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As the year comes to a close, many of us find ourselves reflecting on how we can make a meaningful impact — not just in our own lives, but in the lives of others. It’s important that we understand the options we have available to us to help us create an impact on the things we truly care about.
Charitable giving offers a unique opportunity to align your resources with your personal values, creating a legacy of generosity that resonates far beyond the holiday season. While year-end giving is often associated with tax benefits, the true reward lies in its ability to shape our hearts so that we begin to care about the things we value and believe in.
A mindful approach to charitable giving can be a powerful way to maximize your impact while creating efficiency in your financial plan. Donating appreciated stocks or property allows you to avoid capital gains taxes and support meaningful causes, while qualified charitable distributions (QCDs) offer retirees a tax-efficient way to give directly from their IRAs. Thoughtful strategies like these can help ensure that your generosity creates lasting value, both for the causes you support and for your own financial goals.
Year-end giving isn’t just about the dollars donated — it’s about leaving a meaningful mark on the communities and missions that matter to you most. Let’s talk about how you can make this season one of purpose and impact.
Charitable giving is more than a transaction to give yourself a tax break — it’s a reflection of your values and priorities. Whether you’re supporting local community programs, contributing to global initiatives, or funding a cause close to your heart, giving allows you to make a tangible difference in the world and fulfill your calling to care for others.
At its core, charitable giving is deeply personal. It’s about aligning your resources with your beliefs and making an impact that resonates with your sense of purpose. For many of us, having this alignment can foster a sense of fulfillment and connection, making generosity a source of joy.
Beyond the emotional rewards, charitable giving offers significant financial advantages when used strategically. For donors who itemize deductions, contributions to qualifying charities above the standard deduction can reduce taxable income, easing the overall tax burden. Strategies like donating appreciated stocks or making qualified charitable distributions (QCDs) can amplify these benefits, helping you achieve more with the resources you already have.
While the financial perks are valuable, they shouldn’t overshadow the importance of meaningful giving. The most impactful contributions come from the heart, driven by a desire to create change rather than simply reduce taxes. Balancing financial strategy and emotional intent helps to ensure that your giving is both purposeful and impactful.
By incorporating charitable giving in your overall financial plan, you can make a difference in ways that resonate with your values and bring lasting rewards to both you and the causes you support.
When we think of charitable giving, cash donations are often the first thing that comes to mind. While giving cash is a simple and effective way to support causes, it may not always be the most efficient option. By leveraging the right giving strategies, you can deepen your impact and reap the financial advantages.
These approaches not only make the most of your generosity but also work in tandem with your overarching financial goals.
One of the most tax-efficient ways to give is by donating appreciated assets, like stocks or real estate. When you donate assets that have increased in value since you purchased them, you avoid paying capital gains tax on the appreciation.
On top of this, if you itemize deductions, you can claim the asset’s full fair market value as a charitable contribution. This makes it much more efficient than giving cash and is almost like receiving a double tax deduction.
For example, say you purchased stocks for $5,000, and they have become worth $50,000. You want to make a donation of $50,000 to your favorite charity, so you decide to donate the shares of stock. By donating the shares of stock, you get to deduct the full $50,000, instead of owing capital gains tax on the $45,000 profit. The charity will then get to sell the stock with no tax.
Donating stocks that have grown significantly in value allows you to support your valued causes without reducing your portfolio or donation’s overall value because of the tax implications of selling the investment. This method is particularly effective for those with diversified portfolios who want to rebalance their investments while giving back.
Examples of assets you can donate include Stocks, Bonds, ETFs, Real Estate (full properties and fractional interests), business interests, mineral rights, and even crypto-currencies.
You can donate stocks by providing your financial advisor with the organization’s account number and the DTC number of their investment firm. Be sure to let them know to expect your donation so they can provide you with the appropriate gift receipts. For other types of assets, reach out to the charity ahead of time to discuss your gift to make sure they can accept the gift.
If you’re 70 ½ or older, qualified charitable distributions (QCDs) can be a great way to give directly from an IRA or an Inherited IRA. A QCD allows you to transfer funds from your IRA to a qualifying charity, satisfying your required minimum distribution (RMD) without adding to your taxable income. Since QCDs do not hit your income, you essentially receive the benefit of a charitable deduction even if you do not itemize and the donation does not count for income for purposes of determining your medicare premiums.
This approach is especially useful for retirees who want to support charities while managing their tax obligations. By using QCDs, you can reduce your taxable income and help your chosen organization, all while fulfilling your RMD requirements.
Donor-advised funds (DAFs) can also provide flexibility for those looking to make a long-term charitable impact. DAFs allow you to contribute assets, receive an immediate tax deduction, and distribute funds to charities over time. This strategy may be worth exploring with your trusted financial advisor if you’re looking for a structured approach to giving.
There are many advantages to donating to a Donor Advised Fund here are just a few of them:
Charitable giving often comes with questions about financial security and whether you can afford to give without jeopardizing your long-term goals. It’s natural to feel cautious, especially when balancing current needs with your future objectives. However, with thoughtful planning, you can move past these fears and experience the fulfillment that comes from making a meaningful impact.
Many people hesitate to give because they worry about all of the “what if” scenarios — unexpected expenses, market downturns, or changes in income. While these concerns are valid, they often lead to holding onto resources far beyond what’s necessary for your financial security. Working with the right financial advisor can help you identify how much you can safely give, allowing you the clarity and confidence to contribute without compromising your stability.
Charitable giving is not about depleting your resources; it’s about using them intentionally to create positive change in the world. Take a moment to think about the financial flexibility you already have. Are there areas where you’ve saved more than enough? Could reallocating some of those funds toward causes you care about bring greater purpose to your financial plan?
We are all called to use our resources to help others and make a difference in the world. By reframing your surplus as an opportunity to give, rather than something to hoard, you can change your greater approach to managing your assets. Giving becomes less about obligation and more about empowerment.
If you’re worried about whether charitable giving is the right strategy for you, ask yourself:
Charitable giving becomes powerful when it reflects who you are and directs your heart to what you care about most. By making sure that your contributions align with your values and passions, you can create a deeper connection to the causes you support, while ensuring your generosity can have the greatest possible impact.
Everyone’s values are different, and your giving should reflect what resonates most with you. Maybe you’re passionate about supporting education programs, protecting the environment, or empowering traditionally underserved communities. Whatever your priorities, you want to take the time to identify causes and organizations that coincide with your vision for a better world.
Don’t let your connection with a charity begin or end with writing a check. Ongoing involvement in the charity’s work will connect you deeply with the organization, provide important non-financial support and encouragement to the organization, amplify the power of your gift, and inform future giving decisions.
Reach out to the organization directly to learn about its mission, goals, and specific needs to determine if those align with your charitable intent. The development staff for the organization can share impact reports, budget goals, future strategic initiatives, and information about how they would steward your donation.
Consider how you can volunteer on the front end of the organization’s work, in the background, or engage with the organization’s leadership. If you are supporting a local organization, you may even consider serving on the board or assisting in fundraising.
Charitable giving can also be an opportunity to involve your family. Discuss the causes you care about with loved ones and consider making these decisions together. This not only deepens your impact but also fosters meaningful conversations about values, priorities, and legacy, which can be an incredible relationship-building tool.
Even young kids and grandkids can be brought into the giving conversation. Consider asking them where they would like to give, discussing the challenges children in your community and around the world face, and exploring the organizations that provide hope. You may be surprised and encouraged by their youthful thoughts, perspectives, and engagement.
When your financial plan incorporates your charitable goals, it helps ensure your giving remains intentional and sustainable. By working with a CoCreate financial advisor to structure your contributions to align with both your values and your broader financial goals, you can make sure that you are making the most of every single dollar.
Charitable giving isn’t just about the actual act of giving, it’s about doing so in a way that aligns with your unique financial situation. Working closely with your financial planner can help you maximize the impact of your contributions while ensuring they fit seamlessly into your financial plan.
Your charitable contributions should complement your long-term financial goals, not compete with them. By incorporating giving into your financial strategy, you can:
A skilled financial advisor can help you understand your giving capacity and design a strategy that reflects your values while maintaining your confidence in your future.
As December 31 approaches, it’s important to take proactive steps that ensure your charitable giving is both impactful and efficient. Start by discussing your plan with your financial planning team to identify the best opportunities for your strategic giving. Beginning the process early is crucial, especially for non-cash contributions like stock or real estate transfers, which may require additional time to process.
