(406) 206-7571
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] [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_video src="https://youtu.be/vqifM8g92WE" _builder_version="4.18.0" _module_preset="default" theme_builder_area="post_content" hover_enabled="0" sticky_enabled="0"][/et_pb_video][/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!
If you own rental properties, in the last year and a half you probably have asked the question, “Should I sell?” Maybe it is a thought you have quickly pushed to the side, or maybe you have already unloaded a property or two and are deciding how to best utilize your proceeds. There is a collection of reasons every landlord is asking this question right now and they are important to examine. But even if you decide you should sell a property, the next question is if you can do something else with your proceeds to replace the steady income you received form your rental. In this article we are going to examine the reasons why you should carefully evaluate your real estate holdings at this moment, the considerations you should include in your evaluation specific to your property and situation and finally how you can structure investments to replace, and maybe even improve, the income you received off your real estate.
It is no secret that many investors have been off-loading their rental real estate holdings, especially residential rentals. There are some obvious reasons as to why this is the case, and there are some additional reasons that are less popular to discuss. Let’s start with the obvious. The shut down orders precipitated by COVID caused people to value “home” more and sent many people looking for larger spaces and the prices of homes skyrocketed. There are some additional reasons for the dramatic increase in home prices, but we are not going to get into all of those here. Suffice it to say that we have had a national housing shortage for many years and the US Government’s response to COVID created a perfect storm. It really doesn’t matter where you are in the country, home prices had a significant jump (even Detroit is up more than 18%)[1]. As a landlord, it is natural to ask, “If the market is high, is it a good time to sell?”
In the investment world we are always talking about risk vs. return. Now, the relationship between risk and return is not as clear cut and consistent as many would have you believe; however, it is only logical that if you have a higher risk, you should demand a higher return to compensate you for the additional risk. In March of 2020 the US shut down, and as all landlords are aware, one of the emergency orders put in place was the eviction memorandum which prohibited landlords from evicting tenants for non-payment of rent if their inability to pay was related to COVID. In its initial form, the eviction memorandum was intended to be short term, but it extended over a year and a half.
There are many types of risk, one of them is regulatory or governmental risk and this is a prime example. Our government changed the rules and in doing so changed the risk of owning residential real estate rentals. We have now entered a reality in which if you have a renter who stops paying rent you may not have any recourse for a significant period of time depending on what is going on in the world. If these moratoriums become precedent, these government sponsored rent droughts might occur on a more frequent basis than we would like to envision. Technically, under the recent eviction moratoriums the tenant will still owe all of their back rent, but if they stop paying for a year, we all know it is unlikely you will ever see that money. An investor has two reasonable options when risk is suddenly elevated – they can demand more return, or they can sell the investment. We have seen this take place very clearly as landlords have responded by raising rents and/or selling their rental holdings.
While some owners of residential real estate are large apartment complex companies, many are individuals that own a handful of properties, or maybe even only one or two. For the companies that have many units, the risk, while still elevated, can be dispersed among their many holdings. This is more difficult for the investor with only a few properties. In this case, a tenant who stops paying may have a significant impact on your ability to pay your own bills and it is difficult to raise the rent to a level that would mitigate or appropriately compensate you for this risk. While often effective, real estate rentals are frequently not diversified—a concentrated risk for a property owner. It can be highly effective when things are going well, but unmitigated catastrophe when things turn sour. I want to pause here for a bit of a sidebar. This elevated risk of residential real estate rentals highlights the significance of having appropriate cash reserves. If you determine the best choice is for you to maintain some or all of your rental properties, it is critical that you maintain appropriate cash reserves. The determination of the right amount of cash reserves is specific to your situation and your various income sources, but I would at least start with asking “could I still pay all my bills if I had no rental income for a year?”
