Our Blog

DWM is committed to learning for its team, clients and friends. In this changing world, it’s extremely important to stay current in all areas impacting your financial future.

We encourage all of team members to “drill down” on current topics important to you and contribute to our weekly blogs.  Questions from our clients and their families are often featured in our blogs.  

Financial literacy for clients and their families is very important to us.  We generally hold an annual wealth management seminar for all of our clients.  We encourage regular, at least semi-annual, meetings in person with our clients to review family updates, progress on financial goals, asset allocation and performance of investments.  We’re happy to assist younger members of the family as part of our total wealth management program.

Here’s our latest blog:

 

Print
PDF

It’s beginning to “Cost” a Lot Like Christmas!

Written by Grant Maddox.

 

6th-year-holiday-costs-2.jpg

 

It’s beginning to “cost” a lot like Christmas! It’s a fun play on the popular holiday song, "It’s beginning to look a lot like Christmas", originally written by Meredith Wilson in 1951. Though times have certainly changed since the 1950s, the spirit of gifting and giving during the holidays has always remained the same. According to the National Retail Federation, the average American spends an average of $1,000 during the holiday season!

It’s not uncommon, as we approach the holiday season, that you might find yourself feeling grateful, compassionate and more charitable than any other time of the year. Now is the time people eagerly give to their loved ones and generously give back to those in need. Here’s a look into new and exciting ways people are giving and gifting in 2018:

529 College Savings Plans

As the total student loan debt in the U.S. approaches the $1.5 trillion mark, 529 college saving plans have grown in popularity. Unlike ordinary gift checks, a 529 savings plan can an act as an investment in a child's future that has the ability to grow, tax-free, for the use of qualified educational expenses (K-12 tuition included under the new tax law). While college savings may not be the most riveting gift for a young child to receive at the time, the potential to alleviate the future burden of student loans, all or in part, will be one gift they won’t soon forget.

Custodial Investment Accounts

There are two main forms of custodial investment accounts, UGMA (Uniform Gifts to Minors Act) and UTMA (Uniform Transfers to Minors Act) accounts. They are virtually identical aside from the ability of UTMA accounts to hold real estate. Custodial accounts can be a great way to teach children about investments while limiting their access to investment funds. Depending on your state, access to custodial accounts is limited to minors until the child has obtained ages 18-21.

In 2018, individual gifts are limited to the annual $15,000 gift-tax-exemption limit ($30,000 for married couples). Family and friends can contribute directly to custodial accounts of another person. If these accounts are properly titled as retirement accounts, such as a Custodial Roth Account, contributions must be made indirectly, limited to $5,500 for 2018, and the donee must have earned an income equal to or greater than the contribution made.

Charitable Gifts

Did you know you can complete charitable gifts in the name of a friend or family member and still capture the tax deduction? Assuming you itemize, funds given to charity can come from any taxable account (or qualified, see below) of your choosing and may list a donor of your choosing. For example, one can give to St. Judes Children's Hospital using their own personal funds, receive a tax deduction for doing so, and list the donor as someone other than themselves, like a grandson or other relative. So long as you can prove the funds used came from you, i.e. your name is listed on the account used, you should receive a deduction for these forms of charitable contributions.

There are several ways to give back to charity, one of the more tax efficient ways is by way of Qualified Charitable Distributions (QCDs). This is an alternative to Required Minimum Distributions (RMDs) that you are required to take from your IRA upon obtaining age 70 1/2. A QCD allows you to give a portion or all of the amount that you otherwise would be required to take from your IRA to charity. The benefit of doing so is to exclude these funds from your taxable income. This process can be especially beneficial if, under the new tax reform, you will be using the new increased standard deduction, $12,000 for individuals and $24,000 for married filing jointly, as opposed to itemizing.

