DWM 2Q19 Market Commentary

Carnival Pic

Summer is finally upon us! Weather is steamy, kids are out of school, and it’s the midst of carnival season. Merriam Webster has several definitions of carnival including:

  • An instance of merrymaking, feasting, and masquerading
  • An instance of riotous excess
  • An organized program of entertainment or exhibition

Sounds a little bit like the markets we’ve seen in 2019 so far: it’s certainly been an entertaining program with all asset classes parading higher. But does this Fun House continue or is it all just a House of Mirrors….

Equities: You win a small prize! Equities continue to be the most festive part of the fairground, with many stock markets up over 2-4% on the quarter and now up around 12-18% on the year! Domestic and large cap stocks continue to outperform value and smaller cap stocks, which is typical of a late-stage bull market, this one being over a decade-long!

Fixed Income: You can trade in that small prize for a medium prize!  Like a Ferris Wheel where one side goes up, the other side comes down; yields and bond prices operate the same way. With the 10-yr Treasury now down to around 2.06% at the time of this writing compared to 3.2% last November, it’s no surprise to see strong returns in bond land. In fact, the Barclays US Aggregate Bond Index & the Barclays Global Aggregate Bond Index popped another 3.1% and 3.3%, respectively for the quarter and 5.6 & 6.1%, respectively year-to-date (“YTD”).

Alternatives:  You can trade in that medium prize for the largest prize! The merrymaking continues as most alternatives we follow had good showings in 2Q19, evidenced by the Credit Suisse Liquid Alternative Beta Index, our chosen proxy for alternatives, up 1.3% and now up 5.7% YTD.

It almost feels like you could go over to the Duck Pond and pick up a winner every time. There are indeed a lot of positives out there:

  • US stocks near record highs
  • A stock-market friendly Fed
  • Historically low unemployment with inflation that appears totally under control
  • Americans’ income and spending rising, leading to relatively strong consumer confidence

But this carnival has some roller coasters in the making given some riotous issues including:

  • US-China trade tensions most likely not ending with a solid deal anytime soon, which will fuel anxiety
  • A weakening European economy due to tariffs and other issues, which could bleed over to all markets
  • Slowing US economic growth here as the Tax Reform stimulus wears off
  • A relatively expensive US stock market, evidenced by the S&P500’s forward PE ratio now at 16.7 times versus its 25-year average of 16.2

It definitely wouldn’t be fun if the yummy funnel cake turns into spoiled fried dough…Yuck! We don’t know exactly when or what will happen, but we do know that at some point this bull market will indeed end. You cannot time the market so forget about getting out of the Cliff Hanger before the time comes. That said, you want to stay invested and continue to control what you can control. Don’t wind up being on the bottom end of a Whack-A-Mole game; make sure your portfolio is prepared for the next downturn, which includes making sure your risk level within is appropriate for your risk tolerance.

So don’t wind up being a carny clown. If you want to continue hearing “winner-winner-chicken-dinner!”, work with a proven wealth manager and you’ll be the one controlling the Zipper!

 

Zipper

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.

Your Digital Footprint: How to Protect your Virtual Footprint

The new digital age has seen the onset of countless new conveniences whether through online shopping, banking, entertainment, or social networking. We can now order food and have it delivered to our door, transfer money at the push of a button, and video chat with friends and family that are halfway around the world. Through all these advancements, however, one thing stays the same, the necessity of virtual security. With all these new apps and websites to use comes the addition of endless different passwords to ensure the safety of personal information, with some sites even forcing you to make a new password every x months as an extra layer of security. All in all, this builds up quite the “portfolio” of digital “assets” that can sometimes get confusing. Now, it may not be a comfortable topic, but in the case of the death or incapacity of the owner of these digital accounts, add another layer of complication, as family members now have to weed through various accounts to consolidate their estate.