Rental properties are attractive to many investors because of their ability to provide a steady income stream. Many people utilize a strategy of acquiring a rental property during the wealth accumulation phase of their life through conventional home financing, using the rents to pay the mortgage on the property so that it is paid off around the time of their retirement at which point they can take almost all of the rents as income. Whether or not you have started using your rental income for your living expenses, the goal is to create steady income at some point in time. The good news is that there are multiple ways to create steady income streams that are diversified and give you far more flexibility than a rental property.
At CoCreate Financial we craft portfolios owning high quality, stable businesses that are committed to paying their owners a portion of their profit in regular increments. This functions a lot like a good real estate investment. As an owner you receive both compensation for your ownership through these dividend payments (similar to rents), as well as appreciation of the value of your shares as the company continues to grow and increases their dividend payments over time. This method provides a steady income stream as well as greater flexibility in your finances than owning real estate.
Let’s start with examining the income stream in a bit more detail. Dividend payments on equity investments are generally expressed as a percentage of the current value of the share of stock, however, they are actually a set dollar amount established by the Board of Directors of the corporation and are generally paid out quarterly or semi-annually. The Board of Directors will typically evaluate the dividend on an annual basis, so it does not change with fluctuations in the market. We look for companies who have a long history of regularly increasing their dividend and have the available cash flow to continue doing so. This means that dividend payments continue to come into your investment account (or personal checking account if you so choose), even when the market is in a slump, providing stability to your cash flows.[2] Investments selected for their financial strength and dividend-paying consistency typically do not decrease their dividends in turbulent times (they often increase their payout). The other advantage of a diversified dividend-paying portfolio is that it provides a rising stream of income which is more resistant to inflation than most other methods of generating investment income and does not require you to actively increase a tenant’s rent.
But, as in real estate, we want to see a portfolio that appreciates as well as produces income. The good news is that this is also a benefit of high-quality dividend-paying stocks. And, to make things even better, the growth of each stock’s value in your portfolio is based, in large -part, on the present value of real cash flow and not solely on speculation about its future sale price. When you buy a company that pays a dividend, you are buying an income stream. As the company continues to raise their dividend over time, the value of the income stream rises which drives the value of the underlying security.
Okay, let’s say you are concerned about the newly amplified risks in residential real estate and/or you are attracted to the prices you are seeing similar properties around town. Before you give your tenants notice and throw up a for-sale sign, you want to make sure you have made a full analysis of your situation.
The current long-term capital gains tax rate tops out at 20% and this will likely increase in the very near future based on legislation proposed by democrats in Congress. However, there is generally another component of rental real estate taxes which is depreciation recapture. You will recall that owning real estate has been great for your taxes. This is because the IRS allows you to deduct depreciation, which is supposed to account for an asset being used up or worn out. This is a little different for real estate than a business vehicle because real estate typically appreciates in value. Essentially, when you sell the property, if it has appreciated in value the IRS wants to recover those previous tax breaks from you.
The calculation for depreciation recapture is a bit complicated and very specific to your situation, so we are not going to get into the details of it in this article. If you are considering selling a rental property, it is very important you discuss the tax implications with your CPA so you have a clear understanding of how much is going to be shaved off your proceeds for taxes. You may also be able to mitigate some of your taxes through retirement plan contributions and such, but to maximize your options you will want to be sure you are planning well in advance.
In addition to being aware of the tax implications, do not forget to also account for the cost of selling your property. Typically, sellers pay the closing costs of real estate transaction at 6% of the sale price.
When you compare your other investment opportunities it is important that you use your estimated net proceeds from your real estate sale, not the market value of the property. Your net proceeds are what you have left after sale costs, taxes and paying off any loans against the property.
The unfortunate reality is that while real estate investments have been one effective workhorse wealth building and income strategy for a long time, the amplified risks demand careful evaluation by every investor. There will certainly continue to be opportunities in real estate, but these should be considered in the context of the newly established precedent in the current regulatory environment. Especially for individual investors who rely on the income from their real estate investments, a strategically managed, dividend focused portfolio may prove to be a more flexible, diversified and efficient investment. If you are starting to consider transitioning out of a real estate investment, or are in the process of finding a replacement income stream from the recent sale of property, schedule a call with one of us to start exploring your options.
