The Coronavirus Hits Home-Now is the Perfect Time to Review Your Estate Planning

The Coronavirus health emergency is a huge reminder that life is fragile, precious and unpredictable. The daily increasing numbers of COVID-19 cases and deaths remind us that we are all mortal and we all need to be prepared. We continue to hope that you, your family and your loved ones are doing well through this pandemic that has turned the world upside down and changed our daily routines.  What better time than now to create or review your estate plan?

Here are some questions for you (and your spouse if you are married) to review:

  • Does your will or trust reflect your current wishes?
  • Are your digital assets covered in your estate plan?
  • Are your powers of attorney for property and health care up to date?
  • Who gets your money, when and how?
  • Who are the fiduciaries (executrix, trustee, other) who would handle your estate?
  • If you have minor children, who are your guardians?
  • Who are the beneficiaries of your retirement assets and life insurance contracts?
  • Is the titling of your assets up to date?
  • Will your estate avoid or minimize probate?
  • Are taxes minimized or eliminated?

Let’s spend some time on taxes.  Two keys points.  First, the current lifetime gift and estate tax exemption for federal purposes is $11,580,000 per person.  However, with the National debt already high and ballooning due to the economic stimulus, the government might look to estate taxes for much-needed revenue. Changes in your plan might be made now before the exemption changes.

The second point is state estate taxes, particularly for our clients and friends who reside or own property in Illinois.  In 2011, when the federal lifetime estate exemption rose to $5 million per person, Illinois “de-coupled” its state estate tax exemption from the federal exemption.  Since, 2013, a lower exemption of $4 million per person applies to Illinois residents.  Those with Illinois assets who haven’t updated their estate planning documents since 2011 could be subject to a potentially avoidable and unnecessary payment of Illinois estate tax.

Here’s an example from our estate planning attorney friends at Bischoff Partners, LLC in Chicago.  “If an Illinois couple passes with combined estates of $5 million with no trusts planning, the surviving spouse’s estate could owe an Illinois estate tax payment of $285,714.  If the couple had used trusts to plan for each of their $4 million exemptions, which essentially doubles their applicable Illinois tax exemption to $8 million, the couple’s tax of $285,714 could have been avoided entirely.”  Planning and continual review is so important.  The “bad result” above of owing Illinois $285,714 would be the result from no planning or planning that was done pre-2011 and not updated.

The Illinois estate tax rate is advertised as a graduated rate between 8% to 16% of assets over $4 million.  So, you would guess that the tax on a $ 5 million IL estate might be $120,000.  However, the fine print doesn’t work that way.  It’s 28% on the first $1 million taxable in Illinois.

Depending on the size of the estate, Illinois clients may want their attorney to review the advisability of an “Illinois QTIP Election” which can defer payment of the possible Illinois estate tax to the death of the surviving spouse.  In addition, it is our understanding the Illinois QTIP election allows couples to double the $4 million Illinois exemption to $8 million and still plan for using each individual’s Federal Estate Tax Applicable Exclusion as much as possible.

Lots to review and lots to think about.  Again, we say: “What better time than now?”

At DWM, clients know that we are not attorneys and don’t give legal advice. However, we have collaborated with estate attorneys on hundreds of estates in Illinois, South Carolina and elsewhere.  Part of our “Boot Camp” process for new clients is working with them and their attorneys to create or update their estate plan. This includes our review of the documents, preparation of an “Estate Flow”, a review of their titling and beneficiary designations and providing recommendations.  As a follow-up to this blog, we’ll be sending out existing “Estate Flows” to all clients to help kickstart their review process.  If you are not a client, please contact us and we’ll be happy to discuss how we can help you get started.