The good news is that the same advancements in technology that brought around all these security features, questions, passwords, etc. are the same ones that provide a solution here. Available widely on the web are numerous different password vaults and managers that will allow users to store all of this information in one spot. Applications such as LastPass, True Key, Zoho Vault, 1Password and many others all can accomplish this purpose of simplifying this complicated web of components down to something that is easily manageable. Any new website or service you use can easily add log-in information or notes so that if you ever need to log-in and can’t remember your information, the application will do it for you!

These applications also offer the option to designate “digital heirs” that in the case something happens to the user, these vaults can be passed along and not locked permanently! In this manner, those handling the estate can easily gain access to all the accounts necessary all in one place.

In the case that you’d prefer to simply write down all of your log-in information and other important online details in a notebook or binder, which is sufficient, just make sure to let someone know where that “book” is and how to access it! We at DWM have actually put together a document that can help to organize this all in one written location including other important estate information such as the location of trust documents, powers of attorney, etc. Please feel free to use it if you’d prefer the traditional paper copy!

One additional step beyond providing access to your accounts to your digital “executor” is actually letting them know what to do with the accounts. For instance, if you’d prefer your Facebook to be set to “memorialized” which will effectively make the account inactive, but allow family and friends to continue to post memories and stories on the page versus closing it out entirely. Also actively selecting if you’d like certain digital assets to go to certain heirs, for example if you would want your grandson to receive your illustrious Fortnite account or your daughter to receive the log-in for your online knitting chat group, you can designate those wishes either in the password manager app or in your notebook. That way there will be no confusion or argument over who gets what when the time comes to distribute those assets.

As an added layer of protection, the right to digital assets can be specified in a trust document drawn up by an estate planning attorney for those with more complicated situations that need specific direction. These specifications usually outline the power of the successor trustees to access, view, modify or make use of any electronic accounts including those financial sites that are used.

To summarize, from Uber to Schwab to Amazon to Facebook and many, many more, the necessity to build a plan to preserve our digital legacy for when “the time comes” is imperative. Using these plans can ease the transition for your loved ones to get their arms around your digital assets and secure your legacy properly. At DWM, we would encourage you to get these items in order to make things easier on you and your loved ones in the future, hopefully a long time down the road.

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.”

Leverage for the Next Generations: How to Build Credit Effectively

According to a study done by Sallie Mae recently, the younger generations, from teens to young adults, are much more likely to make payments by debit card, cash, or mobile transfer (Venmo, Paypal), than by credit card. In fact, only around 50% of them have credit cards at all. This statistic is leaving some analysts, like those at Fortune magazine (Bloomberg) wondering if credit cards will soon go the way of the video store or Toys R Us. But what are some possible reasons for this shift away from debt lending instruments in young adults, and what lessons can they learn to ensure that picking one up doesn’t lead them to further financial struggles?

One of the big reasons that can easily be identified as an answer to the first question is the looming student loan debt floating over most of those adults’ heads. The average student leaving college in 2017 had roughly $28,650 in student loan debt. On top of this, about 11% of outstanding student loans were 90 days or more delinquent or in default. With the risks of this debt compiling and carrying out, students and young people entering the workforce are less concerned about credit scores and more concerned on making sure they can pay their monthly loan amount, on top of any other recurring expenses. However, the one piece of good news coming out of paying these student loans is that by doing so, one can build up significant credit that will help take the place of missing out on credit card payments. While this avenue won’t leave much room to start borrowing to buy discretionary items, making these payments on time and for the right amount will allow young folk to build a strong credit foundation for the future.

In addition to student loans, many other issues impede those looking to get a credit card early. In 2009, the Credit Card Accountability Responsibility and Disclosure Act set forth a precedent that banks needed to have more stringent policies with which they lend money, including not offering credit cards to anyone under the age of 21 without a co-signer or proof of income. Even if these are available, with little to no credit history available, some will be turned down for credit card offers. However, most companies offer some sort of secured debt instruments at the least which ask for a deposit upfront as a collateral credit limit. These will allow those with low or new credit scores to earn it while keeping the banks/credit card companies from being at risk. One additional method for those who choose not to use these types of cards is simply to be added as an authorized user on a parent’s credit card. While at a slower pace, this can help out a young person get started even if they don’t use it at all.

