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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Billionaire Investor Ray Dalio: “Capitalism Needs Reform”

Written by Lester Detterbeck.

 

 

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Ray Dalio is the founder of Bridgewater Associates, one of the world’s largest hedge funds. Bloomberg ranked him as the world’s 79 wealthiest person earlier this year. Like many of us, Mr. Dalio was “fortunate enough to be raised in a middle-class family by parents who took good care of me, to go to good public schools, and to come into a job market that offered me equal opportunity.” He has lived the American Dream. America created the first truly middle-class society; now, a middle class life is increasingly out of reach for many of its citizens.

Mr. Dalio “became a capitalist at age 12, using earnings from part-time employment to start an investing career.” Mr. Dalio has been a macro global investor (making predictions on large-scale world events) for 50 years, which required him to gain a practical understanding of how economies and markets work. (In 2007, Bridgewater predicted the coming global financial crisis that hit in 2008-09). Mr. Dalio has learned that capitalism can be an effective motivator to make money, save it, and invest it, rewarding people for their productive activities that produce a profit. “Being productive leads people to make money which provides capital resources, which when combined with ideas can convert them into the profits and productivities that raise our living standards.” Even communist countries, including “communist China” have made capitalism an integral part of their systems.

As part of his work, Mr. Dalio has studied what makes countries succeed and fail. In short, “poor education, poor culture (that impedes people from operating effectively together), poor infrastructure and too much debt cause bad economic results.” The best results come from more equal opportunity in education and work, good family upbringing, civilized behavior, and free and well-regulated markets.

So, how is the US doing?

“Capitalism Is Not Working Well for Most Americans” says Ray Dalio. His research looked at the differences between the haves and have-nots in American- those in the top 40% and those in the bottom 60% of income earners. He found the following key stats:

  • There has been little or no real income growth for most people (the bottom 60%) for decades.
  • The income gap is about as high as ever and the wealth gap is the highest since the 1930s.
  • Most people in the bottom 60% are poor- they would struggle to raise $400 in the event of an emergency.
  • The economic mobility rate is now one of the worst in the developed world- US people whose fathers were in the bottom income quartile have very little chance of moving up to higher quartiles.
  • Many of our children are poor, malnourished and poorly educated.
  • Low incomes, poorly funded schools and weak family support for children lead to poor academic achievement, which leads to low productivity and low incomes of people who become economic burdens on the society.
  • The US scores in the bottom 15% of developed countries on standardized educational tests. High poverty schools really push our average test scores down.
  • Poor educational results can lead to students being unprepared for work and having emotional problems which manifest in damaging behaviors, including higher crime rates.

And, most importantly, he found that the income/education/wealth/opportunity gap reinforces the income/education/wealth/opportunity gap.

 

These gaps weaken us economically because:

  • They slow our economic growth because a large portion of our population doesn’t have money to spend
  • They result in suboptimal talent and human development and, in many cases, lack of having a job that honors the dignity of one’s work
  • They result in a large percentage of our population detracting from our GDP, not contributing to it.
  • In addition, these gaps can cause dangerous social and political divisions that threaten our cohesive fabric and capitalism itself.

In conclusion, Mr. Dalio suggests capitalism is now producing a self-reinforcing feedback loop that widens the income/wealth/opportunity gap to the point that capitalism and the American Dream are in jeopardy. Ray Dalio believes what is needed is a long-term investment program for America that achieves good “double bottom line” returns on investments; producing both good economic returns and good social returns.

The nice bump in economic growth brought on by tax reform has already started to fade. GDP growth is expected to be less than 2% next year. While capitalism has likely worked very well for most of us, who are in the top 40%, it hasn’t worked so well for the bottom 60%. Let’s hope our politicians, of both parties, focus on long-term investments for our country with double bottom line returns. That could really make a difference in long-term economic growth.

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Happy Easter!

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

Sincerely,

Detterbeck Wealth Management

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

Written by Lester Detterbeck.

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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.

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