[1] Source: Case-Schiller MI-Detroit Home Price Index as of 10/12/2021.
[2] Disclosure: while many companies have routinely increased dividend payments for decades, Dividend payments are determined by the board of directors, are subject to the financial condition of the issuing company and cannot be guaranteed.
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
It is a big decision to engage a professional financial advisor and it is helpful to know what you should expect in the process. At CoCreate Financial, we work a little differently than most firms. This article will give you an overview of the process we use to allow clients to explore our firm and initiate an effective, long-term planning and asset management relationship.
We are an intentionally small firm providing highly personalized investment and wealth management services to our clients. Our clients are people who are connected to their purpose. Rather than managing their investments and obsessing over the details of their financial plan, they want to be engaging the people close to them, building their businesses, experiencing the joys of life, and serving their community. We come along side our clients and work to align their financial resources to support them in pursuing their passions and the things that matter most in life.
In order to accomplish this, we have to be the right fit for each other. We have designed our process so that we can both evaluate the potential of a long-term professional relationship along with exploring the specifics of what your financial planning process will look like before either of us makes a commitment.
The first step is to schedule a 30-minute “Find out about CoCreate” phone call by visiting cocreatefinancial.com/schedule and picking a time that will work for you. On the phone call, we will want to hear about the basics of your financial situation as well as your goals and plans. We will ask lots of questions to gain an understanding of who you are and where you want to be headed. We will share about our firm and an overview of how we would engage in your specific situation.
If it appears that we might be a good fit, we will continue the process by scheduling a 1 hour in person (or remote) meeting. Generally, we will also request you provide us with some specific documents and information regarding your situation and the items we discussed before the next meeting.
At our 1-hour meeting, we will examine your situation in greater detail and with more specifics. As we go through the meeting, we will outline the beginnings of your financial plan and how we would assist and support you throughout the different stages of your life. We will discuss any financial questions you have as well as any questions regarding our firm and process.
We will end the meeting with requesting you take some time to consider if our firm is the right fit for you as we do the same. We will call you within a few days to let you know if we determined our services will be able to effectively meet the unique needs of your situation and if we believe we are a good fit for working with each other. At that point, you can let us know if you are ready to start moving forward, or take more time to decide if necessary.
We value this process because we believe it sets us on a path for productive, long-term relationships with our clients. We take a limited number of new clients per quarter in order to ensure a great experience for both our new clients as well as our existing clients.
We hope this overview is helpful in understanding what to expect if you chose to explore working with our firm. If you would like to start a conversation about how personal financial planning may benefit you, schedule a 30-minute phone call with us today. We look forward to talking with you soon!
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.
COVID-19 is here. now how do you invest in the wake of the 2020 Crash?
I’ve looked at hundreds of investment portfolios, and I’ve gone through the materials most advisors have used to create them (speaking generally of course). Occasionally, I’ll see an account statement or a portfolio model that stands out, but most of the time, they all look about the same. While I take a different approach than most, I feel the need to share some important information that will help your portfolio recover. If you’re already a client of mine, this won’t apply, but if you’re in the 90% of people with the same general allocation… Go get your statements… Listen up.