There are many forms of giving. Integrating both charitable giving and family giving can be an intricate part of your overall plan, and it doesn't always have to "cost you an arm and a leg." Ensuring your gestures are both sustainable and tax-efficient are good questions to ask. At DWM we are always looking for new ways to give back to our clients and friends by assisting in these areas. Please, never hesitate to reach out to us in regards to new ways to give back to your family, friends and charitable organizations.

Print
PDF

Understanding Benchmarks: Why is my Portfolio Trailing the S&P 500 so far in 2018?

Written by Brett Detterbeck.

Apples are not Oranges

Many investors with well-balanced, diversified portfolios might be asking this exact question when they compare their year-to-date (“YTD”) return with that of the S&P 500. To understand the answer to this question is to understand your portfolio composition and your relative performance to a benchmark which may or may not include the S&P 500.

Per Investopedia, “a benchmark is a standard against which the performance of a security or investment manager can be measured. Benchmarks are indexes created to include multiple securities representing some aspect of the total market.” Within each asset class – equities, fixed income, alternatives, cash – you’ll find lots of benchmarks. In fact, the total number of indexes is somewhere in the thousands! That said, “when evaluating the performance of any investment, it’s important to compare it against an appropriate benchmark.” So let’s start by getting familiar with the most popular as well as the most applicable benchmarks out there.

  • Dow Jones Industrial Average: Arguably the most well-known index for domestic stocks, the Dow is composed of 30 of the largest “blue chip” stocks chosen by the editors of the Wall Street Journal. The Dow is not a good benchmark to compare your diversified equity portfolio because 1) 30 companies is a small sample given there are over 3000 publicly listed stocks traded in the US alone. 2) The Dow isn’t well diversified with a heavy influence to industrials and excludes big names like Apple, Amazon, & Berkshire Hathaway. 3) It is price-weighted, meaning a stock with a higher price will have a higher weighting in the index than a stock with a lower price. Change in share price is one thing, but absolute share price shouldn’t dictate measurement. Thus, this index is severely flawed.
  • The S&P 500: Another index for domestic stocks, composed of 500 large-cap companies representing the leading US industries chosen by the S&P Index Committee. It’s certainly not as flawed as the Dow, but it too has its own problems: the biggest being that it is market-cap weighted, meaning that a stock’s weighting in the index is based on its price and its number of shares outstanding. So as a company’s stock price rises and its market-cap grows, this index will buy more of that stock and vice-versa. Thus, the index is essentially forced to buy larger, more expensive companies and sell companies as they get cheaper. This “flaw” is great in times when large cap growth companies are hot: think about FAANG – Facebook, Amazon, Apple, Netflix, Google – these are all stocks that up until recently have soared and essentially the reason why the S&P500 heading into this month was one of the only 10% of 2018 positive areas amongst all of the asset categories Deutsche Bank tracks. (See graph below.) However, the S&P500 won’t show too well when growth is out of favor and investors emphasize value and fundamentals like they did in the 2000s, a decade when the S&P500 had basically zero return.
  • There are many other popular equity benchmarks such as the Russell 2000 (representing small cap stocks), MSCI EAFE (representing international stocks - in particular ones from developed regions of Europe, Australiasia, and the Far East), MSCI EEM (representing stocks of emerging regions), and lots more.
  • All of these above focus on a particular niche within the equity market. Therefore, none of them really make a good benchmark for comparison to your well-balanced, diversified portfolio. It’s like comparing apples to oranges! Which is why we favor the following benchmark for equity comparison purposes: MSCI ACWI (All Country World Index): This index is the one-stop shop for equity benchmarks consisting of around 2500 stocks from 47 countries, a true global proxy. It’s not a perfect benchmark, but it does get you closer to comparing apples to apples.