Additionally, once their credit is established and starts going in the right direction, they must remain diligent to avoid having what they worked for diminished. There are many different factors that go into a person’s score, however following some key principles will be more than enough to continue pushing this score up:

  1. Use 30% max of the allowed total credit line. This 30% rule is used to ensure that one’s spending habits are in-line with how much they can borrow.
  2. Pay all bills on time. Either through setting up auto-pay or keeping a calendar with important payment deadlines written down, this is one of the most important factors.
  3. Continue using the debt instrument. Even if it’s only being used to pay for small monthly charges or gas bills, continuing to use the card will build up credit.
  4. Pay as much as is feasible. The balance set on the card is not nearly as important as the fact that it’s being used. In order to keep interest down (some go as high as 17%!), one should pay off as much of the balance as they can each month. This is especially important since roughly 25% of millennials have carried a credit card debt for over a year!

All in all, younger generations of people have sincere trepidation when it comes to using credit cards or any other item causing them to incur more debt than they’ve already been exposed to through student loans. They’re still fearful, having grown up through the Great Recession, and face several hurdles even if they decide to pursue getting a credit card. However, once they have them, and through loans, they can still build up a reasonable credit score and attain their financial dreams by remaining diligent and following advice like those points listed above. Please let us know if you have any questions on the above information for you, your family, or your friends.

Happy Easter!

Easter is the only time of year when it is safe to put all your eggs in one basket. Best of wishes for an egg-cellent holiday!

Sincerely,

Detterbeck Wealth Management

DWM 1Q19 Market “MADNESS” Commentary

In basketball, March Madness is a big deal. For those of you who aren’t familiar with the term, March Madness refers to the time of the annual NCAA college basketball tournament, generally throughout the month of March. In the market, it may appear that “Madness” is never confined to any one month. If you really want to talk about Madness, just think about the last 6 months: The S&P500 was at an all-time high late September, only to throw up an “airball” and bottom out almost 20% lower three months later on worries that the Fed was raising rates too fast, only to “rebound” to have its best first quarter since 1998 as the Fed shifted its tone to a more dovish nature. Is it the NCAA or the markets in a “Big Dance”?!?

Yes, the investing environment now is so much different than our last commentary. Then, it certainly felt like a flagrant foul after a tenacious 4q18 sell-off that had gone too far. We advised our readers then to essentially do nothing and stay the course. And once again, rewards come to those that stay disciplined. With the market back within striking distance of its peak, it almost feels like its “cutting down the net” time. (“Cutting down the net” refers to the tradition of the winning basketball team cutting down the basketball net and giving pieces to team members and coaches.) But of course, the game of investing is not just four quarters like basketball. Investing can be a lifetime. So if you’re thinking about your portfolio like you would a basketball team, let’s hope its more like the Chicago Bulls of the 90s and not the 2010s! (Where’d you go, Michael Jordan?!?)

Like the Sweet 16 of the NCAA tourney, your portfolio holdings are probably like some of the best out there. But there will always be some winners and losers. Let’s take a look at how the major asset classes fared to start 2019:

Equities: The S&P500 soared to a 13.7% return. Small caps* did even better, up 14.6%. Even with a challenging Eurozone environment, international stocks** climbed over 10%. In basketball terms, let’s just say that this was as exciting as a SLAM DUNK for investors! Of course, with a bounce-back like this, valuations are not as appealing as they were just three months ago. For example, the S&P500 now trades at a 16.4x forward PE vs the 16.2x 25-year average.