One of the biggest mistakes financial advisors make is assuming that the quality of your investments doesn’t matter as long as the portfolio as a whole seems ok. We can get into how Modern Portfolio Theory and the Efficient Market Hypothesis became twisted around since their development in the 1950’s & 60’s, but that would take a book (if you have questions, We would be happy to talk with you). Financial Advisors have been taught that the only risk that matters is the volatility of your portfolio. There are other, more severe, risks to which you’ve probably been exposed—all in the name of diversification.[1]
Look at your statement: You’ll likely find several investments with the terms: “high yield,” or “high income.” (on occasion, they will label these as income “opportunities”). These are called “junk bonds,” officially. They are “below investment grade” loans made to governments, corporations, and municipalities with particularly poor credit. They pay a high interest rate because they have more significant default risks. In good times, it’s an unwise financial decision to lend money to someone who can’t pay it back. Why do we do this in our investment portfolios? (FYI, because their price moves differently that “stocks” is a dumb answer.) You don’t need these to be diversified, and the times of crisis, in which bonds might help stabilize your portfolio, will certainly increase the risks that your borrowers won’t make their loan payments. If they don’t, you lose 100% instead of the 10, 20, of 30% you were trying to avoid.
Highlight these on your statements, sell them, and NEVER buy them back.
By “walking tall,” I mean get rid of your “short” funds. These are investments that make money when the stock market declines. These are generally a gamble and are among the rare investments that have unlimited losses when the market goes up in value. It’s well established fact that the stock market increases over time, so these are poor long-term investments. If you have them, they served you well in the recent drop, but as we approach the end of the decline, you’ll want to trade them out.
The impact of the COVID-19 outbreak will hit developing nations much harder that it will the United States (and a few other countries with highly developed economies). Most people own “emerging markets” mutual funds, ETFs, or even index funds. These are higher “risk” investments (read: more volatile), and actually have much higher risks (political risks, stability of the business themselves, Currency & Trade risks, etc.). Advisors keep these in your portfolio to be open to the opportunity that could arise if one country experiences rapid economic growth. Most people, however have a few funds that just own other funds focused on every country around the globe. These have been hard hit in the midst of COVID-19, and they will continue to lose value longer then that United States, and won’t recover quickly.
I’ve always believed with conviction, that if you have a significantly high probability of losing money on a given investment, it’s best not to own it. Like Junk Bonds, these don’t add much of anything to your diversification and they certainly won’t help your portfolio in the coming months, perhaps years. It’s time to move to investments primarily based in the United States.
Most people have a number of “index” funds in their portfolio. An “index” is just a fancy way of making an average. Indexes include a defined set of investments, usually weighted by size. They became commonplace in the 1960s when William Sharpe decided that they would be an effective way to measure covariance (at the time, measuring covariance of individual investments would have been impossible to consistently do by hand). They were never intended to be an investment, but became a staple in the 1990s and early 2000s. As quickly as they became popular, it became clear that indexes were anything but efficient and simple adjustments could almost ensure superior results. There are dozens of approaches, but they all perform a similar function: eliminate the investments that are clearly below average. Owning the index creates reasonably good returns, especially when times are good, but exposes your portfolio to the below-average investments you would probably never choose to own. For example, the Russel 3000 contains approximately 90% of publicly traded US companies. Owning the Russel 3000, you’ll undoubtedly own a number of small, poorly-run companies that will struggle to recover from the impact of COVID-19.
Instead of owning indexes, focus your portfolio around high-quality investments that have been resilient for many years, and have done well though other difficult times. Most of these will be mature, dividend-paying companies with long track-records of increasing their payouts. I would encourage you to work with your advisor to determine appropriate investments.
While staying within the bounds of your investment policy, you should reallocate from your expensive investments to those that you can buy for a bargain. At present, interest rates are almost impossibly low, which means the price of fixed income investments has risen, or at least has declined less than stock investments during the recent crash.
Let’s say you are invested in a portfolio that is 60% equity (stock), and 40% fixed income. If stocks stand to gain 40% in their recovery and bonds stay about the same (or decline as a result of rising interest rates), it is the perfect time to capture more of the recovery by shifting some or all of you fixed income investments into equity. By doing so, you would add a significant amount to the total return of your portfolio.