Next, we look at popular benchmarks within Fixed Income:

  • Barclays Capital US Aggregate Bond Index:  Basically the “S&P500 of bond land” and sometimes referred to as “the Agg”, this bond index represents government, corporate, agency, and mortgage-backed securities. Domestic only. Flaws include being market-cap weighted and that it doesn’t include some extracurricular fixed income categories like floating rate notes or junk bonds.
  • There are others, like the Barclays Capital US Treasury Bond Index & the Barclays Capital US Corporate High Yield Bond Index, that focus on their respective niche, but probably the best bet comparison for most diversified fixed income investors would be the Barclays Capital Global Aggregate Bond Index. This proxy is similar to the “Agg”, but we believe superior given about 60% of its exposure is beyond US borders. Not exactly apples to apples, but it can work.  

Lastly, Alternatives:

  • For Alternatives, benchmarks are somewhat of a challenge as there aren’t as many relative to the more traditional asset classes of stocks & bonds because there are so many different flavors and varieties of alternatives. We think one of the most appropriate comparison proxies in alternative land is the Credit Suisse Liquid Alternative Beta Index. It reflects the combined returns of several alternative strategies such as long/short, event driven, global strategies, merger arbitrage, & managed futures. As such, it can be considered as an appropriate comparison tool when comparing your liquid alternative portion of your portfolio.

Now that you’re more familiar with some of the more popular and applicable benchmarks of each asset class category, you may be asking the question: which one of the above is the best for comparison to my portfolio? The answer is: none of them alone, but rather a few of them combined. In other words, you would want to build a blended proxy consistent with the asset allocation mix of your portfolio. For example, if your portfolio is 50% equities / 30% fixed income / 20% alternatives, then an appropriate blended benchmark might be 50% MSCI AWCI Index / 30% Barclays Capital Global Aggregate Bond Index / 20% Credit Suisse Liquide Alternative Beta index. Now you’re really talking an apples-to-apples comparison!

You now should be equipped on how to measure your portfolio versus an appropriate benchmark. With 90% of assets categories being down for 2018 according to data tracked by Deutsche Bank through mid-November (see graph below), most likely you are sitting at a loss for 2018. 2018 has been a challenging year for all investors. Besides a select group of large cap domestic names (that are big constituents of the S&P500), most investment areas are down. That 90% losing figure is the highest percentage for any calendar year since 1920! Yikes! This also could be the first year in over 25 that both global stocks and bonds finish in negative territory. Wow! It’s a tough year. Not every year is going to be a positive one, but history shows that there are more positive years than negative ones. Stay the course.    

Our investment management team here at DWM is made up of CFA charterholders. As such, we believe in prudent portfolio management which adheres to a diversified approach and not one that takes big bets on a few select areas. We know that with this diversified approach, it’s inevitable that we won’t beat each and every benchmark year-in and year-out, but we can be capable of producing more stable and better risk-adjusted returns over a full market cycle. Further, we are confident that our disciplined approach puts the client in a better position to achieve the assumed returns of their financial plans over the long run, thereby putting them in a position to achieve much sought long-term financial success.

Have fun with those comparisons and don’t forget to lose the oranges and double up on the apples!

Asset Category 2018 Performance

Print
PDF

Could Tax Savings be Under Your Christmas Tree?

Written by Lester Detterbeck.

 

 

Merry_Christmas_cut_taxes.jpg

We hope everyone had a wonderful Thanksgiving holiday. We certainly did! The Holiday season is now upon us. We hope you take the time, before year-end, to see if the Tax Cuts and Jobs Act of 2017 (“TCJA”) has left a Christmas gift for you. TCJA substantially changes tax law for your 2018 returns. It is the most sweeping modification since the Tax Reform Act of 1986. While TCJA was promoted as a simplification (“you can file your taxes on a postcard”), it is far from that. However, despite lots of changes, there may be some tax savings for you.

Last week, before the Thanksgiving fun started, I attended the two-day annual Clemson University Income Tax Course. Here is an 8-page summary of the major income tax changes as prepared and presented at the seminar by Burkett CPAs in West Columbia, SC. (Click here.)

