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:

 

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Dow 26,000-When’s the Last Time You Thought About Your Risk?

Written by Les Detterbeck.

 

risk profileWith U.S. stocks at all-time highs, now is the perfect time to review your risk profile and then make sure the asset allocation within your investment portfolio matches it.  Equity markets have been on a tear.  In 2017, the average diversified US stock fund returned 18%, while the average international stock fund returned 27%.  In the first three weeks of 2018, the MSCI World Index of stocks has increased 5.6%. With low interest rates and inflation, accelerating growth and the recent passage of the Tax Cuts and Jobs Act, it looks like this streak could continue in 2018.

During the current nine year bull market, investor emotions about stocks have gone from optimism to elation and many investors now are not only complacent, but overconfident. Yet, with valuations soaring, we are approaching the point of maximum financial risk.  Certainly, at some point, we will have a pullback, correction or crash.

It always happens.  It could be a conflict in N. Korea or Iran or somewhere else.  It could be a worldwide health scare.  It could be higher interest rates negatively impacting our rising national and personal debt.  It could be something none of us even consider today.  History shows it will happen.  We need to be ready for it by having an asset allocation in our portfolios that matches our risk profile.

What exactly is a risk profile?  There are three components of your risk profile.  First, your risk capacity, or ability to withstand risk.  Second, your risk tolerance, or willingness to accept large swings in investment returns.  It’s the way we are hard-wired to respond to volatility.  Third, your risk perception, or short-term subjective judgment about the characteristics and severity of risk.

We classify your risk profile into one of five categories of risk: defensive (very low), conservative (low), balanced (moderate), growth (high) and aggressive (very high).  As a general rule, younger investors are more willing to take on a higher level of risk.  However, that’s not always true.  Investors in their 80s and 90s who know that they have ample funds for their lifetimes and beyond, and who can emotionally handle high risk, may have an aggressive risk profile, particularly when they plan to leave most of their money to the beneficiaries.  Everyone’s circumstances and emotions are different.  Profiles can change over time, particularly when there are life changing events, such as marriage, birth of a child, loss of job, retirement, changes in health or other matters.  Therefore, it’s important to regularly assess your risk profile. 

Here’s the process:

 

Step 1. Quantify your lifetime monetary goals and compare those with your expected lifetime assets. During your accumulation years, how much will you add to your retirement funds per year?  How many years until retirement?  How much money will you need to withdraw annually during retirement for your needs, wants and wishes?  What are your sources of retirement income?  What's your realistic life expectancy?  What market return is required to provide the likely outcome of success- not running out of money?  Do the goals require a high rate of return just to have a chance of success or is the goal so low risk that even a bad market outcome won't cause it to fail? 

Risk capacity isn’t simply the amount of assets you have; rather it is the comparison of those assets to your expected withdrawal rate from your portfolio.  A low withdrawal rate from your portfolio, e.g. 1% or 2% a year, means you have high risk capacity. A high withdrawal rate, such as 6% or more, means you have low risk capacity.

Step 2.  Evaluate your tolerance for risk.  What’s your comfort level with volatility?  Are you aggressive? Moderate?  Defensive? How does that compare to the risk needed in your portfolio to meet your goals?  If the risk needed to meet your goals exceeds your risk tolerance, you need to go back and modify your goals.  On the other hand, if your risk tolerance exceeds the risk level to meet your goals, does that mean you need to take on more risk just because you can or because you can afford it? You need to go through the numbers and make important decisions.

Step 3. Compare the risk in your portfolio to your risk tolerance.  Separate your assets into all three classes: equities, fixed income (including cash) and alternatives and determine your asset allocation.  A balanced portfolio might have roughly 50% equities, 25% fixed income and 25% alternatives.  An aggressive (very high risk) portfolio could have 80% equities and a defensive (very low risk) portfolio might have only 10-35% equities.  If your portfolio is riskier than your risk tolerance, changes need to be made immediately.  If your portfolio risk is lower than your risk tolerance, you still need to make sure it is of sufficient risk for you to meet your goals, considering inflation and taxes.

Step 4.  Rebalance your portfolio to a risk level equal to or less than your risk tolerance and sufficient to meet your goals.  Make sure you diversify your portfolio within asset class and asset style. Diversification reduces risk.  Reducing portfolio expenses and taxes increases returns. Alternatives are designed to reduce risk and increase returns. Trying to time the market increases your risk. Set your asset allocation for the long-term and don’t change it based on feelings of emotion. Stay invested.

