Indiana Jones and the Fountain of Wealth

With current markets swirling with questions of trade deals, recessions, inverted yield curves, and various other political and financial uncertainties, should we be fearing a near future “Temple of Doom” scenario like intrepid archaeologist Indiana Jones in the much acclaimed 1984 movie?!? Perhaps we can learn some tidbits of info – clues, per se – from Indy that can help us in our quest for our prized possession: financial serenity, wealth management’s version of the Holy Grail. While this ultimate goal may look a little different for each of us, and the journey this may be wildly different, some of the steps we take will likely be extremely similar, and the clues below, inspired by Indy, can provide some guidance as we take those steps!

Clue #1: Diversifying your arsenal, and your portfolio!

You’ve heard it before. In fact, diversification is a word that has been mentioned so many times in TV and movies that it’s become hard to think about investing without discussing how diversified one’s portfolio is. We’re here to tell you that this relationship makes sense! Various studies have shown over the years that having a well-diversified portfolio can significantly benefit investors in the long run.

Figure 1: Hypothetical Growth of $100,000 showing Diversified versus Undiversified Portfolio*

As shown in Figure 1, having a globally allocated, well-diversified portfolio made up of investments that have low correlation to one another, with pieces of each being from the equity, fixed income, and “nontraditional investments” (or alternatives), can help investors try to protect their assets during market downturns, and participate in market upswings. Much like Indy’s arsenal of guns, knives, and his famous whip protected him, using multiple asset class holdings with low correlations can protect investors’ portfolios from extreme danger.

Clue #2: Be Educated!

As a professor of archaeology at Marshall College, Indy’s extensive years of research have provided him a wealth of knowledge to work off of when he begins each search for ancient (and sometimes alien) artifacts. Despite this, he learns quite a bit along the way on his quests that leads to his success in discovering these items. Much like Indy, our pathways to financial health and peace often seem clouded in mystery, and are often filled with confusing directions and puzzles that can lead us astray from the path to our goals. These puzzles and directions, luckily, can be illuminated in most cases by educating one’s self in the complex and intricate business of finance! Whether it’s subjects of Arks, mysterious stones, or crystal skulls, a.k.a. topics of investments, insurance and taxes in finance terms, a little bit of knowledge can go a long way towards creating the ever important map to the desired goal! Blogs like these help our clients become educated and better prepared for the financial journey ahead!

Clue #3: A Little Help From Our Friends

No matter which adventure he’s on, Indy always has a crew of fellow explorers with him to help on his search. Each play their own integral role in supporting his journey as he brushes with Nazis, Russians, and Thuggee cults. In a similar manner, wealth managers like DWM can act as your “Short Round” (an ally) in your continual journey to financial serenity and success, helping guide you through the sometimes dark and perplexing pathways. Our expertise in these “ruins” of sorts can assist with dodging the pitfalls in your financial plans and portfolios.

With or without headlines coming out about recessions or inversions or trade deals or anything else, by following these three clues, and sticking to them for the long-term, an investor can create a stable pathway to success. Just as Indy never gives up on his quests, neither should we.  Our steps may alter in ways over our lives, from accumulating wealth, to protecting it, and then to financially planning for our legacies, but each of these has the underlying pursuit for peace of mind. Please feel free to reach out to DWM if you have any questions about how we can accompany you on your hunt.

*Source: https://www.schwab.com/resource-center/insights/content/why-global-diversification-matters

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

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

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

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

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

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

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

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

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

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

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

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.

DWM 3Q18 MARKET COMMENTARY

Get yourself fit! A diversified portfolio is like a well-balanced diet. You need all major asset classes/food groups for proper nutrition. Think of the major asset classes (equities, fixed income, alts) as your protein, carbs, and fats. If you were to load up in one particular area (e.g. carb loading), you might feel better in the short-term, but it could seriously affect your health in the long-term. And it’s the same way with investing: if you “overindulged” in any one particular area for too long; you are bound to get ill at some point. Which is a good segway for this quarter’s market commentary. Yes, US stocks – those in the large cap growth area in particular – ended the third quarter near records, but now is not the time to be one-dimensional.

