Interest rate changes: what you should know and do

Interest rates have been very low for years. But meaningful changes are occurring.

The 2 year US Treasury note yield increased from 1.20% at the end of December, 2016 to over 2% last week. On a relative basis, that is a huge increase.

According to the Wall Street Journal, this is the first time the 2 year Treasury note has been above 2% since 2008.

This means that you should no longer be satisfied with having significant money in the bank earning .01% or some ridiculously low interest rate close to zero.

You can now earn interest on short term bonds or certificates of deposits that should be somewhat meaningful to you.

Importantly, you should make sure that you do not have significant cash that is not earning interest, or hardly any interest, such as in a bank checking or savings account.

If you have money in an account that is earning nothing or next to nothing, you should contact us to discuss whether we can help you to earn more on this money.

Money market fund returns, or accounts where you have immediate access to your money, are still very low. However, we can provide you with alternatives that offer liquidity within a few days on conservative fixed income investments.

Sometimes small numbers, even 2%, can have a material impact. For example, if you have $200,000 earning nothing, you could gain thousand of dollars of interest income per year.

Give us a call and let’s talk.

The general consensus is that the Federal Reserve will increase short term interest rates 3-4 times this year, .25% at a time. This would likely mean that short term rates will be .75% to 1.00% higher a year from now.

The yield curve is flattening, meaning the difference between short term rates and long term interest rates is decreasing.  Currently, the 2 year US Treasury Note yields around 2%, whereas the 10 year US Treasury Note yields 2.55%, a premium of 0.55% for the longer maturity.  We do not know if this will continue, but for today, it means that if you are a borrower, we would still recommend keeping a mortgage and generally not pre-paying your mortgage payments.

If you are in the market for a new house or mortgage, we still consider mortgage rates to be very low historically. We feel that taking a mortgage today at these rates will prove to be an excellent financial decision for the long term.

The tax law that was enacted at the end of 2017 did make some changes to home related borrowing. Home equity loan interest is no longer deductible for 2018 and beyond, even if the loan was obtained prior to the law. If you are considering borrowing money for home renovations, a car purchase or other reasons, we would still recommend considering a home equity loan, as the interest rate may be better than other loans. We also recommend you to have a home equity loan, if you do not have adequate emergency cash reserves, just to be prepared.

Further, the new law limited mortgage interest deductibility to interest on the first $750,000 of a mortgage loan. Depending on your personal circumstances, we may still advise you to borrow more than $750,000 on a mortgage, as rates are historically low.


This week’s takeaway: Financial advice must be given based on the current environment and the factors involved never remain constant. That’s why you should talk with us before you make financial moves, as interest rates and tax laws are always changing.

5,000, 30, 5 and 2: what do they mean?

The Dow Jones Industrial Average (DJIA) increased by over 5,000 points during 2017, from 19,762 to 24,792 at the end of December, 2017.

Of this 5,000 point gain in 2017, only 5 stocks accounted for over 50% of the increase. Yes, you read that correctly, 5 companies caused the majority of the 2017 rise. The DJIA index consists of 30 large US companies.

Boeing, Caterpillar, UnitedHealth Group, 3M Co and The Home Depot, in that order, were the 5 largest contributors to the index’s rise, accounting for nearly 2,600 points.  Boeing itself accounted for almost 1,000 points, or 20% of the increase.

As the media places so much importance in reporting on the Dow’s ups and downs (though there have been few down periods in the past 18 months), it is important that you understand how the DJIA works and how certain figures and facts can be meaningful, as well as tricky or misinterpreted.

The DJIA index is calculated in an unusual method, which emphasizes the actual price change of the highest priced stocks in the index. It is not based on the percentage change of each company and the companies are not equally weighted. For example, Caterpillar stock gained almost twice as much as UnitedHealth in 2017, but in terms of DJIA points, they contributed 446 and 416, respectively. Not even near double, is that?

When you realize that only 5 stocks caused the majority of the 2017 increase, it can also mean that a few stocks could cause a large decline in the index. As the DJIA has only 30 component stocks and so few of them can have such a big impact on this index, you should realize why the stocks (asset class mutual funds) in the portfolios we recommend may perform quite differently than indexes like the DJIA.