Step 5.  Most importantly, regularly review and monitor your goals, risk profile and the asset allocation within your portfolio.  The results: Improved lifetime probability of financial success and peace of mind.

DWM clients are already covered because we regularly rebalance to their Long-Term Asset Allocation target and, when meeting, determine if anything significant has changed in their lives that would cause a change in their risk profile. 

 

 

 

 

 

 

 

 

 

 

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New Tax Law’s Impact on Housing

Written by Les Detterbeck.

RE411-2014-03-Tax-Deductions-for-Homeowners-POSTCARD-front.jpgMany realtors across the country are not happy about the tax-code overhaul. The legislation reduces the tax advantage of owning a home, effectively making the “American Dream” tougher to achieve.  For decades, our government has encouraged homeownership, as housing is considered one of the engines that drive our economy. Now, the new rules will likely reduce homeownership and prices, particularly in those high-cost, high-income areas which have previously been receiving much of the tax benefit.  Here’s why:

Reducing deductible mortgage Interest.  The new tax rules state that only interest on acquisition debt up to $750,000 will be deductible.  Interest on home equity loans won’t be.  The prior $1 million debt limit is retained for mortgages originated before 12/15/17. 

Reducing the real estate tax deduction.  Taxpayers under the new legislation must add their state and local property taxes to their state income tax with the combination capped at a maximum $10,000 deduction.  For example, if the taxpayers have $15,000 of state income taxes and $20,000 of property taxes, they can only deduct a total of $10,000. The remainder is lost.  As you can see, those taxpayers with larger income and with expensive houses will be impacted most by these two provisions.  The third big change impacts the entire market.

The standard deduction has been doubled.  Previously, the standard deduction for a couple was $12,700, now it’s $24,000 ($12,000 for individuals.)  Here’s a quick example of the impact. Let’s say a young couple wants to buy a house.  Their combined income is $150,000.  They pay $7,000 of state income tax and have $1,000 of charitable donations each year.  They were renting and not itemizing deductions in 2017, because they didn’t have a house and the standard deduction was $12,700 which was more than their itemized deductions.  Under the old rules, if they bought a house and incurred real estate taxes of $4,000 and mortgage interest deduction of $11,000, their total deductions would have been $23,000.  And therefore, the purchase of the house previously would have provided $10,300 additional deductions over the old standard deduction of $12,700 and roughly $3,000 of tax savings.

Now with the tax overhaul, the total itemized deductions are $22,000 (remember that state and local income taxes plus property taxes are limited to $10,000).  So, the itemized deduction is less than the standard deduction of $24,000.  No tax advantage to buying in their current situation with the new rules.

Certainly, even without any tax benefit, there continues to be huge benefits to owning a house:

1.Predictable monthly housing payments

2.Appreciation

3.Freedom to make modifications

4.Cheaper than renting

5.You can live there forever

6.Increased privacy

7.Become part of a community

8.Build equity

9.Provide a retirement nest egg

10.(Perhaps some) tax benefits

11. A yard for the family dog (last on the list, but often a primary reason).

Using the example above, one would expect that with some of the tax advantage of home ownership taken away, some couples who are on the fence may wait another year or more before buying.  This new dynamic, along with the new potential limitations on interest and real estate taxes, could slow down the housing market.

Some areas will likely be hit much harder than others.  Individuals in states like CA or NY will likely be hit hardest.  Think of it.  Wages, state income taxes, housing prices, and real estate taxes are all very high.  Taxpayers could be incurring $50,000 to $100,000 or more total in state income and property taxes and only allowed to deduct $10,000.  And, if they are buying a very expensive house, interest paid on any mortgage amount over $750,000 would not be fully deductible.

It’s no surprise than many companies are now more intensely looking at moving their company in high-cost, high-income states to better locales.  SC and other states in the Southeast could be key beneficiaries.  States with no state income tax such as TX, FL, and WA are also in good position. 

Even before tax reform, the Charleston regional area has been booming with development.  Earlier this week, I visited the Palmetto Commerce Park in North Charleston, near the airport. It’s amazing. Boeing was the initial draw, and now Mercedes Benz, Cummins, Shimano American, Thyssen Krupp and others have moved in.  ReadySC is helping to prepare the workforce with education and training.  The Charleston region has become a globally competitive destination for business, entrepreneurs and talent. Add to that the climate, beaches, history, culture, food, golf and many more attributes and it’s easy to see how 34 new people move to the region every day. And, that could accelerate.