In doing so, it is important that you maintain the diversification of your portfolio. This means identifying investments that don’t move in similar fashion to one another. We’ve generally, and wrongly, assumed that bonds diversify stocks. Often times, they do. They also frequently don’t. Consider the following example: You own 100 shares of stock in the fictitious company CRP. They also owe you money because you own CRP bonds. If CRP loses revenue, the stock value declines. CRP will also have a harder time paying its debt, so your bond will lose value as well. Owning a stock and a bond make sense when the two have low “covariance” (their price movements are unrelated). This is a question of how closely related their price movements are, not whether it is a stock or a bond.
At the time of my writing, it appears that the S&P 500 is near the end of its decline. Its price dropped about 35%, factoring in an economic decline for the quarter of apocalyptic proportions. We would have to see a 80% slowdown in corporate profits over the next 4 months to justify the drop. While the reaction to COVID-19 has been extreme, it will not cause this level of catastrophe. Investments could continue to lose value, but are already at historic bargains. Now is the perfect time to begin preparing yourself to take advantage of the recovery.
We strongly advise working with a qualified investment
professional when evaluating your investment decisions. A CoCreate Financial advisor is prepared to
help you make the right adjustments to your portfolio in times of crisis and
have solutions designed specifically to make the most out of the COVID-19
recovery.
[1] Note: Diversification should have never been translated into “owning everything.” Being diversified means owning enough investments whose prices fluctuate independently (low “covariance”) of one another in such a way that the short term price changes in a single security will have a minimal effect on the overall value of the portfolio.
Investing involves risk in any market conditions. Your investments cannot be guaranteed and may lose value. The recommendations made above should always be considered in consultation with a qualified professional and account for your individual circumstances. These recommendations are given generally and should not be interpreted as individual investment advice.
I believe that our economy is strong. I believe it is remarkably flexible and resilient. A couple of weeks ago I shared our thoughts in verse about economics considering COVID-19 and the “Oil Price War.” You also got a glimpse of my love for Mexican food. As we have watched the story unfold, we have revised our assumptions. The discipline of economics often feels like a luxury when it is growing and healthy, but we can’t forget the close relationship the discipline has with public welfare and social justice. I believe our response at local levels has caused significant economic damage (threatening small businesses and putting the vulnerable out of work and at risk), and will fail to protect our communities from COVID-19. WE MUST FOLLOW CDC GUIDANCE, but in fear, we have not. The future is in our hands.
You can download our in-depth study of what has been going on. The data shows a very different reality from the rumors that are circulating. If you know anyone in local or state government, please consider passing the study along to them.
As far as the Economy is concerned, The S&P 500 has priced in somewhere around twice as much economic castastrophe as seems likely to occur here. Furthermore, I have consistently been amazed by the fortitude and adaptation American businesses have shown in times of crisis. We will see this even more this year. We care about our employees, their families, and the people in our communities. We are likely at the bottom and will begin to recover soon.
WHAT YOU CAN DO: Small Businesses built our great nation. Even the largest businesses were once a kitchen table conversation. Our small businesses have carried us through “the best of times, and the worst of times.” We will continue to do so if we band together and refuse to give up. If you own a business, you’re our lifeline. You are our strength. Stay strong, and be the courageous entrepreneur God created you to be. Let’s carry our community through this. Never give up. Never give in.
Over the last couple of weeks, we’ve watched Coronavirus stir panic across the United States. This past weekend, OPEC met to negotiate oil pricing for participating countries. When Russia wouldn’t agree to reduce production, Saudi Arabia slashed their prices in retribution (this isn’t atypical OPEC behavior). The American people saw this as even more reason to panic and the stock market continued to drop.
As a professional investment manager and financial planner, I want to tell you a few things I absolutely love about the situation in which we find ourselves this morning.