Think of your portfolio as a massive high-rise building, with a huge, 2 city-block wide foundation at the base and is a full city-block wide at the top. Structurally, it is sound and has many types of support. Your portfolio is not the Dow. The DJIA can be compared to a different high-rise, but this one would be much smaller, not even 1/5 of a city-block wide base and much shorter. It may be strong, but it is dependent on fewer beams for support and may be harmed much more by a specific type of event (or for the DJIA, economic events) than the portfolio we recommend.

As we recommend globally diversified portfolios which may contain thousands of stocks in many industries and geographic areas, your portfolio is intentionally structured to perform differently than a limited index, like the DJIA or even the S & P 500, which is comprised of 500 large US companies. Your portfolio is much more diversified, which has significant long term benefits in terms of reduced risk and greater expected return over time.

The Impact of large numbers

Pretend headline: The Dow increased 200 points today. The Dow dropped 350 points yesterday. Those sound big, but they are actually changes of .8% and (1.4%), based on the DJIA’s current level of around 25,500.

As the DJIA is now much higher than it was years ago, numerical moves of the index maybe less meaningful, when viewed as a change in numbers only, and not on a percentage basis. But the media does not usually report percentage changes.

When you hear that the Dow increased by 1,000 points, from 24,000 to 25,000 recently, it is meaningful, but should be viewed in perspective.

When the Dow was at 10,000 in 2009, a 1,000 point increase was 10%. When the DJIA was at 15,000 in April, 2013, a 1,000 point increase was 6.7%.

Facts about the recent rise of the DJIA from 24,000 to 25,000:

  • The gain was a 4.2% increase. That is still positive and impressive, but not as much in percentage terms as a 1,000 point rise earlier in time.
  • 629 points of the 1,000 point gain were attributable to 8 of the 30 Dow stocks.
  • United Health and 3M were the 2 largest point losers in the DJIA move from 24,000 to 25,000.
    • This may seem surprising, as these were 2 of the biggest point gainers during 2017. **
    • Who would have predicted that? This is another example of why we adhere to the investment philosophy which we use and do not pick individual stocks.

Today’s Takeaway: As in other aspects of life, it is not always a great goal to strive to keep up with the Joneses. As the DJIA is an index of 30 US based companies, you should focus on whether your portfolio is helping you to meet your goals, not on how you are doing compared to the DJIA. You will likely be much better off in the long term.



** Source:Wall Street Journal, print edition, page 1 chart, January 5, 2018

Disclosure: We are not making any type of positive or negative recommendation about any of the individual companies which are mentioned in this blog post. The companies which are mentioned in this blog post may be owned in the diversified mutual funds which we recommend for our clients. We generally do not recommend individual stocks for our clients.

The January Effect: Myth or Reality?

The first few days of January, 2018 have been positive for financial markets. What does that mean for the rest of the year?

There are some who believe that as January goes for the S&P 500 (an index of 500 large US companies), it may be a signal whether that index will rise or fall for the remainder of the year.

In other words, the theory suggests if the return of the S&P 500 in January is negative, this would predict that a decline in the general US stock market for the remainder of that year, and vice versa if returns in January are positive.

Has this been an accurate and reliable indicator in the past?

Exhibit 1 shows the monthly returns of the S&P 500 Index for each January since 1926, compared to the subsequent 11 month return (from February-December). A negative return in January was followed by a positive 11-month return about 60% of the time, with an average return during those 11 months of around 7%. So, no, this is not an accurate indicator, at least when January is negative.

What other observations can be made from this data? The lessons of patience and discipline are clear.

January, 2016 was a good example of this. The first two weeks of January, 2016 were the worst ever for the Index, down (7.93%). The full month of January 2016 ended down (4.96%), the 9th worst January since 1926. However, the return of 18% for the next 11 months of 2016 resulted in a positive calendar year 2016 return of almost 13%.

Over the past 20 years, 10 of the January’s were negative. In 15 of these 20 years, the succeeding 11 months of the year were positive, not negative.