Finally, let’s not forget Chicagoland. Yes, Chicago can qualify as a high-cost high-income area.  Yet, Chicago is still an amazing place to live.  You’ve got an already thriving business community (Google and vacuum giant Dyson just moved there), four seasons, great athletic teams, super universities, amazing museums, Lake Michigan, food for everyone, Michigan avenue shopping and lots more.

We’ll be following the impact of the new tax law and its impact on homeownership and home prices.  There certainly will be some winners and some losers.

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DWM 2017 Year-End Market Commentary

SkiierinAir

Ah, winter…colder temps, snow (even in the Carolinas)…it’s a good time for the annual ski trip. But if there are words for caution when skiing, it’s always: “Don’t get too far out over your skis!” Something for investors to think about as we talk about how the markets fared in 2017 and where they might go in 2018.

Equities: “Fresh powder!” In concerted fashion around the globe, equities rallied in 2017, thanks to strong economic fundamentals and friendly central bankers. Almost like Goldilocks’s time, where the porridge is not too hot nor too cold, so is the pace of this economic expansion: fast enough to support corporate earnings growth, but slow enough to keep the Fed from putting the brakes on too quickly. This led to a magic carpet ride for equity investors, with returns of 5.1% for 4q17 & 18.3% YTD for the average diversified US stock fund* and a 4.1% fourth quarter return and a hearty 26.8% YTD for the average international stock fund*. “Gnarly!”  Growth outperformed value, with a handful of tech stocks (Apple, Microsoft, Alphabet, and Facebook) leading the way. But it should be noted that this won’t last forever. In fact, a 2016 study** showed that the average annual price return for growth stocks to be only 12.8% vs 17.0% for value stocks. Another reason to be diversified.

Fixed Income:   It was also a positive time for bond investors, as evidenced by the Barclays US Aggregate Bond Index gaining 0.4% in the fourth quarter and 3.5% for the year. The inclusion of global fixed income assets led to better results with the Barclays Global Aggregate Bond Index registering +1.1% for 4Q17 and +7.4% YTD. Yields on the ten-year bond pretty much finished the year where they started, with investors content with the Fed’s pace of raising rates.

Alternatives:  The Credit Suisse Liquid Alternative Beta Index, our chosen proxy for alternatives, was up 1.7% for 4q17 and 4.6% YTD. Two of the most well-known alternative exposures, gold and real estate, had solid showings for both the quarter and the full year. Gold***: +1.6% and 12.9%, respectively. Real Estate****: +3.5% and 7.8%, respectively.

2017 proved to be another rewarding year for the balanced investor. But how do the slopes look for 2018? Will it be another plush ride up the mountain again? Gondola, anyone?!?

Indeed the same items – low interest rates, low inflation, accelerating growth, strong earnings – that propelled the global economy in 2017 should remain in 2018. The risk of recession seems nowhere in sight. Furthermore, the Republican tax overhaul is also expected to be a boost, at least in the near-term. But not sure if that represents “eating tomorrow’s lunch”. Moreover, two key drivers of economic growth, productivity gains and labor force expansion, have been on the downtrend. So is now the time to be thinking about the “vertical drop”???

With the bull market in its ninth year, many areas of the stock market at record highs, and volatility near record lows, it can be easy to become not only complacent but overconfident. Now is not the time to get too far out over your skis and take on more than you can chew! At some point, the fresh powder will turn into slush. Don’t be a “hot dog” or a “wipe-out” may just be in your future.

At DWM, we see ourselves as ski instructors, helping our skiers traverse the green, blue, and even black diamond runs by keeping them disciplined to their long-term plan, including the allocation and risk profiles of their portfolios.  Rebalancing, the act of selling over-weighted asset classes and buying underweighted asset classes in a tax-conscious manner, is part of our ongoing process and prudent in times like these. There are few signs of financial excess like ten years ago, but the market can only be predictable in one fashion: that it’s always unpredictable.

In conclusion, may your 2018 be a ‘rad’ one, with fresh powder on the slopes and fireside smiles in the cabin. Don’t hesitate to contact us if you want to talk or ‘shred’ the nearest run.

Brett M. Detterbeck, CFA, CFP®

DETTERBECK WEALTH MANAGEMENT

 

 

*according to Thomson Reuters Lipper

**study by Michael Hartnett of Merrill Lynch

***represented by the iShares Gold Trust

****represented by SPDR Dow Jones Global Real Estate

†versus your initial investment target

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