Certainly, the newest and most complicated concept is the Qualified Business Income Deduction (“QBID”). We spent at least 8 hours on this topic and our presenters said we could have spent four days. The QBID is a 20% deduction available on “pass-through” income from partnerships, limited liability companies, S Corporations, trusts, estates and sole proprietorships. The concept of QBID was to provide a comparable tax cut to small businesses that “regular” corporations, including all the huge publicly- traded companies, were receiving in TCJA through a reduction in the corporate tax rate from 35% to 21%.

QBID is fairly simple and straightforward for married taxpayers whose joint taxable income prior to the QBID does not exceed $315,000 (50% of that amount, or $157,500 for other taxpayers). You simply calculate the Qualified Business Income (“QBI”) from your pass-through and multiply it by 20%. $200,000 in business income produces a $40,000 deduction. If your QBI exceeds your taxable income less net capital gains, you are limited to 20% of the smaller amount. The QBI includes businesses of all kinds, whether or not you are active in that trade or business.

When taxable income before the QBID for a married couple is greater than $415,000 ($207,500 for other taxpayers) the calculation becomes more complicated in two ways. First, income from a whole group of businesses known as Specified Service Trade or Business (“SSTB”) is excluded from qualification as QBI. The SSTB includes services such as doctors, lawyers, accountants, performing arts, financial services and wealth managers. None of these professionals will get any QBID from their core businesses if their joint taxable income exceeds $415,000. Ouch.

The other provision for higher incomes is that the business (which again can’t be an SSTB) has to pay wages equal to 40% of the QBI or the QBID is limited to 50% of the W-2s of the company. Wages are prorated to the partners, shareholders and beneficiaries of the pass-through. Companies, like real estate developers, who don’t have significant wages can instead use 2.5% of the cost basis, before depreciation, in qualified business property. The W-2 test is typically not a problem for most businesses, since the business wages only need to be 40% of the business income to get the full QBID.

For married taxpayers with taxable income before the QBID between $315,000 and $415,000 (50% of this for other taxpayers) there may be a reduction in QBID based on SSTB status and W-2 wages.

As you can see, the QBID can be very, very significant. Smaller companies, whose married owners have taxable income less than $315,000, don’t need to have any payroll, but they will need company payroll above that threshold. Married owners with taxable income may want to keep their salaries lower to maximize the amount considered as QBI. Wages and guaranteed payments paid to owners and partners are not part of QBI, so the larger they are, the smaller the QBI will be.

Most small businesses review year-end tax projections with their CPAs in November and December. Since the interplay of taxable income, wages and QBI is so important to maximizing the QBID, it is extremely important for all small businesses to review taxes under TCJA before year-end.

Other key provisions affecting business owners include the elimination of tax-free exchanges for cars and equipment, limitations on utilization of net operating losses, increased availability of cash basis accounting, and elimination of the domestic production activities deduction.

For our non-business owners, there are other new provisions in TCJA which include eliminating exemptions and miscellaneous itemized deductions, capping state and local taxes at $10,000, doubling the standard deductions, reducing tax rates, increasing the child tax credit, possible reducing of mortgage interest deductions, changing the taxation of alimony and no longer allowing Roth conversions to be recharacterized. These could have a big impact on your 2018 income taxes.

The Holidays are wonderful and typically very busy for all of us. TCJA ushered in significant changes to income taxes for all individuals and may be bringing you a 2018 Christmas gift. Make sure you and your CPA review your situation before year-end to make sure you understand how the TCJA impacts you and how you can structure your personal finances to take the greatest advantages of its changes. At DWM, we do not prepare tax returns. However, we do provide tax projections for our clients based on our experience and knowledge to help them identify key elements and potential strategies to reduce surprises and save taxes (aka Christmas presents). Time is running out in 2018. Don’t forget to do your year-end tax planning! And, of course, contact us if you have any questions.

 

 

Let's Get Acquainted

We offer a complimentary "Get Acquainted" meeting to describe our services, and to see if our services are right for you.

Contact Us