The end of the year is also a great time for setting clear goals for your giving, like deciding which causes or organizations to prioritize and how much to contribute. Just remember to keep thorough documentation, including receipts, appraisals, and transfer records, to remain compliant and optimized for all potential tax benefits.
Even with the best intentions, there are common mistakes that can undermine the impact of your charitable giving if you’re not aware of them.
Waiting until the last minute to execute your giving strategy can lead to rushed decisions, missed opportunities, and logistical challenges. Non-cash contributions, such as donating stocks or property, often require additional time to process, and rushing could result in failing to meet the December 31 deadline for tax benefits. Starting earlier in the year can help you make thoughtful and seamless contributions.
Not all charities qualify for tax-deductible donations, so you must verify that the organizations you support are eligible. By that same token, strategies like qualified charitable distributions (QCDs) come with specific rules, like age and contribution limits. Understanding and adhering to these requirements will help you avoid unintentional errors and make the most of your giving’s financial benefits.
Charitable giving is one of the most meaningful ways you can use your wealth to engage your personal values. By using strategies like donating appreciated assets and leveraging qualified charitable distributions, you can maximize the impact of your contributions while optimizing your financial plan.
As you reflect on your goals and priorities, remember that giving is about making a lasting difference for the causes and communities you care about. Whether you’re supporting local initiatives, global efforts, or personal passions, your generosity can ripple outward to create a lasting change, no matter how small or inconsequential it may seem.
This year, we urge you to take the time to plan your giving intentionally. Work with your trusted financial planners to develop a strategy that aligns with your values and ensures your resources are used effectively to serve your greater purpose.
This article is about the stock market decline on December 18, 2024. It is made up of notes and thoughts on December 19th at about 8:00AM. Stocks opened higher today, but there may be more to come.
Yesterday, the “markets” declined rather precipitously, with the S&P 500 ending down 2.97%. Of course, nobody actually owns the index itself, so everyone’s experience was a little bit different. If you’ve taken a business-minded approach, you probably faired significantly better. Fortunately, our portfolios have naturally avoided many of the investments that have become overinflated and crashed multiple times this year. When these market events happen, however, they tend to impact everything for the short term. Yesterday was what we call a a 90% downside day, the first since August 5th (>90% of NYSE operating stocks declined and at least 90% of the volume and points traded were in declining stocks). There are actually a number of these each year, and they aren’t cause for alarm unless you’re a short-term trader or haven’t adequately planned for your immediate cash needs. In fact, we generally have several corrections each year (1-2 that drop about 5% and 1 that drops about 10%).
Over the past couple of weeks, we’ve been experiencing a relatively quiet version of one of these corrections. Most companies have been consistently declining for about 10 days, but they have been buoyed by the excitement about AI stocks. Because the S&P 500 and other cap-weighted indices are so heavily concentrated on the biggest companies they don’t always reflect what is happening broadly. Yesterday’s action brings us into the territory of a meaningful correction of the 10% variety. It is possible it could accelerate, but 90% downside days tend to happen a the beginning or end of these corrections and we think this one is already a little bit extended. Moreover, the events that seem to have led to yesterday’s drop were neither surprising nor particularly significant. We’ll discuss a few key issues that are relevant to what’s happening in the markets. Keep in mind that the best thing to do is often the hardest: be patient and disciplined. If we manage your investments, we’ve designed them specifically to perform well in difficult conditions, and you own businesses we believe are extremely resilient and meet our rigorous financial requirements.
“Oops I did it again, I played with your heart, Got lost in the game…”
Oh Baby, Baby, who knew back in the 1990s that Brittany Spears was actually singing about Jerome Powell and the federal reserve.
The Federal Reserve announced yesterday that they were proceeding as planned with a .25% interest rate cut. They also left their official statement unchanged from their previous press conference, in which they explained that they would take a more thoughtful approach to future rate cuts. When Powell was asked to clarify that statement, he indicated that it meant that rate cuts would slow down in the new year. There are a few really key considerations here:
Overall, the Federal Reserves less dovish stance should be a good sign for the markets in the weeks ahead.
Can we all agree that the threat of a government shutdown is now a holiday tradition? If it is, I’ll take it. It would be great if the Government was good at using its resources to make our country better, but when it can’t seem to balance a budget, keep its spending within a healthy proportion to GDP (less than about 19%), and our politicians’ main goal with the budget process is to implement non-budgetary legislation and increase their own salaries, it doesn’t feel like a budget should just be forced through.
Interestingly enough, the reduction in government spending that comes from a shutdown (if it does happen), is actually a good thing for the economy. This is especially true when our money supply is still out of control and inflation is still a problem. We can take solace knowing that the markets haven’t crashed because of a shutdown (going back as far as the year 2000).
The threat of a government shutdown may sound scary, but in reality, the Government isn’t a producer in the economy. They don’t sell a product, invent things, or make money providing services. The money they spend MUST come from productive segments of the American economy (taxing its citizens who profit from business activity). If this is out of balance its extremely harmful for economic growth. A temporary shutdown of non-essential government services, is actually helpful rather than harmful. IF the end result is a better compromise and can ultimately reduce spending and other negative partisan activity, then it can be very good.
On December 13th, Microsoft made a statement that it doesn’t need more chips for its AI projects. Nvidia dropped a significant amount on the news (it is speculated that Microsoft is 13% of their sales). Other AI Stocks spiked and subsequently retreated, but the effect of Nvidia’s drop was felt more broadly because its exorbitant return, along with other AI stocks have played such a significant role in the S&P 500’s positive growth this year. When AI prices drop, the index funds drop in price as well (especially when there are other sectors correcting)… when people sell the index fund because its price is declining, it causes further decline in AI and every other company in the index. That means that everyone’s stocks decline a little bit in their prices.
This isn’t a surprise if you’ve been thinking about the sequence of how AI needs to be implemented. It did need a groundswell in chip manufacturing at the beginning, but that levels off, both as the major data processing centers become equipped with their basic needs and as the focus shifts to other supply challenges. Microsoft identified power in their specific comments about chip needs. The bottleneck has moved to something else. What’s more is that the AI craze is not because AI is a brand new invention, but because it is much more widely available to the public. Business services have used AI for years, so many of the major consumers of AI were already spending resources to use it before Chat GPT. We have been skeptical of the long-term legs to the craze for these reasons. AI will certainly have major implications on the economy and stock market, but these will take a few more years to play out. Nvidia’s value should have increased significantly because of their coincidental ability to be ahead of the spike in demand, but nowhere near as much as it did.
What does this mean for non-AI stocks? It means that we will see a redistribution of capital from companies like Nvidia to other sectors of the market. Some will reallocate to invest in power, others to financials, foods, or wherever they see the opportunity to invest and make money. Sector rotation and balance is very healthy for the market and is a natural part of the business cycle. For those not invested heavily in AI, this is a tailwind.
All of that sounds very optimistic. We have a lot of economic challenge ahead of us in the coming years. national debt is still through the roof, we are still struggling with shortages in the workforce and personal savings is down while consumer debt has risen significantly. Except for consumer financial health, these are long-term problems that our leadership will need to make difficult decisions to solve. Whatever is left, will be up to the creativity of businesses to fix. These are not issues that show up as short-term market fluctuations like we saw yesterday, but in slower economic growth.
We have been watching these headwinds for quite some time and have positioned our portfolios in investments that we believe will perform well in these conditions for the long-term. If you have questions about your investment, please feel free to contact us anytime.
Here are two sets of charts that we feel do a great job of explaining what is happening in the stock markets over the past few weeks. The first is one that we created about a month ago that illustrates the tech bubble on July 10th. The second chart shows three different stock market averages, the Nasdaq 100 (about 60% technology), the S&P 500 (about 40% technology and heavily weighted in just a few companies), and the S&P 500 equal weight index, which gives an equal representation to each of the 500 largest companies in America. These three charts illustrate the tech bubble burst We believe the S&P 500 is a terrible representation of the overall stock market and when it is used in a portfolio as an investment (in a fund), it's actually a high-risk "momentum" investment. Because the Nasdaq 100 is even more heavily concentrated in Big Tech companies than the S&P 500 index, when we look at the two side by side it illustrates the impact the technology sector has on what most people call the stock market (the S&P 500).