Fixed Income: With the Fed taking a more dovish stance, meaning less inclined to raise rates, yields dropped and thus prices rose. The total return (i.e. price change plus yield) for most securities in fixed income land were quite positive. In fact, the Barclays US Aggregate Bond Index & the Barclays Global Aggregate Bond Index jumped 2.9% and 2.2%, respectively. Further, inflation remained under control and we don’t expect it to be a pain-point any time soon. But TIME OUT!: Within the last several weeks we have seen conditions where the front end of the yield curve is actually higher than the back end of the yield curve. This is commonly referred to as an “inverted yield curve” and has in the past signaled falling growth expectations and often precedes recessions. To see what an inverted yield curve means to you, please see our recent blog.

Alternatives: Most alternatives we follow had good showings in 1Q19 as evidenced by the Credit Suisse Liquid Alternative Beta Index, our chosen proxy for alternatives, up 3.9%. Two big winners in the space were Master Limited Partnerships***, up 17.2%, and Real Estate****, up 15.2%. The pivot by the Fed in terms of their attitude toward rates really benefited the real estate space as new home buyers are now seeing mortgage rates almost a point lower than just several months ago. Unfortunately, not all alts did as well. Gold barely budged. And managed futures†, down 3.1%, were tripped up by the last six-month whipsaw.

So if you think of your asset classes as players on a basketball squad, one could say that pretty much every one had a good game, but the star of the show was definitely “LeStock”. Moreover, there was no buzzer beater necessary this quarter, as your team flat out won. In fact, most balanced investors after just one quarter are up high single-digits! A definite nice start to the year. You have now advanced to the next round, but where does your team go from here?

The game we saw in the first quarter cannot continue. With the Tax Reform stimulus starting to wear off, economic growth has to decelerate. In fact, companies in the S&P500 are expected to report a 4% decline in 1Q19 vs 1Q18; their first decline since 2016! World trade volume has really slowed down, so there’s a tremendous focus on a US-China trade agreement happening – if not, watch out! The good news is that the Fed seems to be taking a very market-friendly position, and unemployment and wage growth are under control.

As always, there are risks out there. But with the bull market on the brink of entering its 11th year of economic expansion, the end-of-the-game buzzer need not be close as long as you have a good coach at the helm. Just like within NCAA basketball, to succeed, you need a good coach on the sidelines – someone like Tom Izzo of the Michigan State Spartans who always seems to get his players to work together and play their best. The same way a wealth manager like DWM can help you put the portfolio pieces and a financial plan together for you in an effort to thrive and succeed.

So don’t wind up with a busted bracket. If you want a lay-up, work with a proven wealth manager and you’ll be cutting down your own nets soon enough. Now that’s a “swish”!

Brett M. Detterbeck, CFA, CFP®

DETTERBECK WEALTH MANAGEMENT

 

*represented by the Russell 2000

**represented by the MSCI AC World Index Ex-USA

***represented by the Alerian MLP ETF

****represented by the iShares Global REIT ETF

†represented by the Credit Suisse Managed Futures Strategy Fund

When Your Plan Ends…

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As our clients know, we use MoneyGuidePro (MGP) as our financial planning software tool and we generally review our clients’ particular plan with updates when we meet. This allows us the opportunity to discuss any changes in their lives, perhaps an upcoming life event, like retirement, or a new goal, like starting a 529 for a grandchild. We help to analyze all of the “known” factors and make some assumptions about the future, including when your time on earth may end. MGP euphemistically refers to this as the “plan end”, or in other words, the time when these variables, assets and concerns will no longer be yours!

Here is where good estate planning comes into play. At DWM, we think it is important to help you with the preparation for the end of your life, as well as your legacy after. We aren’t lawyers, but we work with some trusted estate attorneys and can use experienced insights and knowledge of your financial world to make sure that all of your wishes are properly addressed. We have helped many of our clients in this way, as well as many of their extended family members. We offer to carefully review your existing wills or trust in an effort to make sure your asset distributions and beneficiary designations are how you want them. We like to provide our own CliffsNotes version in a summarized Estate Flow for your convenience.   If things need updating, we can make some recommendations on how and also on who can help you with the legal paperwork and advice.