I wrote about the economic implications of CV last week… for those who missed the article, they are extremely minimal. As of this morning the spread of the virus through mainland China has slowed to a near halt and, while the virus is slowly making its way around the globe, the number of recoveries (62.4k) are massively outpacing the number of new cases (30.6k). The end result, the CV outbreak is subsiding. Sure, we’ll have a quarter or two of earnings reductions for a few companies, but we should play catch up throughout the remainder of the year.
| Q1 | Q2 | Q3 | Q4 | 2020 |
| 2.1% | 0.25% | 3.0% | 3.8% | 2.3% |
Projecting the year’s economic growth (by GDP Growth) with coronavirus we will still have GDP growth for the year of about 2.3%. While this is lower than I would hope to see, it is still growing at a reasonable pace.
What Coronavirus did accomplish for our financial system (the part I’m excited about), was create an opportunity to purchase stable sources of income at discounted prices and to strategically generate tax savings. Of course, this only works if you’re making business-minded investments (for stock traders and index fund investors, the recent volatility just hurts).
I find it fascinating that OPEC decisions like this one often lead to short-term declines in the stock market. The S&P 500, essentially an average for the 500 largest US companies that are traded on the stock exchanges, dropped in price substantially. What’s fascinating, is that the companies the average represents actually received a boost to their financials.
If I owned a taco truck
and parked it down the street,
I’d spend money on beans and beef
and pork and lots of things to eat.
If costs are high, when people buy
themselves a tasty treat,
I’d find that I have less at times
to keep for me and mine.
But when beans go on sale…
I have plenty room for profits to avail
and money to put food on my own table.
If I owned a taco truck
and could drive it down the street
I’d need more supply to feed new customers of mine
and another truck to park on their street.
So I’m no Robert Frost… But I can tell you that if I owned a taco truck, it might cost $2.00 to make my lunch special that I sell for $4.50. At the end of the day, I get to keep $2.50 of profit to support my family. IF beans and meat and cheese go down in price and I can make my lunch special for $1.50, I now have $3.00 in profit. That’s 50¢/taco that I can use however I want. I can pay down debt, pay for my kid’s education, buy a boat, or I can use it to grow my business. This results in more profit for me over time.
Lower oil prices are like discounted beans. Every business has energy costs, so lower oil (or other energy) prices mean more profits. If my taco truck makes more money, its value goes up proportionally. This is true for our stock market. The sudden drop in oil prices actually increase the value of every business in America that is not dependent on the sale of oil for their profit.
The “markets,” however, have never been rational. Instead of looking at a business’ value, people are selling out in mindless panic. SO there are bargains to be had in which you can buy the same dividend cashflows for less than you could a few weeks ago, and if a company’s profit is resilient, then their dividend payouts should be as well.
As I contemplate our situation, I recall a figure from my research a few years ago when oil prices declined: a $0.01 drop in gas price puts around $1 BILLION back into the pockets of the American Consumer. I can’t confirm this number is precise for today, but it gives you an idea of how much we stand to gain from cheap energy. EVEN MORE IMPORTANTLY, the United States became a net-exporter of oil to OPEC nations back in 2015, and we have, in each of the past 5 months, sold more oil to them than they have to us. Because the U.S. is energy independent, we have the freedom to choose how we are affected by a small, focused trade scuffle between Saudi Arabia and Russia.
The recent decline in oil price is good for our portfolios, and the unnecessary panic can help give us a nice discount.
There are many more reasons to believe that the economy is going to continue to accelerate. We are experiencing the dawn of a new age in manufacturing, data processing, machine learning, data storage, communication (5G), Genetic-based treatments for disease. It’s all coming together at the right time, and the technological revolution, which was in its infancy when we all purchased our first iPhone, is now entering adolescence and we will soon feel its impact more than ever.