Conclusion:  Life is fragile, precious and unpredictable.  Yet, working with your attorneys and your wealth managers you can plan, implement, monitor, and revise your estate plan to prepare you and your family for the future. No time like the present to get it done!

https://dwmgmt.com/

Zoom – A Saving Grace During the Covid-19 Crisis

When Social-Distancing was first announced, a lot of people did not take it seriously. As the weeks went on, and we headed into March, we realized this Covid Crisis was not letting up anytime soon. Businesses were panicking, schools were moving to online classes, vacations were cancelled, and families were not recommended to go visit each other. Here at DWM, we were devastated by the news that it would be safer for our clients not to walk through our doors, as we love having face-to-face relationships. We are quite familiar with webcam applications that let you video conference with people, as we have used one for years with our clients around the US, but Zoom came into our horizon at DWM at just the right moment!

Zoom is a leading application software that specializes in online meetings, video webinars, virtual conference rooms, phone systems, and cross-platform messaging with file sharing abilities. Their online meetings are quick and easy to access from any type of device; phone, ipad, computer, with simple applications for each that enable quick use. Their video webinar tool allows you to host up to 100 video participants with interactive capabilities with emojis and chat options. Zoom’s chat feature is available in any package. This makes collaboration easier during meetings by having a chat box where people can silently communicate and even ask questions to the host without interrupting. The chat feature is great for team communication and saves time by having all messages related to the topic in one place. For more information, please visit the Zoom website!

We are grateful to have already experienced great Zoom meetings with some clients here. The video quality is very clear and the voice quality is exceptional. When in a Zoom meeting, there is a section where a participant can share their screen, showing other members what is on their computer. This is really neat and helps when discussing documents all together, like we do here at DWM! We have pulled up investment documents on one screen, shared it to the meeting, and everyone is looking at the exact same picture, every scroll and every mouse change! In the chat box, you can also share files there to where everyone in the meeting has access of opening it up individually and personally looking at it, with the option of saving it straight to someone’s personal computer. This is an easy tool that saves time by not having to email documents to people, just drop them in the chat box! These feature have really made a difference in the efficiency of our tele-meetings here at DWM.

Here are the steps to having an amazing Zoom meeting…

  1. Be on the lookout for an email from us at DWM with the Zoom information. It will look something like this…

Join Zoom Meeting
https://zoom.us/j/756525649?pwd=ZlpYV29qWWVxVk1Wdk4zc2F2REZqZz0

Meeting ID: 756 525 649
Password: 274689
 

  1. From there you will click on the ‘https//Zoom.us’ and it will ask you to download and run the Zoom application.
  2. Once you have the application open, it should direct you straight to our Meeting, if not, enter in the ‘Meeting ID’ shown in the email.
  3. Enter in the password we provided
  4. Enable your microphone and video camera to utilize our Zoom meeting to the fullest.
  5. Enjoy face-to-face conversation!

We are aware of some articles released recently exposing Zoom for issues regarding customer service, data-mining strategies and intruders in meetings. Zoom’s customer service has been deemed almost useless as Zoom has grown over 1000% since mid-February. They are trying as hard as they can to post resources and FAQ’s on their website to tackle their booming clientele with limited employees, when hiring is on the backburner during COVID-19. Their data-mining strategies with Linkedin and Facebook put them underfire. Zoom was linking user’s names and emails so they were able to be found on Linkedin if you had the Sales Navigator premium Linkedin package (mostly used for sales prospecting) and also sent that information to Facebook. Zoom has disabled these features. Lastly, Zoom had a huge issue with hackers joining public Zoom meetings and posting inappropriate content on the screens and chat, also known as ‘Zoom-Bombing.’ Zoom created password protection on meetings and a ‘waiting room,’ where every user has to be admitted in by the host, to prevent that, after the FBI started investigating the issues. These are only some of the issues that Zoom has claimed and reacted to, click here to read a full statement by CEO Eric Yuan.

Here are some tips of what DWM does, and what you can do to help make your Zoom meeting as efficient and safe as possible…

  • Operate Zoom on trusted Wifi
  • Password Protect Zoom Meetings
  • Keep an eye out for unrecognizable people in the ‘Waiting Room’ area asking to join
  • Closely watch for new articles and news regarding tips, safety and even flaws
  • Limit confidential information in the chat section of a meeting

Millions of people have downloaded Zoom as Covid-19 has unfolded, for different uses. Local dance studios are teaching interactive classes over Zoom, colleges are maintaining that face-to-face interaction between student and teacher on Zoom, bands are hosting live concerts and people are doing home workouts and yoga classes with the guidance of their instructor. One of the best reasons for Zoom during social-distancing is being able to talk to multiple family members at once and all feeling connected regardless of being in separate spaces.