We also review all of your estate plan ancillary documents that discuss your end-of-life plan. These include the Health Care Power of Attorney (HCPOA), which designates an agent to represent you on health care decisions, the Durable Power of Attorney (DPOA), which designates a financial, legal and business representative on your behalf and the Living Will, which essentially outlines your care wishes in the event of incapacitation or when you can’t speak for yourself. Many of our clients come in not understanding how vitally important these documents can be for you and your family to have in place BEFORE there is a reason to need them! These documents are also state-specific and must be updated or kept current for where you spend time, either in a primary or secondary residence. Every situation is different – a terminal diagnosis may give you time to determine the answers for these questions and to generally get your affairs in order. However, a sudden, unexpected incident, especially for a younger person, can leave the people you love with decisions and demands that may be overwhelming.

An article in the WSJ recently talked about this issue of “Preparing for a good end of life”. Planning ahead and talking to your loved ones is important for everyone’s peace of mind. There are some fundamental pieces that should be considered to have a good plan ready. As the WSJ writer recommends, “Imagine what it would take to die in peace and work back from there.” This might include where you want to be and how you will manage the financial and physical obligation of your end-of-life. Would you want to be at home and perhaps have in-home care? Would you rather allow for in-patient hospice treatment so there is less demand on your family? The WSJ references a 2017 Kaiser Foundation study that suggests most people care much more about the burden on their families, both financially and emotionally, than about extending their own life.

The Living Will and HCPOA allow you to specify what kind of medical attention you want during a serious medical event or terminal situation. Will you want to be kept alive artificially while being treated so you can live as long as possible? These documents allow you to determine who will be your representative on these matters and what decisions for your care that you make ahead of time or ask that your representative decide for you. In some cases, the right choice might be someone more neutral than a close family member, as their judgement may be emotionally clouded. Either way, it allows you to make decisions now that will offer a guideline to follow for those who love you. Having these conversations ahead of time about who will make decisions and how you wish to be cared for will hopefully bring solace to your loved ones, as well as relieve any stress for you by knowing that this is in order.

It is also important to ensure that all of your legal affairs are in order. Make sure that all of your bequests to others and the timing for them to receive them are kept up to date. It is also important to make sure deeds and the beneficiary designations on other assets are current and titled the way you want them, whether in a trust to avoid probate or with named beneficiaries to make your wishes clear. Make sure to keep life insurance policy information in a safe place and the beneficiary designations current. Also, safely store a list of all important financial documents and social media passwords in at least one place to make it easier for your personal representative(s) to tie up your affairs. Prepare a business succession plan and keep all the documents current. Don’t put off assigning items of sentimental or financial value to those you want to receive them. Many people are now even planning their own memorial services and writing their own obituaries to lessen the obligation and make sure everything is how you would like it. We are happy to help you store some of these financial documents in our secure “vault” in our DWM cloud.

We may have all experienced or know about situations where no planning was in place or updates to wills, titles and/or beneficiary designations were missing or outdated. Your family and friends will be dealing with tremendous grief during this time, so making these preparations ahead of time will allow both you and them some comfort when it’s time. While it may be hard to have these conversations and make these decisions, it will certainly make it easier for everyone in the long run.

Please let us know if we can help you get these affairs in order. At DWM, we are always happy to help bring peace of mind to our clients and their families.

Tick, Tock…is it Time for Your Required Minimum Distribution (RMD)?

“Time flies” was a recent quote that I had from a client.  Remember a long time ago…putting money aside in your retirement accounts, perhaps at work in a qualified traditional 401(k) or to an individual retirement account (IRA)?  It’s easy to ‘forget’ about it because, it was after all, meant to be used many years down the road.  It would be nice to keep your retirement funds indefinitely; unfortunately, that can’t happen, as the government wants to eventually collect the tax revenue from years of tax deferred contributions and growth.