People have been overly excited about the impact that publicly available AI will have on the economy and on profit margins. In short, the tech bubble is bursting, but the broad market is much healthier. The business-minded investor has a broader and longer view of the market, and resists the temptation to speculate. When you look at the S&P 500 Equal Weight, which is very closely aligned to the performance of our portfolios so far this year, you see a much different picture. For people in diversified portfolios (not an S&P 500 ETF) who are thoughtfully evaluating profit margins, business models, and dividend payouts, the story has been much more positive (blue line in second chart).
We've been skeptical of the Big Tech explosion for some time, and even made some adjustments in our client portfolios in July to account for the increased risks of the tech bubble. We believe that there will be some upside from here, but we aren't out of the woods yet. The election is coming soon and markets should be quite turbulent until then. In the mean-time, dividend-oriented businesses that fit or investment criteria are generally in a strong position and are continuing to increase dividends despite inflationary pressures and other economic challenges. These should be the strongest companies in a recovery, and have mitigated losses very well in the past weeks. We are excited to continue to collect cash from dividends to be reinvested ate better pricing.
All in all, we aren't particularly concerned for the long-term investor who is in an appropriately managed investment portfolio. It may even prove to be an exciting time with great entry-points for new cash.
A contact directory for our clients.
Matt Hudak, AAMS®, CFP®
We don’t publicly engage in much discourse that touches the political spectrum. We believe the polarization of American society is the greatest geopolitical and economic risk we face today and in order to overcome this risk we need to come together. In turn, we do our best to put our energy into listening to a diverse range of ideas and opinions. Most of our personal ideology is centered around loving people who are different than us and coming together. At times, it can be difficult to publish about important economic topics and concepts without crossing lines into politics and divisive rhetoric. Nevertheless, we will attempt to take a neutral political perspective while addressing the challenges to the strength of our economy.
There are several key concepts we feel should be relatively apolitical and have benefits for both sides of the spectrum. These concepts are primarily monetary & economic—politics-adjacent, but overshadowed by divisive rhetoric and ineffective dialogue. Before we can engage any productive solution, of course, our political leaders must learn to work together. This collaboration seems nearly impossible, but it begins with each of us.
While a lot of the headline economic reports look good, and the 7 companies that represent the “stock market” have shot up (a little sarcasm for you. Microsoft, Apple, Amazon, Meta, and Alphabet represent 31% of the S&P 500, what people mistakenly call the “stock market”). The reality of our economic environment is a little more complicated. We believe that we are currently in a ghost recession. Primarily because savings are low, people are feeling the pressure of higher costs and are thinking about how they use their money carefully. When we see positive data points, there are often divergent stories in the components it represents.
Before we suggest a few helpful ideas, we should identify the drivers behind the challenges facing our economy.
M2. If you’re an economics nerd, that’s all I should need to say. Most economists and officials are too busy trying to figure out how to turn on their flashlight to realize it’s high noon on a sunny day. Contrary to what you may perceive from the world’s obsession with central banks, inflation doesn’t have anything to do with interest rates. Interest rates can affect the speed of inflation, spreading it out over a slightly longer period of time, but no change in interest rate policy by the federal reserve can ultimately change the purchasing power of a dollar. What’s astonishing is that the obvious realities about the monetary system haven’t really been a part of the conversation at the policy level. Perhaps its because both parties are equally responsible for directly causing the current inflationary environment by more than tripling our money supply (M1) in less than 12 months. The M2 measure increased by 40% in the same timeframe (We think M2 will prove to be the predictor of inflation. To wit, prices and incomes will eventually reestablish balance with M2).
It shouldn’t go unnoticed that the M2 measure of money supply and inflation have a near perfect correlation and as seen in the chart in figure 3, until November of 2023, had never before been inverse. They move together 90.5% of the time. In fact, all of the anomalies shown in the chart are at point of major government intervention in the monetary system, and they are all followed by a rapid reversion to the normal correlation. We believe we will see the same effect in the present.
Simply put, inflation is the effect of supply and demand for the dollar. Just like the price of a carton of eggs or a used car changes depending on whether they are hard to find on a shelf or if the dealer can’t seem to move them off the lot, the dollar has more or less purchasing power if there is an abundant supply or if is scarcer in relation to goods and consumers. Policies that are effective at combating the inflationary riptide of a surging money supply will either claw back such supply, limit its future growth or distribute it among a higher number of productive citizens.
Government spending as a percentage of GDP isn’t as much through the roof as it might seem when we compare it to historical norms, but it's too high for a healthy and growing economy. This is especially true with the current level of debt. Republicans and Democrats alike stand on platforms to expand spending. Regardless of what each of us deems worthy of government funding, those funds need to be in balance with the overall productivity of our country. GDP is the total value of goods and services the US produces (consumer spending, government spending, investment, and net exports). If we imagine a scenario in which Government spending accounted for 100% of GDP, where would they get their revenue? In this hyperbole, there are no businesses or personal revenues to tax (taxable revenues begin with business investment and consumers spending on their product)
The key in a realistic solution is in finding a balance between government spending and non-government productivity. I would suggest that a healthy level of government spending (in the system we have in place today) should not exceed the 18% average (since 1947), but is probably better averaging 14%-15%. If it exceeds that rate, any additional revenue it needs has to come from non-tax policy that stimulates productivity growth in the non-government components of GDP.
This is not a “border wall conversation,” and it is a particularly difficult conversation to have given the contention surrounding the topic of illegal immigration.
The process for allowing a person who lawfully applies to leave their country to enter the United States, is painfully slow—bureaucracy for the bureaucracy’s sake. It would be easy to expedite this process for productive, low-risk people who want to come to the US to work, pay taxes and spend money. The median processing time of an application for an immediate family member of a US citizen is 11.3 months and an application for an alien entrepreneur (I-526) is 53 months. A green card takes 13.6 months. Half these applications take longer and are probably just sitting on a desk.[1]
Immigration is inherently disinflationary. When we discuss inflation in functional terms, it really must be done hand in hand with population growth. Inflation and disinflation are the impact of supply imbalance between the dollars available in the system and the goods & services available. The goods and services are, at least in our present circumstances, relatively static (except, of course, when supply chains are temporarily disrupted). Because those are static, more money means higher prices. They are directly correlated as we discussed above. Adding more people into the equation, however, dilutes the money supply. Ultimately as the end consumer, we choose where we direct the funds we possess. If I don’t have as many dollars, I am more careful about how I spend them. I’m also more inclined to be more productive so that I can earn more.
GDP growth in the US is negatively impacted by a less productive population. This is both due to an aging population (i.e. retiring baby boomers and increasing life expectancy) and an economy that is highly developed. Immigrants have proven to be highly productive and innovative because they are motivated by the opportunities of their new situation. Immigrants also tend to be younger and have larger families than those born in the US. By expediting the application process for entry into the United States, we can effectively boost GDP Growth while curbing inflation.
Imagine you’re selling your home and you have two buyers. Both of the buyers can afford to pay $7,000 toward their monthly mortgage payment and have saved $40,000 for a down payment. The first buyer has a bank that will lend 80% of the purchase price. That means they can afford to make an offer for up to $200,000 ($40k/[100%-80%]). The second buyer is working with a bank that has an investor who can take a higher level of risk and so they are willing to finance up to 95% of the purchase price. This second buyer can afford to make an offer for up to $800,000 ($40k/[100%-5%]). Sellers naturally sell to the highest bidder. Assuming there is enough demand, the maximum price is limited to the amount of capital available to the consumer. If you’re considering your options, and everyone is buyer 1, then your sale price can only be $200,000. If your market has buyer number 2, you’ll naturally try to sell to them for $800,000… just because you can.
This is exactly the scenario that led to the 2008 housing crisis. Before the Government Sponsored Enterprises (Fannie Mae, Freddie Mac, et al) began packaging loans and reselling them (CMOs) in the early 90s, the banks lent money from their own portfolios. This meant that they had to be more careful because they were responsible for the loan until it was completely paid off. Banks typically required 20% down because it meant that their borrower had demonstrated capacity to make payments and manage their funds for an extended period of time. Now, this may seem exclusionary to many, but changing this percentage doesn’t change how much a person can/needs to put down.