Here at DWM, we believe that Zoom is going to be a ‘Saving Grace’ for us to meet with clients during this crazy time. While we are aware of some of some of the security issues Zoom is currently working through, we are comfortable and excited to use it with our clients with the safety precautions mentioned above. If you are not comfortable with Zoom, a speaker phone meeting will also do the trick, but face-to-face meetings help keep that personal relationship we all desire and strive for, successful. We are looking forward to seeing our favorite, familiar faces over Zoom in the upcoming weeks. Stay safe, and stay healthy!

https://dwmgmt.com/

DWM 1Q20 Market Commentary

Obviously, our market commentary’s purpose is to address the state of the markets, economy, and all things financial; but it goes without saying that our first and foremost concern is that of your health. One’s wealth takes a back seat to health. As of this writing, there are over 1.380 million world-wide infections and over 76,000 deaths. This is a public health crisis and it’s traumatic.

Amazingly, this wasn’t even on the radar when we wrote our last commentary and frankly blindsided pretty much all of us. It was only a little over a month ago when stocks were setting all-time record highs. The economy was actually accelerating in the early weeks of the quarter, with unemployment still at all-time lows and consumer confidence near all-time highs. After an 11 year bull market run, it only took a record-setting 16 days for the S&P500 to fall into bear market territory, meaning a fall of 20%+ from the peak. And it got worse from there before bottoming out on March 23 and the market rallying 9% the next day. This quarter brought us unprecedented volatility, with the last month experiencing trading days with moves of 3%+, creating further anxiety amongst participants and usually passive onlookers.

As normal, we will showcase how the different asset classes did, with the theme being “trying to run to safety” during this unprecedented period.

Equities: Pretty much the worse quarter on record since 1987. Equities, as evidenced by the MSCI AC World Index, fell 22.5%. Small cap fared ridiculously worse than large cap as evidenced by the Russell 2000 dropping over 30% and the S&P500 “only” down 20%. In a flight to safety, the biggest companies with the most solid balance sheets performed relatively better. The style box graph below tells a tale of which we’ve never seen before with the relative performance amongst those boxes at extreme levels. For what it’s worth, international equity* and emerging markets** were down over 23% for the quarter.

Equity QTD Percentages

Fixed Income: Again, only the perceived safest havens did relatively well. The Barclays US Aggregate Bond Index was up 3.15% thanks to its significant exposure to Treasuries which was one of the only bright spots in bond land. The stand-out area within fixed income per the graph below was that part of the style box which focuses on higher quality and higher duration. Those with low quality experienced double-digit declines. For the record, the Barclays Global Aggregate Bond Index was down 0.33%, and the Markit iBoxx USD Liquid High Yield Index down 12%.

Fixed QTD Percentages

Alternatives: In a “baby being thrown out with the bath water” theme, alts still felt the pain as evidenced by the Morningstar Diversified Alternatives Index, off 13.82%. Much better relatively to equities but still in the red. Oil***, typically listed as an alternative, was the biggest story, falling over 65% amid a price war breakout between Saudi Arabia and Russia. Gold*** was a bright spot, +3.15%, in the rush to safety.

Cash: those that didn’t stay the course and tried to time the market by going to cash have lost out on double-digit moves up by the major stock indices since the 3/23/20 bottom.

So, yeah, it was a brutal quarter for portfolios with many investors suffering significant paper loses. A multi-asset class portfolio like the ones at DWM helped soften the blow, but values are considerably lower than last quarter’s statements. And the virus and its negative headlines aren’t going away any time soon. Most of this country has yet to experience their “New York moment”. It’s stressful for all. Further, damage on the economic front is going to be significant. It’s not a matter of if this is a recession but how deep? With millions out of jobs and still maybe a couple weeks away from receiving stimulus relief, this is a dire time.