In general, once you reach the age of 70 ½, per the IRS, many of those qualified accounts are subject to a Required Minimum Distribution (RMD) and you must begin withdrawing that minimum amount of money by April 1 of the year following the year that you turn 70 1/2.  Of course, there are a few exceptions with regards to qualified accounts, but as a rule, when you reach 70 ½, you must begin taking money from those accounts per IRS guidelines if you hold a traditional 401(k), profit sharing, 403(b) or other defined contribution plan, traditional IRA, Simple IRA, SEP IRA or Inherited IRA.  (Roth IRA withdrawals are deferred until the death of the owner and his or her spouse).   Inherited IRAs are more complicated and handled with a few options available to the beneficiary, either by taking lifetime distributions or over a 5 year period.  The importance here, is to be aware that a distribution is needed.  Another word of caution…In some cases, your defined contribution plan may or may not allow you to wait until the year you retire before taking the first distribution, so a review of the terms of the plan is necessary.  In contrast, if you are more than a 5% owner of the business sponsoring the plan, you are not exempt from delaying the first distribution; you must take the withdrawal beginning at age 70 1/2, regardless if you are still working.

The formula for determining the amount that must be taken is calculated using several factors.  Basically, your age and account value determine the amount you must withdraw.  As such, the December 31 prior year value of the account must be known and, second, the IRS Tables in Publication 590-B, which provides a life expectancy factor for either single life expectancy or joint life and last survivor expectancy, needs to be referenced.  The Uniform Lifetime expectancy table would be referenced for unmarried owners and the Joint Life and Last Survivor expectancy table would be used for owners who have spouses that are more than 10 years younger and are sole beneficiaries.  It comes down to a simple equation: The account value as of December 31 of the prior year is divided by your life expectancy.  For most individuals, the first RMD amount will be roughly 4% of the account value and will increase in percentage each year.

It all begins with the first distribution, which will be triggered in the year in which an individual owning a qualified account turns 70 ½.  For example, John Doe, who has an IRA, and has a birthdate of May 1, 1949, will turn 70 ½ this year in 2019 on November 1.  A distribution will need to be made then after November 1, because he will have needed to attain the age of 70 ½ first.  Therefore, the distribution can be taken after November 1 (for 2019), and up until April 1 of the following year in 2020.

Once the first distribution is withdrawn, subsequent annual RMDs need to be taken for life, and are due by December 31.  In this case, John Doe will need to next take his 2020 distribution, using the same formula that determined his first distribution.  This will become a regular obligation of John’s each year.

So, we’ve talked about who, what, why and when, now let’s talk about the where.  Once the distribution amount is calculated, an individual can then choose where he or she would like that money to go.  Depending on circumstances, if the money is not needed for living expenses, it is advised to keep the money invested within one of your other non-qualified accounts such as a trust, individual or joint account, i.e. you can elect to make an internal journal to one of your other investment accounts.  Alternatively, if you have another thought for the money, you can have it moved to a personal bank account or mailed to your home.  Keep in mind that these distributions are taxed as ordinary income, thus, depending on your income situation, you may wish to have federal or state taxes withheld from the distribution.  At DWM, we can help our clients determine if, and what amount, to be withheld.  One exception is the qualified charitable distribution or QCD, which is briefly discussed next.

Another idea that may be a possibility for some individuals is for the distribution amount to be considered a qualified charitable distribution (QCD).  Instead of the money going into one of your accounts, a direct transfer of funds would be payable to a qualified charity.  There are certain requirements to determine whether you can make a QCD.  For starters, the charity must be a 501 (c)(3) and eligible to receive tax-deductible contributions, and, in order for a QCD to count towards your current year’s RMD, the funds must come out of your IRA by the December 31 deadline.  The real beauty about this strategy is that the QCD amount is not taxed as ordinary income.  You would simplyprovide the QCD acknowledgement receipt(s) along with your 1099R(s) to your accountant for the correct reporting on your tax return.

It may be pretty scary to know how quickly time flies, but with DWM by your side, we can take the scare out of the situation!

Ask DWM: Should I Consider Investing in Marijuana?