We do not believe that sound investment policy should be based on “indicators” such as this. You should not make investment decisions for a year, or the long-term, based on the market movements of any one month.

Over the long-term, the markets (both US and overseas, and across various asset classes, as we recommend) have rewarded investors who are patient and disciplined, who can look beyond indicators such as this.

Frequent changes to your portfolio or investment strategy can hurt performance. Rather than trying to beat the market based on your emotions, hunches, headlines or indicators, investors who remain disciplined, patient and calm can let the markets work for them successfully over time.

We are here to provide you with sound, reliable guidance and advice, so you can meet the financial goals of you and your family. And not just in January!


Source: Dimensional Fund Advisors LP

Actionable Information

With the S&P 500 and other broad US stock market indices hitting new all-time highs, should this cause a change in your investment strategy?

Given the strong performance of many US and International asset classes during 2017, the information below is even more relevant today than it was last January, when we originally wrote this blog post. We updated it as of the end of 2017. The message still applies!

The Dow Jones Industrial Average (DJIA), an index of 30 US based stocks, was close to 20,000 for the first time in early January, 2017. The DJIA increased to almost 25,000 by the end of December, 2017. The S &P 500 was around 2,250 in early 2017 and increased to almost 2,700 by the end of December, 2017.

Should this cause a change in your investment strategy?  Should you be getting out of stocks?

History tells us that a market index being at an all-time high generally does provide actionable information for investors.  As the date below shows, all-time highs are generally followed by even higher levels in the future.  History and US stock market data would recommend that as a long-term investor, you should maintain your appropriate stock market allocation, even though markets may be at highs.  You should not be getting out of stocks.

As financial advisors, we recommend a globally diversified portfolio of US and International asset class stock funds, not just US stocks. For purposes of this essay, information on US stock is used, but the same logic can be applied to various asset classes and International stocks.

For evidence, let’s look at the S&P 500 Index for the last 90 years. As shown in Exhibit 1, from 1926 through the end of 2016:

  • Over the 1,081 months during the period, 319 months, or 29%, had new closing highs.
  • After a new monthly high, there were positive returns 80.5% of the time over the next 12 months.
  • For all 1,081 months, there were positive returns 74.7% of the time over the next 12 month period.

While this data does not help us predict future returns, especially in the short-term, it validates the importance of remaining invested over the long-term. It shows that the S&P 500 has been higher around 75% of the time 12 months later over the past 90 years. Staying invested and not making changes based on your emotions and current news events increases your likelihood of long-term investing success. And this data would be even stronger with the results of 2017.

Many studies document that professional money managers are not able to deliver consistent outperformance by making active picks and frequent trading. In the end, prices set by market forces are difficult to outperform. This is why we have adopted, and consistently adhered to, our investment strategy of using index-like mutual funds.

It is reasonable to assume that the price of a stock, or the price of a basket of stocks like the S&P 500 Index, should be set so their expected return is positive, regardless of whether or not that price level is at a new high. This helps explain why new index highs have not, on average, been followed by negative returns. At a new high, a new low, or something in between, expected future returns are positive.

So while expected future returns are positive, that does not help us know the future direction of stocks, especially in the short term. Historically, however, the probability of equity returns being positive increases over longer time periods compared to shorter periods. Exhibit 2 shows the percentage of time that the equity market premium (defined for this purpose as the Total US Stock market, over the short term US Treasury bill return) was positive over different rolling time periods going back to 1928.

When the length of the time period measured increases, so does the chance of the stock market premium being positive. As an investor’s holding period increases, the probability of a negative realized return decreases. This is why it is important to choose a level of equity exposure that you can stay invested in over the long term.

We can certainly not predict how the stock market will do in the next few months or even the next few years. We know it is normal for there to be ups, as well as regular declines of 10% or more, within a year. There was not a decline of more than 10% during 2017, so you should be prepared for such a temporary decline. It is normal.

However, we remain rationally positive that over the long-term, you will benefit if you remain invested in a globally diversified portfolio of asset class mutual funds, in an allocation which is appropriate for your personal situation.