Fortunately, governments, skilled professionals, caregivers, and many others around the world are stepping up in many ways to battle the virus. In the US, the Fed has done an amazing job with monetary policy to keep our markets liquid. And the government is providing unprecedented fiscal stimulus, including last week’s CARES Relief Act, in an attempt to keep this economy from cardiac arrest. A “Phase Four” and probably “Phase 5” Act are already being discussed to keep the heartbeat going. Further, there’s been some recent optimism driven by encouraging signs that things are starting to return to normal in China, fewer deaths per day compared to a week ago in Italy and Spain, and hospitalization rates in New York showing signs of slowdown.

No one alive will ever forget this pandemic – that’s for sure. But we’ve recovered from multiple shocks before this, each time with the market going higher. Long-term investors will see similar new highs in the not-so-far out future. It won’t be a smooth ride with most likely lots of suffering and changes to normal lifestyle along the way, but we’ll all get through this collectively. As our recent blog on what not to do now explained, try to remain disciplined and refrain from drastic knee-jerk reactions. Let us know if you need assistance – we’re always here to help, particularly in such challenging times like these.

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

Brett M. Detterbeck, CFA, CFP®

DETTERBECK WEALTH MANAGEMENT

*represented by the MSCI AC World Index Ex USA

**represented by the MSCI Emerging Markets

***represented by Crude Oil WTI Front Month

***&represented by the iShares Gold Trust

Perhaps a Silver Lining – Time to Refinance?

The coronavirus has been brutal. There are now over 1 million cases and 54,000 deaths worldwide.  Left to itself, the covid-19 pandemic doubles every few days. Millions have lost their jobs. Most of America is on lockdown. We’re certainly in a recession right now. Worse yet- there continues to be a huge uncertainty as to when the coronavirus will stop its path of destruction and when we can all start to return to some form of normalcy.

We sincerely hope you and your family are safe and healthy. And, we hope all the other Americans and fellow citizens of Planet Earth that have been impacted will get through this crisis quickly and successfully.

At the same time, the equity markets have crashed since February 19th, ending an 11 year bull run. We were probably due for a pullback or correction after the huge run-up in 2019. The coronavirus seemed to provide the tipping point.  Economic growth in 2020 will certainly be less than 2019, though we don’t know how much less.

With all of this gloom, here is one possible “Silver Lining.”

With many investors running for safety into bonds and the Fed dropping rates, the fixed income markets are showing huge drops in interest rates.  10 year treasuries are near .6%.  30 year U.S. treasuries are at 1.25% interest.  These rates foretell less economic growth and lower inflation in the future.

The Mortgage Bankers Association is forecasting lots of business this year for new purchases and refinancings.  They expect $2.6 trillion in new mortgages this year, a 20% gain over 2019. Refinancings are the key drivers of the change and are expected to be up 37% in 2020.  Bloomberg reported yesterday that the average rate for a 30-year mortgage loan was 3.33%, down from 3.5% last week.

Because there are typically costs to refinancing, doing so makes the most sense for people who plan to stay in their house for some time and where the cost to refinance is less than the interest expense that can be saved.  In addition, if inflation will be lower in the future, then nominal investment returns should be lower as well.  For example, if your nominal investment return is 6% and inflation is 3%, then your “real” return is 3% (the amount above inflation).  If inflation is 1.5%, then a 4.5% nominal return produces the same 3% real return.

If you have a mortgage with an interest rate of 4% or more, you likely should be looking at refinancing it or paying it off.  Because of the increase in the standard deduction and the limitations on state and local income taxes, 90% of households no longer itemize deductions. If you are in that 90%, you get no tax benefit from your mortgage interest.

So, if it is time to look into refinancing, check around and keep your eyes open for low mortgage rates.  At this point, there is no reason to believe that rates will be going up anytime soon.  And, if you would like a second set eyes to help you determine if it is time to refinance, give us at DWM a call.  We are always happy to talk.  Stay well.