In 1996, California became the first state to legalize the use of medical marijuana. This began, for many, the first opportunity to legally invest in this industry. In 2012, both Colorado and Washington State legalized the use of recreational marijuana. Both events were monumental for the development of marijuana investments but, arguably, the most momentous day in marijuana investments occurred on October 17th, 2018 with the legalization of recreational marijuana in Canada. In June of 2018, Canada voted “yes” to legalization and became the first major country to do so. Interest in these investments have soared ever since.

Cannabidiol (“CBD”) is one of the major attractions in this story. CBD is a cannabis compound used primarily for medical purposes. CBD has been proven to provide benefits for pain management, sleep aid, and stress. The primary difference between marijuana and CBD is its lack of hallucinogenic properties. CBD does not contain tetrahydrocannabinol (“THC”), the main hallucinogenic property found in marijuana. CBD is currently legal in all 50 states. As of February 2019, marijuana has been legalized in over 30 US states for medical purposes and ten, including Washington D.C., have approved it for recreational use.

Spending in the legal marijuana industry is expected to surge from $8.5 billion in 2017 to over $23 billion in 2022. As a side note and for comparison purposes, illegal sales of pot represented 87% of all North American sales and over $46 billion in 2016 according to Arcview Market Research. Hard to not get excited about those growth figures! Further, in a sign of credibility to the industry, major investments from some of the world’s largest beverage makers including Coca-Cola and Corona brewer Constellation Brands have created even more hype and have sent some pot stocks soaring. It’s not just Wall Street taking notice, but ordinary people are wondering if they should get in on the craze.

But just like Bitcoin & other cryptocurrencies, this upstart legal cannabis industry has many red flags and may lead to some scary results.

First off, “FOMO” or the Fear Of Missing Out is no reason to plow good money into a speculative area. It is prudent to do some serious research before dipping into the waters of an industry that faces many legal, regulatory and other hurdles. Further, beware of fraudsters on the internet claiming “this pot stock is the next big thing!” Investing in cannabis is like the wild, wild west and similar to the dot.com mania of the 90s with tons of extreme volatility and broken promises.

More specifically, there are a variety of risks associated with investing in this area. Marijuana is still not legal at the Federal level, which makes banking for marijuana companies within the US difficult and future issues uncertain. Second, most marijuana companies are considered “start-ups” where company revenues are low or nil, and they may be running at a loss. In addition to this, overall investments in marijuana continue to remain small, albeit growing, in comparison to developed industries. For example, the ETFMG Alternative Harvest ETF (symbol: MJ), one of the largest marijuana funds available, holds just $1 billion in capital. Lastly, with only a handful of well-known “reputable” companies in this area, don’t get burned by loading up in just one or two names and thus becoming subjected to company-specific risk.

If you are still interested in investing in marijuana, there are a few considerations to keep in mind. As a general rule, you should not allocate more than a couple percent of your total investment portfolio to one company name. Further, prudent portfolio management suggests to limit your overall exposure to a speculative area like this to no more than 5% of your total investable assets. Avoid concentrated company-specific risk and diversify. A diversified mutual fund or ETF like the ETFMG Alternative Harvest ETF (symbol: MJ) mentioned above is a great choice for those that aren’t good at research but “have to get in”…

At the end of the day, investments in marijuana should be considered widely speculative and highly susceptible to losses. Volatility in both specific companies and funds have been extremely high since their inception. Investments in these areas should be considered more like taking your money to Las Vegas. It’s a gamble and you could potentially lose your entire investment.

At DWM we consider ourselves to be financial advocates for our clients and we love being a part of all of our client’s financial decisions. Questions such as investments in marijuana have been a reoccurring theme as of late, eerily similar to those in 2017 about Bitcoin and we know what happened there….In other words, if you are still interested in this area, PROCEED WITH CAUTION!!!

At this time, DWM is not investing in marijuana for managed accounts due to the many issues mentioned above. For clients still interested in reviewing marijuana investments via a self-directed/unmanaged account, we welcome your calls.