Source: Dimensional Fund Advisors LP
Disclosure A: The S&P data is provided by Standard & Poor’s Index Services Group. For illustrative purposes only. Index is not available for direct investment. Past performance is no guarantee of future results.

Disclosure B: Information provided by Dimensional Fund Advisors LP. Based on rolling annualized returns using monthly data. Rolling multiyear periods overlap and are not independent. This statistical dependence must be considered when assessing the reliability of long-horizon return differences. Fama/French indices provided by Ken French. Index descriptions available upon request. Eugene Fama and Ken French are members of the Board of Directors for and provide consulting services to Dimensional Fund Advisors LP. Indices are not available for direct investment. Past performance is not a guarantee of future results.




Financial Lessons from 2017

As 2017 draws to a close, there are many financial and investing lessons to be learned.

It pays to be disciplined and remain invested. Few market analysts would have predicted the significant gains of the past two years of the broad US and International stock markets. Investors who stayed the course have been rewarded. Market timing does not work and will not work in the future.

Do not mix your political views with your investment policy or decisions. Whether you are a Republican, Democrat or Independent, allowing your political views or concerns to influence your investment decisions would have been detrimental to your financial health. The US stock market as defined broadly by the S&P 500 has done very well over the past 10 years, during both Democratic and Republican presidents. Yes, some political changes can impact the US stock market, but in the long term, corporate earnings and future earnings expectations drive stock prices, not politics.

Being broadly diversified, including internationally, is to your benefit. Both in the long term and short term, holding a significant allocation to stocks outside of the US, in the form of International and Emerging Market mutual funds, has been beneficial to our clients. While the US stock market has performed well in 2017, broad international and emerging market funds have done even better than US asset classes in 2017. As we discussed in our blog post “Benefits of Global Diversification,” dated April 13, 2017, a globally diversified portfolio far outperforms a US based large company portfolio in the long term. This year shows why this is valid.

Don’t get complacent with the lack of volatility. This year was historic not for its gains, but for the lack of volatility. This was a year without any major downturns and no broad market declines of 10-20%. While the economy may continue to do well, you should always be prepared for a temporary decline in stocks of 10-20% during any year.

It is hard to predict the future. It is hard to pick individual stocks and long-term trends.We are convinced and academic data proves that owning low cost asset class mutual funds is more effective than trying to pick stocks or hire a mutual fund manager who thinks they can outperform the markets over the long term. Another benefit of owning the broad asset class funds we recommend is that clients benefit from economic trends and changes, which may be hard to identify in advance. For example, investors who were heavily weighted in energy stocks a few years ago may continue to receive dividends or distributions from their investments, but the stocks or partnerships have significantly underperformed market averages. The energy bet may produce income, but a more diversified portfolio would be way ahead in terms of total capital. This same logic could apply to other sectors at different time periods.

Password and internet security is still important. We continue to stress that you remain vigilant regarding using strong passwords, changing your passwords a few times a year for key websites and not using the same passwords at multiple websites. We recommend using a password manager program, such as 1Password or other similar apps. These can be used on your cell phones, laptops, desktops, iPad or almost any other similar device. They will save you time, as well as provide you with greater security. Try it. You’ll like it! You should also be aware of phishing emails and check your credit card activity and statements regularly for unauthorized charges. Internet fraud is increasing.

Be prepared for disasters. Check your homeowner’s insurance coverage. Unfortunately, this year saw many hurricane and wild fire related disasters and many homes were destroyed. It is important for everyone to review their homeowner’s coverage, to make sure the value of their coverage is adequate for today’s replacement value. This is especially important if you live in an area that is prone to these types of disasters, such as Florida and California. Based on discussions with people who live in areas affected by the California wildfires, those with more expensive homeowner’s insurance providers expressed that it was well worth the additional premiums. The general feeling is that you get what you pay for. In this case, the extra costs will result in much better coverage and benefits. Make sure your computer records are backed up regularly and do some disaster planning in advance. I will write a more detailed post on this topic in the future.

We are truly thankful to our many clients and readers of this blog. We wish all of you a Happy Holiday Season! We wish each of you good health and happiness in 2018.