Stay safe and stay healthy during this pandemic. And, if appropriate, take advantage of one of the few silver linings of the pandemic by refinancing at a new low rate.

https://dwmgmt.com/

CARES Act Brings “Pennies From Heaven”

We hope each and every one of you and your families are safe and healthy. In response to the unfolding COVID-19 global pandemic, Congress passed the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act last Friday. This $2 trillion emergency fiscal stimulus package (“Pennies from Heaven”) was designed to help ease the economic damage caused by the virus. Below are some of the key provisions that can offer relief to individuals, families and businesses. In a number of situations, it’s important for you to act quickly. Items with time urgency are underlined. The objective is to provide short overviews of the provisions. If there are any questions, we at DWM will try to help.

Recovery Rebates. Perhaps 90% of Americans should receive some amount of Recovery Rebate. The rebate can be as much as $1,200 for a single, $2,400 for a married couple plus $500 for each child under age 17. The only limitation is your Adjusted Gross Income (“AGI”). Singles with AGI of $75,000 or less will receive $1,200 plus extra for eligible children. Married couples with AGI of $150,000 or less will receive $2,400 plus extra for eligible children. Incomes above that will get a lesser amount until completely phased out. The IRS will use the latest tax return filed to make their calculation. If your 2018 tax return has a lower AGI, wait to file your 2019 tax return until the rebates are made. If 2019 is a lesser year than 2018, get 2019 filed immediately. Please understand that the rebate will be “trued up” based on your 2020 return. So, if your income in 2018 and/or 2019 disqualified you from the rebate, you can still get the rebate in 2021 if your 2020 tax return shows you are below the $75,000 or $150,000 threshold. And, for those who received a rebate but ultimately had a larger income in 2020 that would have disqualified them-no worries. The IRS will not “clawback” any rebates. Checks and direct deposits are promised “as soon as possible” which hopefully will be in April.

Covid-19 Distributions from IRAs and Loans from 401ks. Distributions up to $100,000 from IRAs and $100,000 loans from 401ks can be made without tax penalty for those impacted by the virus. The income tax of the distribution can be split evenly over 2020-2022. Distributions are not subject to withholding and can be repaid (rolled back in) in 3 years, in a lump sum or installments which will produce a refund of the tax paid.   Loans from Company Retirement Plans can be made up to 100% of the vested balance up to $100,000. Repayments on the loan may be delayed for up to one year.

Required Minimum Distributions (“RMDs”) are waived and can be returned. RMDs for 2020 are specifically eliminated for owners and beneficiaries. Owners, not beneficiaries, that have already taken a 2020 RMD and would like to return it, need to act quickly. If the distribution took place in the last 60 days, you can roll the money back in (note, if withholdings were made, you’ll need to “gross up” the net distribution) and save paying the tax. If the 60 day window has passed, you can still complete a valid rollover for up to 3 years if you can show you were impacted by the coronavirus crisis.

Charitable Contributions. To encourage contributions to charity, Congress has provided that individuals can make and deduct contributions up to and in excess of 100% of their AGI. Hence, they could wipe out their taxes and even get a carryforward for 5 years. In addition, individuals who use the standard deduction (90% of taxpayers) can get up to a $300 charitable contribution deduction “above the line” in the addition to their standard deduction.

Relief for Student Loan Borrowers. Required payments on Federal student loans are deferred until September 30, 2020, during which time no interest will accrue. Furthermore, this period of time will continue to count towards any loan forgiveness. Hence, any student borrower who intends to qualify for a program that will ultimately forgive the entirety of their Federal student debt should immediately pause payments. Any payments made in this period will simply reduce principal and therefore are reducing a debt that will be forgiven. In addition, through the end of the year, employers who provide employees with up to $5,250 of student debt payments may exclude those payments from the employee’s W-2.

