (using the MSCI AC World Index) are about level from December 1, 2018 until last Friday, February 8th. However, if an investor got cold feet and got out in mid-December and waited to get back in until mid-January, they would have lost 3.5% on their equity returns. Timing the market is not a good idea- unless you own a crystal ball, can implement perfect end of day execution on buys and sells, have no transaction costs, and don’t mind paying taxes on realized gains.

Patience and Time are two powerful warriors-they are your friends. Let them do the heavy lifting.  Invest for the long-term. Yes, slow and steady wins the race. It may not make for great cocktail conversation, but boring investing can be very effective.

U.S. Housing Market: Not Hot Everywhere

us housing market

Zillow just reported that the U.S. Housing Market is up 49% overall since 2012. That’s roughly 6% per year in that time period-though, to be fair, 2012 was when the housing market hit bottom after the 2008-2009 financial crisis. The U.S. Housing Market is huge- $33 trillion (“T”). It’s larger than the value of all U.S. stocks and is about equal to the Gross Domestic Products (GDPs) of the U.S. ($19T), China ($12T) and Canada ($2T). Commercial real estate, including retail, hotels, office buildings, apartment buildings and industrial is about $6T.

The U.S. housing market has had some big winners and some big losers in the last 7 years. Almost 1/3 of the gain of $11T since 2012 has occurred in California. Four of the country’s 10 most valuable markets are in California; LA (5% increase in value in 2018), San Francisco (9.6% increase), San Jose (10% increase) and San Diego (3% increase). New York Metro itself has $3T of housing. The Washington, D.C. metro housing is worth $900 billion. DC itself has more housing value than 40 states, including Colorado, Arizona, Ohio and Oregon.

Unfortunately, housing in some areas hasn’t done so well. Illinois has many state-specific issues which makes it one of the worst housing markets areas. In fact, among the nation’s top 100 metro areas, Chicago is expected to be the weakest housing market of them all in 2019. With mortgage interest rates possibly causing a likely national homes sales slowdown of 2% in the U.S. in 2019, Chicago metro, including Naperville and Elgin, is expected to have an 8% decline in home sales this year. Taxes are a big problem in Illinois. Illinois homeowners are subject to the highest overall tax burden in the country, including the second highest property taxes in the U.S. Since 1996, Illinois property taxes have grown 43% faster than home values and 76% faster than home values in Cook County (Chicago). Worse yet, less than 50% of the tax increases have gone to pay for services. Most of the increase has gone for teacher and other governmental pensions and debt service on bonds.

In 2017, Illinois raised income taxes- the largest permanent state hike in history. Add in a sluggish state economy and outbound migration and the Illinois housing market is hurting. Even so, the Illinois Association of Realtors expects the median value of houses in IL to rise in 2019 by 4%, to roughly $196,000 for the state and $241,000 for Chicago.

The Lowcountry in SC is faring much better. Charleston Metro is now home to 700,000 people. Ongoing job growth means continued housing demand. The median home value in Charleston is now about $320,000 and Charleston home values went up 8% in 2018. The forecast for 2019 is 3% growth. Buyers outnumber sellers. A typical home in Charleston receives only one offer. However, homes sell for only 3% less of the listing price on average with 73 days on the market.

Charleston has many reasons for its housing growth:

  • A booming job market with an unemployment rate under 3% and one of the least unionized states in the nation
  • Wages are low
  • South Carolina’s overall tax burden is among the lowest, particularly for retirees.
  • Huge Tourism industry including being the most sought after wedding destination in the country
  • Home Appreciation is strong- 31% over the last 10 years

Overall, the U.S. Housing market is strong for now. Many winners, but some losers. Mortgage rates, after jumping to 5% and more on 30 year mortgages just a few months ago, are now down in the low 4% range. If they stay there, 2019 could be a pretty good year again for the U.S. Housing Market. But, with many areas coming off a strong run overall the last several years, a cool-down on housing prices wouldn’t be surprising. We’ll continue to watch how the events unfold and keep our clients and readers informed as conditions warrant.