When CMOs came along, the banks no longer needed to lend from their own portfolios but could be paid to originate the loan and sell it to a third-party investor through the Government (not technically, but the GSEs are essentially the government). There was so much demand from the GSEs to buy the loan that banks could hardly justify making loans the old way, and so the GSEs gained control over the markets. To increase homeownership levels, they began lowering down payment requirements all the way down to 3% and a borrower could use up to 45% of their income to purchase. Now, if you’re the lender, and you don’t offer the 3% down option when all the other banks do, you simply lose the revenue from making the loan. Banks, who had figured out how to structure loans that were safe for both lender and consumer, could no longer compete if they didn’t conform to the GSE’s structures. This created buyer number two (along with all the other ethical problems of consumer fraud and predatory lending). Remember, you’ll sell for the highest price just because you can. Buyer number 2 had 4 times as much capital, so the home price quadruples to match the money supply.
There have been several points in history when the Government has infused a substantial amount of capital into the housing and education markets. The effect has been dramatically increased costs.
Sallie Mae is the GSE for student loans. The same principle applies to student loans as housing. If students have limited funds for their education, the universities will work within those constraints and charge less. When student loans are nearly unlimited universities would be stupid not to maximize their income. In fact, they are forced to increase student costs in order to stay competitive. If a bank were to lend to students from their own portfolio, they would want to make sure the student can pay the loan in the future. The bank would consider the cost of the education program, the income potential for the student upon graduation, and the students commitment to graduating with a degree. All three are major problems that have presented in the current crisis.
These are the fundamental economic roots of the housing affordability crisis and the student loan crisis. We could make significant headway in both areas and dramatically reduce inflation more broadly if we placed significant limits upon the GSEs or dissolved them entirely. Additionally, Student loan forgiveness would be much more palatable if there were a long-term solution to the problem. Sallie Mae could be dismantled and unwound in conjunction with some sort of student loan forgiveness program or benefit for those who have been victims of this Government Sponsored Entity.
Recently the Tax Foundation published a lengthy research report (available here) discussing reform of the non-profit sector, noting that the net income from business-like sources would raise nearly $40 billion in tax revenues. I’ve been very involved in charitable work and was quite perturbed at the idea until giving it full consideration.
Most of the not-for-profit sector are made up of organizations like credit unions, insurance companies, athletic associations (i.e. NCAA), consulting firms, insurance companies, and golf clubs. Most businesses can adopt the form of a non-profit organization, it just means identifying how it serves the public/its members and it can’t pay its profits to owners (it can, however just convert the dividend to “reasonable salary”). What if we narrowed the definition of what a charity is, and the non-profit businesses could pay tax on their net profits just like any other corporation would (excluding income from charitable donations). This would level the playing field for competition and broaden the tax base by approximately 10% of GDP. IF the non-profit business uses its revenues to cover its expenses, those would not be taxed just like businesses deduct their expenses. The Government could use the $40 Billion of excess revenue to help resolve its budget deficit and pay down the insane amount of debt it has amassed in recent years.
People have been discussing the future solvency of the Social Security programs for a long time now. We have our thoughts and positions (essentially that no politician wants to alienate their voter base over an issue that won’t be critical until they have retired themselves), but have a couple of obvious observations. When Social Security was created, the average lifespan of someone taking benefits was around 3 years. It's much longer now, and we need people to retire later. Congress is obviously divided on this issue and whether we should or how we go about forcing it. At the same time, there are policies in place that disincentivize people who want to continue working. Instead of forcing a new retirement age, Congress could begin by simply removing the disincentives for staying employed and push some of their costs back into the private sector (which would in turn create more taxable profits).
The first change to address would be the social security benefit itself. Your Social Security based on your benefit at your FRA (full retirement age). For most people going forward, that is 67. If you take it early, you receive reduced benefits. If you wait to take it until age 70, you receive an 8% annual increase to your benefit over those three years. After you're age 70, there is no reason by which you could justify waiting longer. Why couldn’t we create some mechanism by which someone could continue to benefit from deferring past age 70?
Amplifying the effect, if you continue to work after you start drawing Social Security, after certain thresholds, your benefits are both partially taxable and are reduced relative to your earnings. If your goal is to continue to work into your 70’s or 80’s (more common than you would expect), then your decision causes you to lose much of your social security benefit while still paying into the system for others. The system causes a meaningful imbalance for those that could be reducing the burden on the system. We should simplify the system by increasing the ability to defer indefinitely with some incentive, and remove the benefit penalties for earned income.
The second issue to resolve is to establish a system for individuals to continue without Medicare beyond age 65. If you don’t file form Medicare at 65, you incur substantial penalties when you do file. There are exceptions to this if you properly apply, but these should be the rule of thumb. If you have adequate health coverage by another means, the Medicare program should be glad not to have to pay for your health coverage. With the broad scope of the Medicare program, this shouldn’t impact their ability to underwrite their costs. There is even a possibility it could cause a net reduction in the cost of healthcare across the board. Medicare also has significant premium penalties for those who pass certain income thresholds. If the end goal is to have more employed people contributing, this penalty needs to exclude earned income.
The current tax code allows for a property owner to sell their property in a like kind exchange. For many, they have been able to save for retirement by owning rental properties. While there is a lot of power in the ability to use debt to finance a rental or two, the structure is often less ideal when transitioning into retirement. Income is not truly passive, it isn’t from diversified sources and liquidity is a major obstacle if there aren’t significant savings in other categories. Many who have built their nest egg on a few rental properties feel trapped because of the massive tax burden they can become subject to in a sale (up to 100% of the price could be taxable). The IRS should allow, at least for a time, owners of these properties to defer taxes by depositing the proceeds into an IRA or 401(k). This allowance would allow owners flexibility to position themselves most efficiently, increase the housing supply for entry-level buyers, and would cause a net increase in tax revenue for the IRS over the long term (ordinary income vs capital gains / inherited IRA rules vs step up in basis).
If you don’t have a retirement plan from your employer, it is much harder to save in tax deferred accounts. Your annual contributions to your IRA and Roth are limited to $7,000. IF you have a plan through your workplace, you can defer much more (23000 in a 401(k)). There are other options between and some that allow for even more. It would make sense to increase the limits of each plan to the 401(k) limits creating a fair structure for individuals and small businesses. If many people increase their contributions accordingly, it would slow the pace of inflation by removing those dollars from circulation until the account holder begins their retirement. Coming full circle, the amount of money available directly correlates to the price of goods and services. Creative solutions that remove this capital from the playing field, even temporarily, are more effective than parlor tricks with interest rates.
[1] Historic Processing Times (uscis.gov)
We're really excited to announce our cocreate financial client portal and app. In the first few days of July, each of our clients will receive a link and instructions to set up a new portal account. We've been working very hard to include a lot of useful features and have complete control over how your reports appear. You'll be able to schedule appointments and engage with us right through the app.
We're confident this is a HUGE upgrade and will help us serve you more effectively!
You can download the new app on your app store by searching for CoCreateFinance or clicking here
Our Developers have created an instruction manual for us to provide to you. download it here.
We get a lot of questions about how to teach kids about money, and for good reason! Every parent wants their kids to develop the skills to be successful and live a meaningful and impactful life and we all know that money management plays an important role. When considering engaging your children (or any young person in your life) about money, here are some principles to remember:
Tell us what you have done with your kids to teach them about money! Please take a moment to write us a note (some of our best ideas come from our clients). We would love to share your great ideas with other parents in the CoCreate Community.
Welcome to CoCreate Financial! Embrace the excitement as we unveil our brand new client portal feed. This test blog post aims to enhance your experience and keep you informed about the latest developments. At CoCreate Financial, we believe in fostering a co-creative mindset, where our team collaborates with you to achieve your financial goals. With our personalized approach and expert insights, we offer a wide range of products and services designed to empower your financial journey. Schedule an appointment online or give us a call at (406) 206-7571 to embark on this transformative experience. Visit our office at 1805 W Dickerson St, Building 2, Suite 3, Bozeman, MT 59715, and for any correspondence, kindly mail to PO Box 4785, Bozeman, MT 59772. We prioritize transparency and are registered as an Investment Adviser in the state of Montana. While we provide factual and up-to-date information, please consult with a professional adviser before making any investment decisions. We strive to empower you with the necessary knowledge, and for your convenience, we provide hyperlinks on our website. However, we do not endorse any third-party websites. Our services are specifically tailored for U.S. residents. Remember, past performance may not predict future results, and all investments carry risks. Rest assured, our dedicated team is committed to working with you in creating a profitable and secure investment portfolio. Thank you for choosing CoCreate Financial!