Additional Unemployment Compensation Benefits. Unemployment benefits have been increased from 26 to 39 weeks. Futher, Self-employed individuals will now be eligible. Plus there will not be the typical one week of “waiting time” for unemployed employees of self-employed individuals without work. Additionally, the weekly benefit is increased by $600 per recipient for up to 4 months. Since the average weekly unemployment benefit is about $400, this will increase the average benefit to $1,000 for those 4 months. Therefore, employees and self-employed individuals who have lost their job or don’t have work, could qualify for up to 9 months of unemployment benefits, with an extra 17 weeks of $600 payments – meaning, an average worker could get as much as $26,000 in the first 9 months.

Paycheck Protection and Forgivable Loans.  Businesses, including sole proprietorships, with less than 500 employees can apply for an SBA loan to help with economic suffering on their business caused by coronavirus. The loan is the lesser of $10 million or 2.5 times the monthly payroll costs over the past year and must be applied for by June 30, 2020. Loans will be made on a first come-first serve basis until the total maximum of $10 Billion has been loaned. So, a company with a 2019 monthly qualified payroll of $40,000 could borrow $100,000. And, as long as the business maintains the same number of employees, the loan will be forgiven for all payroll, rent, utilities and healthcare costs incurred in the first 8 weeks after receiving the loan. For example, if payroll remained $40,000 per month, rent was $6,000 per month, utilities $2,000 per month and health care costs $2,000 per month, virtually the entire loan would be forgiven. And, any debt forgiven is not included in taxable income for the year. For the portion of the loan that is not forgiven, interest on the loan will be at 4% or less over a term of 10 years and payments will be deferred for at least 6 months and no longer than one year.

Employee Retention Credit. Businesses who doesn’t qualify for the SBA loan above but suffered a reduction in quarterly revenues in 2020 to 50% or more for the same quarter in 2019, may qualify for a $5000 employee retention credit.

Deferral of payroll taxes. Most employers, other than those who receive the special SBA loans above, qualify to defer the employer portion of payroll taxes for over one year. Their 2020 employer payroll taxes can be paid half by December 31, 2021 and half by December 31, 2022.

Net operating loss rules are loosened. The CARES act allows losses in 2018, 2019 or 2020 to be carried back five years producing tax refunds that can be used now.

Conclusion. The CARES act provides significant funds, programs and tax benefits for individuals, families and businesses. Some of the provisions have time limits as outlined above. DWM will be individually contacting our clients who we think might be able to take advantage of these programs and get their rightful share of the “Pennies from Heaven.” We will also alert them to other financial and/or tax strategies, including Roth conversions and tax loss harvesting, given the CARES provisions and the state of the current markets. If you have any questions, please contact us.

We hope that you, your family and your community stay healthy and we all can get back to normal as soon as possible.

https://dwmgmt.com/

Keep Your Distance – Socially and From Cyber Fraud

The bear economy is creating a bull market for cyber-crooks. An unfortunate side effect of economic downturns is an increase in cyber fraud. Worldwide cyber fraud has hit an all-time high. For the first time on record, data theft has now surpassed the stealing of physical assets as compared to the past two decades. Given our current global pandemic, cyber fraud has only increased as fraudsters try to take advantage of high demand for information regarding COVID-19.

Due to recent restrictions placed on communities and social distancing, more and more people are spending their time online. Cybercriminals are taking advantage of the increase in online traffic. According to the cybersecurity firm, MonsterCloud, there has been an 800 percent increase in cyber fraud claims since the beginning of the year.

Here are some of the most common cyber frauds as reported by Charles Schwab:

  • Outbreak maps. Malicious actors have begun spreading malware through online maps claiming to track the impact of coronavirus. As users visit the sites or click the links, they are exposing usernames, passwords, credit card numbers, browsing history, or other nonpublic personal information that is then exploited by the attackers or sold to other criminals on the dark web.
  • Email campaigns. Criminals are also leveraging common forms of fraud like spam email campaigns, using infected attachments or downloads to gather information.
  • Charitable giving. Scammers may pose as organizations in need. It is important to verify where your donations are going to before donating. One important resource here: https://charitycheck101.org/

Fortunately, there are several steps that individuals, businesses, and families can take to prevent a cyber attack. As many continue to work remotely, and as we transfer to a more digital society, please consider the following:

  • Make sure everyone is using a VPN, or a virtual private network, to do office work from home.
  • Require devices to have two-factor authentication, which verifies a person’s identity before logging in.
  • Only use WiFi networks that are password protected.
  • Companies should maintain a reliable back up for their data on a different network.
  • Organizations should make sure their antivirus software is up to date.
  • Everyone should think before they click on links and emails.