Writing this blog is work, which I feel is very worthwhile and effort well spent. There are not many advisors of firm’s of our size who write in this manner. We feel this is a vital method of communication to our clients, as well as learning, education and discipline for me. We hope that you are a better investor and person as a result of these weekly blog posts. This is the 50th post of 2017 and I will likely write #51 for next Friday. Thanks for reading!

Bitcoin Mania: What’s it all about

Bitcoin has gotten lots of attention over the past year, as its price has skyrocketed. This post is intended as an introduction to Bitcoin and cryptocurrencies. This is not intended to be a recommendation or advice regarding purchasing Bitcoin or other cryptocurrencies, as they are highly speculative and extremely volatile.

Bitcoin was introduced in 2009 and intended to be a new form of currency, in the way dollars or gold can be used as a form of payment or exchange. Bitcoin is a worldwide currency and digital payment system. Its value changes 24/7, not like stocks, which generally trade only during specific stock market hours during the day, in each country or region. Bitcoin and other cryptocurrencies are not physical. You can not hold or touch a Bitcoin.

Four years ago, Bitcoin traded around $125. Last December and early January, 2017, the price was in the $900-$1,500 range. By August, the price first crossed $3,500. Since mid-November, Bitcoin skyrocketed from the $6-7,000 to a range of $16-17,000 in the past week.

Bitcoin is traded all over the world and is not currently regulated by governmental agencies in the US and most other countries. It has been widely used for black market transactions, money laundering, or other illegal activities. This does not imply it is only for illicit purposes. However, if it becomes more regulated, demand for Bitcoin may decline, which would cause the value to decline. Per the WSJ, as of the end of November, Japan, South Korea and Vietnam accounted for over 80% of the 2017 global trading activity. In the past few weeks, the US share of trading activity has increased.**

I have followed this more closely since the summer, when a relative told me he had purchased some Bitcoin and another cryptocurrency starting in 2015. He has done this independently of me and is not a client of WWM.

What originated as a new method of currency has evolved into a hot investment. However, most currencies are not this volatile or speculative. Note that Bitcoin is only one of many cryptocurrencies.

We cannot emphasize enough how different Bitcoin is from stocks, bonds, gold or other investments. There is nothing backing it at all. There is no basis for any valuation methodology, like an individual stock can be evaluated relative to its future earnings expectations or underlying assets. Bitcoin is not an asset in that respect and has no earnings or dividend paying ability. There is supposedly a limited supply of Bitcoin, although more can be “mined” in the future. It has increased in value due to a huge spike in demand and media attention.

What no one knows is whether this will continue to appreciate or whether this is a huge bubble waiting to burst. We would offer the following advice to anyone who has held this and has significant “paper” profits: Sell some percentage of your Bitcoin holdings (like 15-20%) and take your profits in real cash. Sell off at least your original investment. By doing this, you will have realized some actual profit and still hold the remainder, if the price goes up in the near or long-term. As we do with stock investments we recommend, we would advise anyone with these types of holdings to gradually take profits if the value increases.

As of now, we cannot assist anyone in purchasing Bitcoin or other cryptocurrencies, as none of the major financial institutions, which function as custodians, have developed a method for holding it, let alone trading it.

From what I have read and heard, buying, selling and holding it can be somewhat complicated and costly on a percentage basis (significant bid/ask spreads), at least compared to buying and selling stocks, bonds or mutual funds. There have been reports that exchanges have not been able to process trade orders on a timely basis in recent days and weeks, as volume has surged.

Bitcoin is what is referred to as a “bearer security,” meaning you have the key/individual data for what you own….and if you lose that key, then you lose your investment, as no one else has that data. It is comparable to owning stock and the only proof of ownership is the actual stock certificate. If you lose your bitcoin blockchain data (your key), you would not be able to sell your bitcoin. For a humorous look at this situation, and a primer on Bitcoin, see “The Bitcoin Engagement” episode of The Big Bang Theory on CBS, which first aired on November 30, 2017.