[/et_pb_text][/et_pb_column][/et_pb_row][/et_pb_section]Thinking about the future of your business? At CoCreate Financial, we work with business owners at all stages so that your business gives you the most opportunities to live the life you want. Whether you're just starting your business, making plans for strategic growth, or preparing for your next adventure, CoCreate Financial Advisors integrate business planning and advanced exit planning services with comprehensive financial planning and wealth management.
Where are you in your journey?
[et_pb_section fb_built="1" theme_builder_area="post_content" _builder_version="4.18.0" _module_preset="default"][et_pb_row _builder_version="4.18.0" _module_preset="default" theme_builder_area="post_content"][et_pb_column _builder_version="4.18.0" _module_preset="default" type="4_4" theme_builder_area="post_content"][et_pb_text _builder_version="4.18.0" _module_preset="default" theme_builder_area="post_content" hover_enabled="0" sticky_enabled="0"]News about Silicon Valley Bank’s failure has been somewhat of a nerve racking moment for those who remember the Lehman Brothers collapse before the crash in 2008. It’s an especially unnerving moment considering the economic challenges involved in unwinding the covid stimulus passed out over the past several years. We’ll continue to see turbulence for some time from these events in the coming months, but we’ve been well prepared for economic growth to slow under the pressures of inflation since 2020 and for a period rapidly rising interest rates long before that. So when we look at a bank failure in the context of our economy, and more specifically considering the specific businesses our clients own in their portfolios, we need to do so carefully and methodically. While there are a few similarities between the SBV and the Lehman Brothers collapses, the differences are far more striking and SVB’s failure will not do substantive damage to the economy and financial markets on its own.
Bank failures are actually quite common. According to the FDIC, there have been 73 failures in the past 10 years. These can happen for a variety of reasons, but the overwhelming majority are isolated problems that are the result of the failed bank’s business practices. Silicon Valley Bank’s failure is a perfect example of such and isolated, run-of-the-mill failure. Failures from systemic problems, like the Lehman Brothers collapse, are quite rare.
Most people struggle to understand the “bad loans” that caused the 2008 crisis. When congress established Fannie Mae and Freddie Mac to buy packaged loans from banks, they altered the mortgage industry forever. Instead of Banks making loans from their own capital, they had an instant investor—the Government. To stay competitive, banks had to adjust their business models so that they could originate loans and sell them according to Fannie or Freddie’s standards. These standards dramatically lowered standard requirements for a borrower. No longer on the hook for the a long-term, banks began to make loans and move on. This legislative action affected all banks, so it was systemic rather than isolated.
Fannie and Freddie package these loans together to be sold to private investors in investment vehicles called CMOs. Lehman Brothers was heavily invested in these complex investments. The problem was, congress had established a rule that forced the CMOs to be valued in a way that did not reflect the quality of the mortgages in each CMO. Because of these “mark-to-market” accounting requirements, investors had to way to understand the real value (or lack thereof) of what they owned. As a wave of foreclosures began, banks that were significantly tied to these CMOs struggled greatly. Lehman Brothers and others collapsed as a result.
Silicone Valley Bank is a different case. Sure, it’s a larger bank than most that fail and rapidly rising interest rates have affected it to a degree, but real reason for its failure has to do with its own business practices. Most banks diversify their products, loans, investments, and customers across a wide range of businesses and individuals. They also tend to be relatively conservative with their capital investments. SVB focused much of its business on venture capital and small publicly traded companies. These are both very high risk categories that have faced significant struggles post-covid, and SVB did not appropriately staff its risk management department, operating for nearly 8 months without a Chief Risk Officer. These are problems few banks face, and when they are well managed and diversified they will not have problems.
Rising interest rates have affected the banking industry, but we believe that most of the financial sector is quite healthy looking out a year or two. Think of how much more profit a bank can make on an 8% interest loan vs a 3% interest loan. The challenge, in the short term, is that depositors are expecting more interest when the bank’s loan portfolio is still producing at lower rates. For a simplified example, the bank made a loan to a customer last year at 7% at that time, they were paying interest on to customers CDs at 2%. That CD gave them the capital to make the loan, and the bank profited 5%. Now, the bank needs to pay 5% on their CDs to customers, but the loan was locked in at 7%, so the bank’s profit margin is only 2%. Soon, they will make a new loan at 10%, and be able to achieve their previous level of profit, or their variable rate loans will adjust and mitigate some of the impact of rising rates. Banks also have many other ways to generate income. Rising rates have been inevitable for some time now, and we’ve had confidence in banks with diverse revenue sources, substantial variable rate loans, and a strong deposit base.
All that to say, the banking system is in-tact. At the same time, its an important reminder to make sure if you have substantial assets at a particular bank, that you are fully covered by FDIC insurance. They will cover up to $250,000 per account category at each institution. Your accounts we manage at TD Ameritrade or Schwab have spread the cash balance among multiple banks so that you have sufficient coverage for cash. If you’re unsure about your situation, feel free to reach out to us at any time and we can help you evaluate your FDIC Insurance coverage.
[/et_pb_text][/et_pb_column][/et_pb_row][/et_pb_section]Our job as financial advisors is to help you navigate the challenging questions surrounding your financial resources. Most people start out with a specific financial question that fits into one of these three categories.
Perhaps you’re wondering if you have enough money to retire comfortably. Maybe you’ve been working toward a second career and need capital or supplemental income. You could even be evaluating a number of philanthropic or estate goals.
Starting with the specific issues that are on your mind, we’ll help you answer these questions and implement an effective plan to help you feel confident that you’ll always have enough.
“enough” is an elusive term. An immanently quantifiable expression of many things that are innately intangible—Success, Satisfaction, Impact, Purpose, Relationship, “enough” is more than the sum of your future expenses. As Financial Advisors, we try to connect to these things that really drive your present and future. This way you can maximize your wealth, which is much more than money. We call this Pursuing your Passion, and its more important than pursuing wealth.
One of the most fundamental aspects of what we do is work to create sustainable income streams for our clients. We have many tools at our disposal in meeting your income needs. For us, the most important part is avoiding the risks that affect your income negatively while simultaneously earning consistently rising cashflow in your portfolio.
If pursuing your passion is more than just pursuing wealth, then simply generating passive income isn’t enough. We focus on developing a financial architecture that more effectively drives you toward what matters to you. You can more effectively meet your goals when you have the appropriate retirement plans, capital funding, savings for your children’s future, giving strategies (think donor advised funds or family foundations), and legacy assets. Your financial architecture, when properly set up, can reduce your tax liability, simplify your day to day financial life, and create ways for you to engage future generations to be prepared to steward your legacy.
We bring together a lot of moving pieces in the effort of creating a future together. But we don’t just leave you with a laundry-list of complicated to-dos. We strive to work actively with your other financial professionals to manage each piece of the puzzle so you can focus your energy where it counts.
Dividend Income provides more stability to your portfolio and enhances your performance, especially during market crises. Today's general perspective on dividends is that they don't matter... clearly they do.
If you're like most people, who are in the left column, let us help you make sure you're in the best position possible to Pursue Your Passion!
2020 is in the running for one of the most bizarre years in American history. We’ve all spent most of the year just trying to decipher what’s happening. Some of us have been fortunate in the midst of it, and some of us have experienced great loss. At CoCreate Financial, we’ve been doing everything we can to support our local economy, from trying to help business owners make decisions on relief options to more than 100 contacts with legislators and officials. The way we see it, if our economy died and took our client’s livelihoods, it would be even more impactful than a market drop. There are quite a few things no one has ever seen before, including widespread economic shutdowns mandated in most states and massive stimulus packages that dwarf anything previously imagined. I’m tired of the term, but 2020 has truly been an unprecedented year—unlike any other. Our 2020 economic update is mostly an article about risks we are looking out for with hope and optimism.
We’ve also had our heads down, diving deep into a myriad of data and research trying to foresee various outcomes, both short-term and longer-term, that could affect the businesses our clients own in their portfolios. This has meant making meaningful, educated conclusions based on all of the available data in an environment when that data often means something different than it did before the shutdowns. That meant having to determine appropriate adjustments to the information, which was changing at a very rapid pace with very little consistency. This has made it difficult to put together relevant publications of any nature. By the time you finish a Google search on the topic of the day, the world has moved on to a new issue or data-point that appears to be contradictory to the first on the surface.