But, before we dive into a proper nutritional program, let’s see how the major asset classes fared in 3q18:

Equities: Let’s start with the spicy lasagna…the S&P500, the hot index right now, which climbed 7.7% in the quarter and up 10.6% for the calendar year. However, most don’t realize that just three companies (Apple, Amazon, & Microsoft) make up one-quarter of those year-to-date (“YTD”) gains. Besides these outliers, returns in general for equities are more muted as represented by the MSCI AC World Index registering a 3.9% 3q18 & 3.65% YTD return. Emerging Markets* continue to be the cold broccoli, down 1.1% for the quarter and now -7.7% for the year. In other words, even though the headlines – which like to focus on domestic big-cap stocks, like the ones in the S&P500 and Dow – are flashing big numbers; in reality, the disparity amongst equity benchmark returns is huge this year with some areas up sizably and some areas down sizably.

Fixed Income: The Barclays US Aggregate Bond Index, was basically unchanged for the quarter and down 1.6% YTD. The Barclays Global Aggregate Bond Index fell 0.9% and now down 2.4% YTD. Pretty unappetizing. The shorter duration, i.e. the weighted average of the times until the fixed cash flows within your bond portfolio are received, the better your return. It’s a challenging environment when interest rates go up, but the Fed continues to do so in a gradual and transparent manner. Last week, the Fed raised its benchmark federal-funds rate to a range between 2% and 2.25%. We could see another four rate hikes, one for each Fed quarterly meeting, before they stop/pause for a while.

Alternatives: The Credit Suisse Liquid Alternative Beta Index, our chosen proxy for alternatives, increased +0.7% for the quarter and now off only 1.2% for the year. Alts come in many different shapes and forms so we’ll highlight just a few here. Gold** continued to drop, down 4.9% for qtr and now off 8.6% for year. Oil*** continues to rise, up 4.7% 3q18 & 27.5% YTD. MLPs**** jumped 6.4% on the quarter and now +5.0% for 2018. Whereas alts have not been “zesty” as of late, think of them like your morning yogurt: a great source of probiotics, a friendly bacteria that can improve your health when other harmful bacteria emerge.

So after a decent 3q18 for most investors, where do we go from here and what should be part of one’s nutritional program?

Let’s first talk about the economy. It’s been on a buttery roll as of late. The Tax Cut & Jobs Act of 2017 has created a current environment for US companies that has rarely been more scrumptious, as evidenced by earnings per share growth of 27% year-over-year (“YOY”). Unemployment clicked in at last measure at 3.9% and most likely will continue to drop in the near future. With the economy this strong, many may find it surprising to see the lack in wage growth and inflation. Wages are only up 2.8% and core inflation is up only up 2.0% YOY. Wages are staying under control as the Baby Boomers and their higher salaries exit the work field, replaced by lower-salaried Millennials and Gen Z. Part of the lack of inflation growth is because of the internet/technology that gives so much information to the Buyer at the tip of their fingers, keeping a lid on prices. Trade talk/tariffs, have been a big headliner as of late creating a lot of volatility; but that story only seems to be improving with the revised NAFTA taking shape with Mexico and Canada. Some type of agreement with China could be on the near horizon too.

This is all delectable news, but the tax stimulus effect will peak in mid-2019 and companies will have to perform almost perfectly to remain at their current record profit margin levels. With earnings a major component of valuation, any knock to them could affect stock prices. Further, the S&P500 is now trading at a forward PE ratio of 16.8x, which is north of its 16.1x 25-year average. This is not the case in other areas of the world – Europe, Japan, Emerging Markets – where valuations are actually lower than averages. If you haven’t done so already, time to put those on your menu.

It’s not only a good diet you want for your portfolio; you also want to make sure of proper fitness/maintenance, i.e. rebalancing back to established long-term asset allocation mix targets. Time to bank some of those equity gains and reinvest those into the undervalued areas if you haven’t already done so recently. Regular portfolio rebalancing helps reduce downside investment risk and instills discipline so that investors avoid “buying high” and “selling low”, a savory way to keeping you and your portfolio healthy.

In conclusion, we are in interesting times. The economy is peppery-hot, but incapable of keeping this pace. A slowdown is inevitable. The question is two-fold: how big will that slow-down be, and are you prepared for it? Now is the time to revisit your risk tolerance and compare that to how much risk is in your current portfolio. That spicy lasagna, aka the S&P500, has been a delicious meal as of late, but don’t let too much of it ruin your diet. Make sure your portfolio is diversified in a well-balanced manner. Stay healthy and in good shape by working with a wealth manager like DWM who can keep your portfolio as fit as a triathlete.