| I remember when... | Now... |
| I looked up phone numbers from a book | I use voice control and the internet |
| We typed commands into a computer that took up the whole desk. | I don’t even have to type |
| We had to unplug the fax machine to connect to the internet… | I’m never disconnected and can download at 2 Gbps/second (soon to be 100) on my phone. |
| We managed & stored paper files | AI manages our storage & document security and we can access them around the globe. |
| When work was location based | we work from wherever it is most efficient. |
| I remember learning about the assembly line | Kids are learning to print parts and make robots in school |
| We watched worn out Video-Cassettes we rented from blockbuster. | “What’s Blockbuster?” You can watch anything anywhere as long as you have your phone… in HD. |
Technology has developed to the point that we have complete mobile systems that can produce with extreme efficiency and automation. They reduce costs while increasing output, customization to consumer, and flexibility of service/product delivery. Now that these systems exist, they are beginning to integrate seamlessly with one another. 3 years ago, remote employees were a viable option at select positions in the service sector, particularly for tech-savvy businesses. Now as all of these technologies mature into their adolescence, we are starting to see comprehensive solutions that make normal businesses location agnostic.
The growth we’ve seen in the last ten years is only the beginning. Sure, there will be ups and downs in the market, and we will certainly experience some growing pains. We’re at beginning of one of the greatest opportunities investors will have in our lifetimes.
Be patient with the markets, and take advantage of good opportunities. This is part of how we create a future… together.
Coronavirus has dominated headlines for most of the year so far, and it’s become the most frequently asked question we’ve received from clients in regard to the security of their portfolios. For most of the year, the markets mostly ignored CV and have been growing rapidly because the investing public finally accepted that recent economic strength was much more than an illusion. Over the past several days, however, the S&P 500 has declined about 7.8%. I expect that it will decline tomorrow again by about 3% and settle in the range of $3025 - $3040 (which is significantly undervalue by several valuation methods other than over-used PE ratio). I believe we’ll sit there for a week or two and then the markets will begin to recover. In this article, I’ll attempt to highlight a few points about the Coronavirus and its impact on the economy and address a few ways in which we’ve set our client portfolios up to be insulated from the impacts of the virus. I’ll also provide links to a few good outside resources.
First, it’s important to remember that if you’re a client of ours, your portfolio is NOT the S&P 500 and, regardless of the specific investments you have, we have designed your account to lose less than the market in moments like this one. A quick napkin-scratch calculation at the close of the market today showed that most accounts are presently down about 3.5%.[1] That’s a lot less than what you’re hearing about in the headlines. A “market index,” like the S&P 500 is just a form of average, so while it is blown by the wind, our portfolios have a specific focus on eliminating specific risks as much as is possible. One of the specific risks we had prepared for before the CV headlines, was trade risk with China as a result of tariffs. That means that, on an investment-by-investment basis, we evaluated the companies our clients own to make sure they would be resilient in a trade slowdown with China. Because we were prepared and designed the portfolios with stability and dividends top-of-mind, the portfolios have the ability to grow with the markets and have the potential to mitigate the types of losses we are seeing in today’s news.
Coronavirus infected humans, most famously in China, quite recently. Strangely enough, other forms of CV are very common, for example most housecats have a form of CV that doesn’t affect humans. The outbreak has affected a significant number of people and has been fatal for about 2% of those who have had the virus, though that number may be decreasing to 1% of those infected outside of China. Early on, the symptoms resemble those of the Flu, but become more severe as the virus progresses. The biggest challenge with CV, is that treatment and vaccination has not had time to develop. It has also been difficult to diagnose when specialized kits aren’t available to test.
While CV has been a tragedy, it has had a much smaller impact globally that the Flu has in the US alone, and immunologists and drug researchers are making significant headway in treating the illness. It is a relatively safe assumption that we will have ways to contain this virus and hopefully treat it effectively in the very near future.
Here is a link to a video on the virus from the World Health Organization: https://www.who.int/emergencies/diseases/novel-coronavirus-2019
Assuming that the disease continues on the path it has been on, not really. The Chinese government has been working to control the spread of CV and it has impacted production. While this could lead to a short-term slowing of imported goods from China, it won’t bring them to a complete halt. The aggressive response in China will ultimately yield a better long-term result than a hands-off “come to work sick” approach. Even if we do have a more rapid slow-down in China, the effects on the US economy will be minimal as net imports for China represent less than 1% of GDP. The virus will have significant impact on specific companies whose products are dependent on Chinese manufacturers who face temporary shut-downs. Even these effects will be short term.