“Think before you click” is perhaps the most important measure here. At DWM, we take cybersecurity very seriously. As the majority of us work from home over the next few weeks, we continue to rely on two-factor authentications, virtual private networks through our cloud platform, antivirus software, and secure home WiFi. We also continue to collaborate with our third-party technology providers to stay proactive and increase our security on a daily basis.

https://dwmgmt.com/

Why this Bear Market Feels so Different, and What Not to Do Now

It’s official – the almost 11 year bull market is over thanks to a couple of “black swans”: COVID-19 and the oil price war.

Quick terminology recap here:

  • Pull-back – a falling of a price from its recent high, typically 5%
  • Correction – typically 10% from recent high
  • Bear Market – 20%+ from recent high

Within a few weeks, we zipped past just a pull-back and correction and are officially in a bear market. Further, a recession is imminent with businesses about to take a hit from “social distancing” and broken supply chains. The US government is trying to get its arms around this threat and is working to eventually restore life back to normal. In the meantime, uncertainty continues. The market hates uncertainty and investors’ portfolios reflect that.

We’ve had pull-backs, corrections, and bear markets before. What’s different this time is the personal impact or the “human effect”. I think all of us have personally felt the coronavirus impact us in the last couple of days with upcoming plans being altered. Many are coping with tough travel decisions with Spring Break around the corner. Handshakes have turned into elbow bumps. Many employees are working from home. And our cherished past time of watching sports gets disrupted with major sports suspending their play. Heck, even Tom Hanks and his wife have tested positive for COVID-19.

Yes, this is certainly different from the Great Recession of 2008 as that didn’t impact personally like this threat has. And because of it, the level of emotion is stronger. And the emotion of fear is dominating right now. And with the help of the media, the fear is building upon itself and, for some, creating panic.

This downdraft has happened so fast – it was exactly one month ago that the stock market was hitting its all-time high – that even if you wanted to, it was almost impossible to react. Stock benchmarks are down over 25% as of this writing. This volatility for most is stressful, unnerving and can be tough to stomach. Fortunately, a balanced portfolio that holds multiple asset classes – not just equities, but fixed income and alternatives – has helped cushion the blow, but not by much given that most investment styles are down.

Emoji Graph

People struggle to separate their emotions from their investment decisions. See the slide above which shows how emotions relate to the different stages of the market. These emotions cause these investors to sell and buy at the worst times as this “recency bias” influences undisciplined investors to chase performance through buying high and selling low.

Now see the slide below which shows what happens when an emotional investor who went to the sidelines and missed the best ten days. The average annual return dropped from 6% to 2.4%. If that investor missed the 30 best days, their return goes negative.

Impact of Market Timing

The moral of the story is you don’t want to try to time the market. You should stay the course and stick with your long-term asset allocation target mix. We have had multiple discussions with our clients about risk. Risk tolerance, risk capacity, and risk perception. And from those discussions, we have identified appropriate long-term asset allocation target mixes. This crazy environment is a test of character to stay with that disciplined strategy and not give in to fear. It sounds hard to do, particularly, in scary times like now, but disciplined investing has ALWAYS paid off. The market inevitably always bounces off its lows to eventual new highs.

We aren’t calling this the bottom, by no means. We don’t know exactly what tomorrow brings. No one has a crystal ball. The market could trade lower, but if you have faith in our country pulling through this pandemic like it has in the past and understand this threat will be beaten, then remain disciplined and fully invested in your long-term asset allocation. We understand that everyone is wired differently and based on your current perception of the risk today, that may be hard to do. If so, please contact us so we can discuss further.

 

https://dwmgmt.com/

Technology and Real Estate Collide: Will we be trading homes like stocks in the next several years?