As we reach a point in time with a little more stability in data, we look forward to putting this year’s election season behind us. Overall, the businesses that are surviving the closures have shown their strength and have grown in their ability to adapt to new situations. There are substantial risks to mitigate in the near-term and long-term for investment portfolios, but we should see continued growth, albeit slower growth, for those who are invested selectively in high-quality businesses with a long-term perspective. We’ll address some of them below:
We’ll be brief on the topic of Covid-19 and its effects on the economy. They are extreme and very dramatic. They are also very temporary. There are three primary reasons the Virus and the gubernatorial closures will have a limited ongoing impact. The first is the amount we’ve learned about the virus and how to treat it. The initial wave of Covid in the US was dramatically different than the second, with deaths and hospitalizations decreasing by astonishing proportions after their March peak (even while cases rose to new levels. We made great strides in testing, intervention techniques, and therapeutics. Since the time we began to see such drastic improvements in our response, Covid statistics look much more like those of illnesses we’ve lived with every day and payed less attention to. Because of this, we believe the impacts of Covid-19 on the economy will not be permanent.
Secondly, most people seem to believe the Covid situation has been turned into a political issue and the election is immanent. We agree. We also think that much of the Covid propaganda (from all sides) will quiet in November and getting life back to normal will become the path to every politician’s next reelection.
Third, as we’ve watched the numbers, from unemployment to the number of people looking up directions on their phones each day, something significant began to stand out. First, people self-regulated before governors issued their various mandates and then after a period, people slowly began to reengage life. Unemployment is still high, but it is artificial because most of the businesses that have survived are already wanting to re-open and re-hire the workers they temporarily laid off. Americans have been making every sacrifice they can to keep from spreading the virus or contracting it, while continuing to live life to the best of their ability regardless of their governor’s orders. They have been putting conscience and necessity ahead of rule which will help us survive our politicians who care more about the outcome of the election than they do the people they supposedly serve.
The biggest long-term impact will be the extreme number of businesses that are not reopening their doors. In a quarterly economic report published by Yelp regarding the status of their listed businesses, some 55% of businesses that reported closing for Covid stated they would not re-open their doors. To date, there are more than 100,000 permanent closures that we know of. That number has undoubtedly grown as the year has progressed. To reach a full recovery, we will need to replace these businesses with new ones.
There is a positive side to the employment situation in that businesses have had the opportunity to creatively redesign their staffing structures and those with an entrepreneurial spirit have dreamed up new ideas. They will create exciting new businesses out of a combination of passion and necessity. While we don’t believe these silver linings make the shutdowns tolerable—especially considering their impact on things like domestic violence, child abuse, addiction, and suicide, but we do believe in our ability as Americans to make the most of it.
Pumping money into the economy in a crisis makes a big difference. In the midst of state governments shutting down commerce, it was perhaps necessary for survival. When we see it play out, stimulus packages look a lot like an athlete on steroids—it enhances immediate performance, the athlete gets credited with an exceptional feat of athleticism and experiences the long-term health consequences of steroid use. In terms of Stimulus, the Cares Act stimulus was far and away the most effective stimulus package in recorded history. Not only was the amount of federal dollars handed out off the charts, but it was done in a way that actually made it into the hands of businesses and consumers. We don’t have much to compare this to and can’t even look at the “Quantitative Easing” that was intended to stimulate the economy after the 2008-09 crisis because those funds never made it into circulation. This shouldn’t cause any kind of crash. Instead, it will slow the overall growth of the economy and should cause astute investors to select individual investments rather than trying to replicate the US economy broadly.
When it comes to personal finance, we like to say “debt always mortgages the future.” This is true in Government Fiscal Policy as well. The more we borrow, the more we have to pay back at a future date. If we look at the US Economy in terms of GDP (essentially the dollar value of all of our commerce), there is a finite amount of money to go around. The government taxes individuals and businesses and also spends a piece of the pie (GDP). When they have more debt to pay, they need a bigger slice, which takes resources away from individuals and businesses who are the ones produce economic growth. Deficits don’t cause crashes, but create long-term obstacles for the growth of the economy. It is conceivable, however, that a rapid rise in US debt could result in the US government’s bond issues affecting the marketability of other fixed income securities (we’ve been avoiding these in our accounts because of their instability after Dodd Frank, QE, and potentially now this).
“The Fed,” meaning the Federal Reserve Bank and its board decide what rates they will pay to banks or other major financial institutions that want to borrow from them. They will lend and recall these loans to influence how much capital is floating around in the economy. This activity influences inflation, and the Federal Reserve has had a intermediate/long-term goal of 2.0% inflation. We’ve experienced inflation below 2.0% for some time, so they have recently announced they are willing to let inflation exceed 2.0% to bring balance around their target.
Inflation has to do with how many dollars are in circulation relative to the stuff being bought & sold. Simply put, if a dollar bill is hard to come by and a box of cereal is not, then you can buy a lot of cereal with your dollar. If one hundred-dollar bills rained from the sky and covered the ground, one dollar wouldn’t buy much of anything at all. We measure this in economics. “M1” is how much money exists, which is whatever the Government creates at its whimsy. The government can create tons of money that never enters into the economy (which is what happened in response to the Great Recession). It basically sits on the shelf and has no impact on the economy. When it actually goes into use, it becomes “M2.” To our knowledge, the amount of money in circulation (M2) has never “rained from the sky” like it did earlier this year. Investments and financial plans will need to accommodate for higher levels of inflation for the foreseeable future.
It’s important to remember that every politician’s approach to governing involves tradeoffs based on their political priorities. Our assessment of economic and tax policy is mathematical rather than philosophical and will be critical in projecting potential outcomes over the next 6 years(ish). in our assessment of this, we’re attempting to look at the economic/fiscal policies in isolation from everything else, which is not how any of us should consider our ballots. You should vote by making educated decisions on a number of issues that reflect your personal convictions. Also, the economic/tax situation doesn’t change on election day. Frankly, the President isn’t actually as important in these policies as we tend to think. Many of these issues will be addressed in Congress. We will have time to patiently adapt after the election, though “the markets” may quickly overreact and then level out.
Fun Fact: the federal government has never balanced a budget when their spending has exceeded 19% of GDP.
We’ll spend less time addressing the philosophies of our present administration because a second term will likely bring similar results. The extreme political fighting between parties in the media and on twitter acted like a smoke-screen as the President was more active in policy making than almost any other president in history (whether you feel its for better or worse). The President loosened regulation that various industries felt was overly burdensome in favor of free-markets and consumer choice, began to overhaul the tax system and negotiated new trade deals that removed hundreds tariffs that were disadvantageous to the United States. Admittedly, we didn’t believe the latter would work out, but it’s hard to argue with the economic results. That’s not to say these things don’t come with a cost, but the economy liked the policy enough that it remained resilient in the midst of a crisis the likes of which we haven’t seen since the Civil War. We’re getting back on track.
If there is a downside to the President’s fiscal policy, it’s that he is overeager to stimulate the economy and is too willing to borrow money to fund excessive government spending (more on that later).
Biden, the Challenger’s, proposed policy looks like what you would expect from someone running for office—its convoluted and lacks detail. If he wins, we’ll eventually see it with more clarity. What Biden and Harris have proposed isn’t great news for the overall economy, but economics isn’t really on their list of political priorities. Again, we’re not trying to endorse a candidate, we’re just looking critically at one issue in isolation.
If Biden’s administration is successful at implementing their proposed changes, they will add a number of different taxes to businesses, from raising tax rates on business income to adding a tax on US-based businesses assets that are not currently US-based and doubling the Global Intangible Low Tax Income. These changes will add about $2.6 billion to the government’s revenue, but will change profit margins substantially. The hit would be about 500,000 jobs and a decrease in the intrinsic market value of impacted businesses somewhere between 3%-10%. This will be a difficult challenge especially when paired with the reinstatement of regulations that were challenging to businesses. Again, this is one issue among many, and his intent would be to expand entitlements with the $2.6 billion to offset the difference. One of the biggest challenges with this policy is that it will reduce private retirement funding sources by that same 3%-10%, and the 2.6 billion likely won’t be enough to replace it.