Here is an article from Brian Wesbury, who I believe to be one of the most reliable economists I follow: https://www.ftportfolios.com/blogs/EconBlog/2020/2/25/time-to-fear-the-coronavirus
In summary, even though coronavirus is making a lot of noise in the headlines and the market indices are down as a result, but we don’t see any reason to be concerned about your CoCreate Financial Portfolio or the US Economy in general.
[1] Disclosures: Note that this performance is not the performance of a specific investment, portfolio, or account, but is instead the rate of change for all firm assets. This may or may not accurately reflect the performance of your portfolio. Furthermore, past performance does not guarantee future results. While CoCreate Financial portfolios are designed to mitigate risks, they may not reduce losses in every imaginable circumstance.
There are a lot of opinions swarming around the world about financial matters and a plethora of places to turn for financial advice. One prevalent conversation that frequently comes up is the belief that paying off your mortgage and owning your residence free and clear is a key step toward financial freedom. While it is obvious that having less debt and more assets is a good thing, the problem comes when the concept is simplified to Mortgage Free = Financial Freedom. Let’s take the time to explore what paying off your mortgage does and does not accomplish for your financial situation.
There is no question that housing expenses are a sizeable chunk of most people’s monthly budgets and is frequently the largest bill that a person pays. The idea of eliminating this payment sounds like a great way to free up cash flow or allow yourself to live on less. The first point that is critical to remember is that generally, your mortgage payment includes more than your mortgage. It’s likely that about a third of your mortgage payment is going to an escrow account to pay your home insurance premiums and your real estate taxes. It would be a big reduction in your monthly payment to not have your mortgage, but don’t forget to factor in paying your home insurance and property taxes directly in your post-mortgage budget.
Another important question to ask when evaluating if paying off your mortgage early should be a goal for you is, what are your long-term housing plans? Do you intend to stay in your current home forever? Do you hope to upgrade? Do you dream of building a custom home? If your goal is to stay in your current home forever, eliminating your mortgage payment as soon as possible could be a great plan. However, if you plan to move to a different home, and especially if you hope to build a custom home you may creating unnecessary challenges for yourself if you start throwing extra money at your mortgage.
If you plan to purchase a different home before your mortgage is paid off and sell your existing home, there could be some significant advantages to building up cash savings instead of paying extra money toward your mortgage. Having significant cash available allows you to have greater negotiating power and flexibility when searching for your next home that is not dependent on the sale of your existing home.
If you hope to build a custom home someday, this is even more significant. Generally, when you build a custom home you need to purchase the land and qualify for construction loans that require hefty down payments. If you have significant equity in your home, but no cash on hand this becomes much more challenging.
We have been in a long season of historically low interest rates. This means that your borrowed money is cheap. It is common to see interest rates on 30-year fixed mortgages around 4%, which is drastically different than when mortgage interest rates were over 18% in the early 1980s. Good financial advice is always situational. You should always ask yourself, “Am I using my money in the most productive and beneficial way possible.” If you have a low interest rate on your mortgage, you may end up much farther ahead putting additional money into your retirement account or an accessible investment account than putting extra toward your mortgage. Not only are you likely to earn a larger percentage in an investment account than your interest rates, that extra money will compound in your account year after year.
Don’t settle for someone else’s dream. What does financial freedom mean to you? Paying down your mortgage could be a great step to accomplishing your goals, but I doubt your life mission is to own a home fee and clear. Don’t accept the easy answers and ask yourself the hard questions and keep asking them because over the course of our lives our answers can develop and change. What is most important in life? What are the things you truly want to accomplish? What does success mean to you? What do you value most? Once you answer these questions, we can determine how best to structure your finances to support your life mission. Remember, financial goals are never really the goal.