Brett M. Detterbeck, CFA, CFP®

DETTERBECK WEALTH MANAGEMENT

 

*represented by the MSCI Emerging Markets Index

**represented by the iShares Gold Trust

***represented by the Morningstar Brent Crude Commodity ER USD

****represented by the UBS AG London BRH ETracs Alerian MLP ETF

Labor Day- A Holiday and a Time to Reflect on the American Dream

Hamdi_Ulukaya.jpgWe hope everyone had a wonderful Labor Day weekend. We certainly did. Labor Day always marks the “unofficial” end of summer. Time for school and work to begin in earnest. It’s also an excellent time to remember the contributions and achievements of American workers and to reflect on their chances of achieving the American Dream, which is “the ideal that every U.S. citizen should have an equal opportunity to achieve success and prosperity through hard work, determination and initiative.”

Last week, I read a very engaging interview in the NYT about Chobani yogurt’s founder, Mr. Hamdi Ulukaya (pictured above) and his quest of the American dream for himself and others.

Hamdi Ulukaya grew up in eastern Turkey with sheep, goats and cows. He and his family spent the spring, summer and fall in the mountains; herding animals and producing yogurt and cheese. They came back to their village in winter time. Hamdi went to a boarding school, but didn’t like it. He left school, got in trouble and then thought he should leave Turkey. A stranger suggested, “Why don’t you go to the United States?” Hamdi wasn’t sure, but decided to take the plunge in 1994, at age 22, and came to America with $3,000 in his pocket.

After several years of university study and odd jobs, in 2002 Mr. Ulukaya was encouraged by his father to start making feta cheese. Years of hard work and struggle ensued with little success. One day, Mr. Ulukaya saw an ad for a fully equipped yogurt plant for sale. Kraft was closing the operation in the dairy region of NY, near where Mr. Ulukaya lived. His attorney checked into it and reported back, “They’re looking for an idiot to unload this on. They probably have environmental issues. And, if they thought yogurt was a good business, they would not be getting out of it.” This was 2005 and at that time Greek yogurt represented about ½ of 1% of the yogurt market.

But, Mr. Ulukaya was convinced he could make it work. He pursued the deal and, on August 17, 2005, he had the “key” to the factory. Today, Greek yogurt is over 50% of the yogurt market. Chobani, which means “shepherd”, went from no sales in 2005 to over $1 billion per year by 2012. It continues to grow as the #1-best-selling Greek yogurt in America. BTW, it’s my favorite.

Chobani started with a few people and now employs thousands. They are known for offering generous wages and benefits and recently gave away equity to its employees. Mr. Ulukaya tells why: “Look, my background is a working-class background. One of my dreams was to make this company a place where everybody’s a partner, and the employees deserved a portion of what they have helped to build. If you make $7 or even $9 per hour, you can’t have a house. You can’t have good food for the kids. Forget vacations.” He continues: “Especially for rural communities, we (the employers) have to start worrying about our own employees, their families and their children’s well-being, and the school, and the firehouse and the baseball field. You have to get involved.”

Chobani needed people for its growth. Coincidentally, at this time people from different parts of the world were being settled in the Utica, NY area near the Chobani plant. Mr. Ulukaya, an immigrant himself, decided to start hiring them: “These are hardworking people-they’ve gone through a lot.” Today roughly 20% (500 to 600 people) of the Chobani workforce are immigrants from 19 different countries. In April 2016, Mr. Ulukaya gave his employees 10% of the shares of Chobani.

Labor Day is a perfect time for a holiday and perfect time to reflect on the American dream. Chobani’s Hamdi Ulukaya is a shining example that the American dream is alive and well. Mr. Ulukaya, now 45 years old, is worth $1.7 billion and is an owner, investor and philanthropist. And, as importantly, Chobani is helping keep the flame of the American Dream alive for its employees; by providing generous wages and benefits, including equity.   All 2,500 Chobani employees, some of them newcomers to the United States from other parts of the world and some whose families have been here for generations, could all celebrate in a very special way on Labor Day. The American dream is alive and well, particularly with entrepreneurs like Hamdi Ulukaya leading the way.