The challenger’s proposed policies will impact individuals differently than corporations. For individuals earning over $400,000/year, the impact may be rather extreme. The marginal tax rate will increase to 39.6%, and it will limit itemized deductions to 28% of their incomes (most of which are charitable contributions). It’s important to make note that his promise not to raise the marginal tax rate for those earning less than $400,000/year does not necessarily mean the taxes they owe will not increase. The Tax Foundation reports in their extensive analysis, “The bottom 20 percent On a dynamic basis, the Tax Foundation’s General Equilibrium Model estimates that the plan would reduce after-tax incomes by about 2.5 percent across all income groups over the long run. The lower four income quintiles would see a decrease in after-tax incomes of at least 1.1 percent. Taxpayers in between the 95th and 99th percentiles would see their after-tax income drop by 2 percent, while taxpayers in the 99th percentile and up would have a more significant reduction in their after-tax income of about 7.6 percent.”[1]
Perhaps more significant to the individual at all income levels is how his policies will impact 401(k)s and retirement savings. After the impact of the corporate tax changes reduces intrinsic values of 401(k) investments, his proposed plan will make dramatic changes in the deductibility of retirement savings and the availability in employer plans.[2] The proposal intends to eliminate deductibility of 401(k) contributions (to be taxed at withdrawal), and replace them with a matching tax credit. We’re ok with this at first glance because it could mean lower taxes for savers in the immediate future, but it will actually end up causing substantial government budget issues over the long-term as it disrupts the tax deferral system on which retirement savings accounts rely. Biden’s plan will also reduce the total amount an individual can contribute each year to 20% of their income or $20,000 (from 50% & $53k) including their employer’s contribution. This will have a tremendous impact on individuals at all income levels and disincentivize employer benefit plans altogether.
Once more, this is not intended to be a pro-Trump or anti-Biden commentary. They have different priorities, and our focus is on projecting a range of potential economic outcomes and developing a corresponding playbook to help maintain our clients income and account values over the long term. We are preparing for each risk and opportunity as they seem to arise, and very unlikely that Biden’s policy will bear much resemblance to its current form after the House and Senate put it together.
Over the past decade, it’s been hard to keep pace with the growth of huge Facebook, Amazon, Google (now Alphabet Inc), and Apple stocks. There is even an acronym, FANG (N for Netflix). Together, Facebook, Amazon, Alphabet and Apple make up about 17% of the S&P500 (which is why index investing has appeared to be so attractive).
We are about to see the end of an era, and it’s been on the horizon for a very long time. Yesterday, the House of Representatives Subcommittee on Antitrust issued a 449 page report detailing their investigation on the ways in which these companies have violated antitrust rules, abused customer privacy, and used their monopolies to control/eliminate their competitors and the free press. It was a fascinating read; however long. The committee stated that the house should pursue vigorous enforcement of antitrust laws against these companies. This will change the fabric of the S&P 500 and the way many people think about how to invest.
I remember two times in my career in which the average stock was down about 33% but the S&P 500 was not largely because of these companies. There were two things that thrived in these “silent bear markets,” strategically selected, dividend-yielding stocks and the “FANG” stocks (including a few similar companies). These Big Tech companies have had a huge impact in broad-based market returns. Finally, the government has recognized these as monopolies in a bipartisan investigation and will likely split them into multiple entities. We are working on another article to explain the impact of this in more detail, but in short, it will make mirroring the S&P 500 quite unattractive as an investment.
Consider this, if the average value of these 4 companies is 58 times their earnings (PE ratio) and the Government eliminates the competitive advantage attributable to their respective monopolies by dividing each company into 4 separate entities (the number 4 is arbitrary for illustration), the resulting companies may each be members of the S&P 500, but none of them will likely have significant influence on its return because of their reduced size. Furthermore, if their earnings multiples are close to a historical average for the other companies in the S&P 500 without the benefits of monopoly (about 15.8), then their cumulative values drop by 72.8% and the effect on the S&P 500 index is a 12.3% decline in value. From there, the S&P 500 will look much more like an average than an outlier. With the exception of Apple, who we expect to be just fine based on the specific findings, we had very little exposure to these companies because of the imminent and inherent risk that is just now materializing.
Not only are we at the beginning of a rising interest rate environment, which always causes the value of fixed income instruments to decline, but we’re approaching a season in which inflation will begin to accelerate (meaning that the fixed payment you receive today will buy less stuff tomorrow). The only way to increase your fixed income is to sell the investment at its reduced value (absorbing the loss), to buy new investments that pay more. To get the increased payments, you will likely be taking on more risk and paying a higher price for it.
Alternatively, dividend yielding stocks are an attractive alternative in this environment for producing income. When speaking of companies with good financial strength, we know that the dividend payments are extremely stable. Historically, these high-quality companies even tend to increase their dividend payments in times of extreme economic crisis. This gives you a rising income rather than a fixed income. More important to our inflation protection strategy, owning businesses (stocks), naturally adjusts to the strength of the dollar. Consider this example, as inflation occurs, the candy bar that cost 5¢ now costs 50¢. The Candy Co. has adjusted their prices to account for the strength of the dollar, their cost shifted from 3¢ to 30¢ which means their profit margin is the same. If they generally pay out 50% of their profit to the people who own the Candy Co, then the dividend has risen perfectly with inflation. In an ideal world, the Candy Co. would also find ways to increase their profit and grow their payout even more. Dividends are the ideal alternative to replace fixed income in a rising inflation environment.
We can expect the S&P 500 to lose its luster in favor of strategically identified investments. This is a highly complicated issue which we are tackling in an upcoming article, but it is significant for anyone engaged in “index investing.” Many investors have joined the fad of buying S&P 500 index funds started in the late 90s because of their low cost and competitive return. The biggest reason for the trend has been because of the obscene amount of marketing resources that were expended to promote these funds which back a now-studied and disproven theory that you can’t do better than the index.
There are a number of things that often don’t translate into the consumer’s thought process when it comes to the S&P 500. The most relevant of which is the concept of a “Cap-Weighted Index.” The S&P 500 is a cap weighted index, which means that each company participates in the overall performance of the index based on its total market value (called Market Capitalization). In today’s stock market, the top 10 or so companies account for the bulk of the index’s return. Over the past 5 years, the “FANG” stocks (Facebook, Amazon, Netflix, and Google) have been primary drivers in the S&P 500 index performing exceptionally well.
With the onset of bi-partisan work to “vigorously” pursue anti-trust enforcement against Amazon, Google, Facebook, and Apple, we’ll see a significant change to the structure and performance of the index. Investors will no longer be able to rely on the momentum of Amazon, Google and Facebook to make their index fund efficient.
The markets tend to overreact to headline news… even when it is as significant as election results. The best tool in our belt to manage the risks and opportunities we will see in the coming months is our cash allocation. As broad market risks grow, we can increase cash proportionally. Increasing cash allows us to mitigate losses and then reinvest at discounted prices. If the market explodes on a given headline, we can sell investments at a higher price to reinvest when the broader markets return to their normal levels. When dealing with the longer-term impacts, we need to remember that we are investing in individual businesses rather than the broader market. Each of the businesses in which you own an equity stake, will experience the impacts of these issues differently. As potential long-term risks grow for a particular company or their business model, we have a number of different choices depending on the probability and severity of whatever is on the table. We will want to be ready to hedge against certain risks (such as limiting losses with options contracts, though this comes with its own cost), limit our exposure to the company, or transition to a competing business that has a better opportunity to thrive in the environment.
[1] https://taxfoundation.org/joe-biden-tax-plan-2020/
[2] There is a great detailed article on the topic of 401(k)s at https://www.forbes.com/sites/ebauer/2020/08/25/joe-biden-promises-to-take-away-401k-style-retirement-savings-whats-that-mean/#6c4fc7164eb0
This article was written as a whitepaper we used prior to the extreme impact the Coronavirus lock-downs had on the employment situation across the US. Although unemployment rates skyrocketed and it it looks like a employer's labor market, hiring and finding the right employees is just as hard as it was before the virus, but as the country reopens, there will be more employers looking to fill open positions. Having an excellent employee retention strategy is more important than ever. We've published the resource below to help you start thinking about your retention strategy.