The total wealth of Americans is $113 trillion. The major categories are real estate, both homes and commercial, of $50 trillion and stocks and stock funds of $35 trillion.

Technology has had a huge impact on stock trading. 50 years ago, selling or buying company shares was opaque, illiquid and expensive. Now, technology has taken over more and more aspects of trading. Markets are transparent and liquid. The cost of equity trades is zero or close to it.

Real estate not so much. Of course, while every common share of Amazon is identical, no two houses are identical. Throw in emotion, 5-6% commissions and time delays and hassles in buying and selling and it’s no surprise that the real estate market has had low volumes and heavy transaction costs. As a result, only 7% of American homes change hands every year.

American homeowners traded property worth only $1.5 trillion in 2019, paying out about $75 billion in commissions. About $40 billion of stocks are traded each year with less than $10 billion in commissions, which are shrinking. The real estate transaction model is still opaque, illiquid, expensive and stressful. More owners are staying put and this is contributing to the decrease in homeownership in the US to 64%, lower than it was in the early 1990s.

In the last decade, technology has started to gain traction in real estate transactions providing more transparency, more liquidity, less cost and quicker and easier moves. The old real estate model may be replaced by a new one, with lower fees (on a percentage basis) but more turnover and more customer satisfaction. The last decade has seen the birth of a new industry- property tech or “prop tech.” It has attracted $40 billion in venture capital in the last three years. The four biggest firms, Zillow, Redfin, Compass and Opendoor have a combined valuation of $23 billion. Prop tech is fundamentally changing how the real estate sector operates.

Zillow’s “Zestimate’s” 2006 algorithm for pricing used traditional metrics; such as number of bedrooms and baths, square footage etc. Today Zestimate goes deeper and has become more accurate. Homeowners listing with Zillow upload pictures and provide additional detail information. The new Zestimate model has an error of less than 2% (of the home’s actual selling price) as compared to a 14% error back 13 years ago. The next wave of Prop tech could include more hyper-local automated valuation model (“AVM”) elements to their valuation models. Zestimate’s hyper-local AVM algorithm in Washington, D.C. has only a 1.2% error. Zillow’s AVM won’t replace appraisers for mortgages that are needed. However, Zillow believes it could transform appraisers from evaluators to fact-checkers.

Prop tech has also sped up transactions. Discovering listings used to take days. Now Redfin (and others) notifies customers with its “Updates” faster than anyone else about new listings and price changes. Using just a couple of clicks on their smartphone, Redfin customers can “Book it Now” and request a home tour, almost like making an online restaurant reservation.

Another trend is instant buying- or iBuying, offered by both Zillow and Redfin. Sellers can sell in a few days. The companies make prompt, algorithm-driven offers, pay in cash, and sell homes themselves- sometimes after some minor upgrades. Opendoor takes it one step farther. It buys using iBuyer and then resells through the Opendoor app, backing sales with a 90 day guarantee. Opendoor says home buying and selling can be “as easy as buying and selling cars.” Knock is another iBuyer who buys houses for cash and then helps sellers find their dream house. Knock even handles repairs and updates on the old house.

Prop tech may even provide a complete solution. (Think of Amazon meets real estate). Jen Chao, executive at Redfin sees prop tech heading towards such a comprehensive offering. She believes that the overall management of buying and selling a house, including finding the house, negotiating the contract, finding the mortgage, an attorney, a mover and more is a very big deal to many. So much so, that many just don’t move. Chao feels that Redfin can become a one-stop shop, providing a seamless home-buying (and/or selling) experience.

Chao says this automation will not do away with the work of agents and other real estate professionals. “Real estate is a highly personal business,” says Chao. Technology is being used to streamline and get rid of the tasks that software can do really well, to free up time for agents and others to focus on things that require the human touch.

Prop tech proponents believe the future of real estate is rooted in precision and personalization. At DWM, we believe our total wealth management process is very similar. We use technology to streamline and perform tasks that software can do and we use our combined knowledge, experience and communication skills to provide the personalization that is so important. In short, that is how value is maximized for our clients.

https://dwmgmt.com/

 

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/