Nearly every employer, manager, and small business owner have been wrestling with the same question lately. Unemployment has been at a record low. The economy has recovered. Yet somehow some business can’t even stay open because their employees are moving on to new opportunities. HOW do you keep good employees for the long term?
CoCreate Financial’s most foundational conviction is that we “create the future… together.” We believe we do this for ourselves and, more importantly, those around us. As employers, we have one of the most profound ways to impact others—our businesses. By creating a positive employee culture and good employee benefit offerings, we can help our employees thrive and keep them around for the long term.
This article will dive into a few of the important pieces to an effective employee retention strategy and particular benefits you can use to create a magnetic business. Of Course, you can schedule an appointment with a CoCreate Financial Advisor to discuss your strategy.
Numerous studies have investigated the reasons employees leave their employers, and all have shown that compensation is rarely the primary reason an employee leaves their post. This has become a fairly well circulated fact, which, by now, is almost old news. Pay is often a job-change catalyst when an employee feels dissatisfied for other reasons. The biggest of these comes down to leadership within your business. After all, it’s about turning our employees into our business’ most avid fans.
For any of us, thinking critically about our own behavioral tendencies and professional philosophies, isn’t particularly fun. Often it can feel like the least effective use of our time. But a little self-reflection always goes a long way.
We’re all a product of context… Writing both as a Millennial and a business owner, I can fairly say that my generation was conditioned to approach their careers with a fend-for-yourself mentality. Big-Media, ENRON (et al), a Great Recession at the wrong time, and a highly politicized world of social media has conditioned many Millennials to be skeptical of business and “the elite” who are the owners. Also, if any business can go down in flames—or anybody can be laid off and struggle to get back on their feet, then pay-checks, retirement accounts, promises of the future, are all somewhat fleeting. (There were also a number of healthy perspectives that developed for Millennials too, like their emphasis on community.) I don’t think these skeptical presuppositions are remotely accurate. I’m not even sure how aware most in my generation are even conscious of their perspectives, but they insist that business owners and management must engage their employees differently.
There are a lot of resources on leading and developing your employees well (here are a two: research on generational differences; The Harvard Business Review), so I’ll only address two relevant ideas in this article.
You have to lead by example on the job, but you need to lead by example in commitment too. You have to commit to your cause (your business mission) and you need to show you’re willing to do whatever it takes to accomplish your mission (that means even the things that are “beneath you”). After all, your engaged employee is willing to do whatever you say it takes but if you aren’t willing to engage in a particular task, you either don’t really care about your cause or the task isn’t worth doing. This is old news.
You have to be “in-it” with them. There is another side to the paradigm. Being able to retain good employees means transcending the on-the-job management duties of leadership and becoming human with them. The need to see you connect with their experience of life and the world. This bridges the conceptual gap (however subconscious) for millennials between “elite” or “corporation” and “leader” or “professional family.” This doesn’t mean you have to agree with worldview or acquiesce in matters of business. Have conviction and give direction; just do so while demonstrating understanding and commitment.
Your employees need to know that they are your priority. Not the company’s priority—yours. This means you need to engage with them, ask for feedback AND RECEIVE IT (with humility and genuine interest), and you need to demonstrate your willingness (read enthusiasm) to invest in them. This is the foundation of your corporate culture. [you can’t just put something in a manual, a policy or memo… Culture is driven by you as a leader]
All of your employee benefits, compensation plans, and vacation packages have to be consistent with your culture and your heart as THE leader of your business. Any dissonance will engage the employee’s inner-skeptic.
Again, each of us is a product of context. Our perspectives, no matter how right or wrong they may be, came from our experiences. Yours did, and so did mine. When we engage others, we need to honor the experiences that led to their perspectives and values systems (that’s not to say we need to agree or necessarily validate their perspectives at the expense of our own personal conviction). This is one way you can apply the “personal” to your leadership and create an effective filter for creating employee benefits. Let’s take a look at some things that have been said about Millennials as an example, bearing in mind that these stereotypes don’t actually represent the majority of us.
| You’ve heard it said… | What experience shaped their perspective? | When we honor the experience we can create an effective solution within the employee retention strategy. |
| Millennials will only work at your company for a year or two and then quit. | They are younger and are focused on achieving a variety of goals, and are also racing to reach a place of financial stability their parents never had (you never told us, but we all witnessed it…). They spent an unusually high amount of time in college (possibly multiple degrees) before entering the work-force, so they value learning and growing into new challenges. | At your business, you can create pathways for growth, exploration, and developing new ideas to help the company grow (all within defined limits). Also, by laying out a career trajectory, you can create a way for them to achieve from within. They know that you usually grow your professional capacity more when you change companies, but this doesn’t have to be true at your business. |
| Write your example here: |
Your business has a unique mix of demographics. Employees in different life stages have differing worldviews, life experiences, urgent needs, etc. When your beginning to plan your employee retention strategies, you should make an evaluation of what these are for your business. I would recommend making a short list of all of your employees (or if you have a large number of employees, creating profiles that represent common personalities) and answering three questions for each:
Now that you have [done the above], you’re ready to offer a diverse range of benefits to your staff, because each one of them matters to you.
For a long time, many small employers have prioritized cost-effectiveness of their benefit plans, but in today’s competitive market for employees, the winner is the employer who puts retention-effectiveness first.
You should also market the exceptional quality of your benefits to your employees and why you care about providing each individual benefit.
Here are a few benefits you will want to consider as you specifically tailor your benefit plan to your unique employee demographics. Of course, you can always enlist the help of a CoCreate Financial Advisor to design and implement the employee retention strategy that is right for you.
Retirement plan options can become very complex, but most small-midsized employers opt for Profit-sharing/401(k) plans or Simple IRA plans. Here are a couple of considerations in selecting the right plan.
Many of your employees are working hard to pay down their student loan debt. This group of age-diverse employees feel a sense of urgency to get out from under their over-priced education. Not only do they have the emotional complications of having a massive debt hanging over their heads, they also have the immediate cash flow impact of its payments. Helping to cover the cost of this debt makes an immediate impact for your employees.
To make this benefit even more significant, many people wait to begin start saving for retirement in a meaningful way until after they have paid off their loans. This means that the employees student loans are hurting your employees doubly (interest paid & interest not being earned) while diminishing the value of your retirement plan benefit. By implementing a student loan repayment benefit, you can significantly help your employees and demonstrate you care about their situation right now.
Employer Sponsored 529 plans are becoming increasingly popular as well as help with student loans. There are some great aspects to this benefit but also some considerations to be aware of. 529 plans are tax-incentivized accounts, but the tax incentives are not as great as retirement accounts, however they may be more flexible than you realize.
When an individual sets up a 529 account their contributions are not deductible on their Federal taxes; however, most states offer some sort of tax benefit for contributions. In Montana you can deduct the full amount of your 529 contribution from your state income taxes. While there are currently 7 states who have incentivized employers to contribute to 529 accounts with additional tax benefits, in Montana, like most states, the tax structure remains the same regardless of if an individual or employer is contributing to the account. Any employer 529 contributions are taxable income, but your employee does receive a deduction on their state taxes.
One very powerful benefit you can use to motivate and retain your employees is the non-qualified deferred compensation plan. These plans are highly customizable and can provide benefits to your employees that become vested & available to employees at specified dates or triggering events (i.e. retirement). The date could be a ten-year anniversary, a retirement age, or specific year. The benefits can also be designed to be awarded only if your employee or company meets certain performance objectives. You can fund the employees future benefits now, create a plan to informally fund their benefits, or simply pay the benefits out of your cash flow when they become eligible to receive it. Because of the flexibility these plans provide, and the significant legal complexities in Section 409(a), These plans should always be established in conjunction with an attorney with experience in this area of law.
While non-qualified deferred compensation plans are often referred to as “golden handcuffs,” and often used for key executives or high earning employees, they can be used effectively to provide incentives and longevity benefits for any dedicated employee who does significant work for your business.
Never underestimate the power of a thank-you gift. Plan to identify a success for each employee at least once a year and give them a thoughtful gift in recognition. Do it individually. Do it thoughtfully. Do it at random. If the gift needs to be included in their taxable income, be sure to cover the tax liability for them.
We believe it is our duty to help businesses in their time of need. During the COVID-19 outbreak, we are offering free consultation to businesses who need help navigating the relief programs.
The best way to choose your relief options is to start with your business's needs. This flowchart can guide your thought process.