There are different exchanges or places to purchase and sell Bitcoin, and as of now, the prices can vary significantly between exchanges, as CNBC has recently shown. This would be like Amazon’s stock selling for three different prices at the exact same time (say $1,000, $1,050 and $1,100)…which does not occur for a stock in today’s financial markets.

Some of these issues will likely get addressed in the future. Although this is not a brand new investment/currency, with its recent publicity, the controls and exchanges should improve. But that may take months or years. Bitcoin is considered an asset for tax purposes, so any sales are reportable as capital assets for US tax purposes. Thus, you are responsible for keeping track and reporting your financial data, such as purchase and sale dates and amounts.

Summary thoughts for now: I would not call this an investment, as we generally think of that term for our clients. Due to the incredible increase in price and very volatile trading, it is a highly speculative and risky bet.

As I have told my relative and others who have asked, I have never seen any form of investment increase in value like what has occurred in the past year, during my lifetime. And I doubt I will again. If I had purchased some years ago or even prior to October, I would certainly be taking some profits, with absolutely no regrets, even if it continues to increase. Nothing goes up forever. So the real question is, how high is up? No one knows. When it goes down from a peak, how fast will it go down and will it recover? Will you have sold or taken some chips off the table? Don’t be too greedy.

If someone wanted to speculate (note, I intentionally didn’t say invest) in Bitcoin, you should be prepared to lose a very large percentage of it. Bitcoin and other cryptocurrencies may be in their infancy, but as there is no real economic valuation to evaluate Bitcoin, other than demand, this is total speculation.

If you are interested, I highly recommend that you carefully read the following materials, especially the first two:

Bitcoin: Investment or Bubble? Larry Swedroe, Director of Research, Buckingham Strategic Wealth and the BAM Alliance (Our back office firm). This article was a reference source for some of this blog post.

SEC Public Statement: Statement on Cryptocurrencies and Initial Coin Offerings, SECChairman Jay Clayton, December 11, 2017

“Bitcoin Soars as Futures Start,” Wall Street Journal, print edition, page B1, December 12, 2017.

“Bitcoin Trading Overwhelms Exchanges,” Wall Street Journal, print edition, page B4, December 12, 2017

**”Bitcoin Lures Asia Investors,” Wall Street Journal, print edition, page B1, December 13, 2017

Tax planning during uncertainty

Tax planning is filled with uncertainty as two different bills were passed by the Senate and the House but have yet to be reconciled. It is not likely that a final version will be known until close to Christmas.

There is no way to know what the final bill will contain and whether it will get enacted by year end.

This post is to provide recommendations and guidance, but any actions or decisions should be discussed with your tax advisor and be based on your specific circumstances. This is intended to provide general information only, not political commentary.

Tax rates: In general, individual tax rates should be lower in 2018 than in 2017, so deductions should be accelerated into this year and income delayed to 2018, if possible.

The House and Senate tax rate schedules are different, so the impact on each person or couple will be dependent on your taxable income. The difference in the two rate schedules has not been widely discussed, but this is a key difference which will not be reconciled until the legislation is finalized.

Many of the changes in tax rates are temporary in the Senate bill, due to budgetary rules, and would revert back to current levels in 2026.

See a comparison of the current tax rates to the House and Senate tax plans at the bottom of this post.

Itemizing and Standard Deduction: You should review the amount of your itemized deductions (see Schedule A of your last tax return) and compare that to the proposed standard deduction figures. Each bill has a different amount as of now, but they are similar. The standard deduction for single taxpayers would be approximately $12,000 and married couples would have a standard deduction of $24,000, as of now.

By raising these standard deduction amounts, many taxpayers would no longer itemize in the future. If you fall into this category, especially after considering some of the changes/eliminations below, you should pay items which you currently can deduct in 2017, prior to December 31, 2017.

The higher standard deduction amounts are offset by the elimination of the personal exemption (was $4,050 per member of your family). If you are a family of four, currently you would deduct your itemized deductions if they were greater than $13,000 (current standard deduction amount for a couple) and deduct $16,200 of personal exemptions.

In the proposed bills, this family would get no personal exemptions and deduct the greater of the new standard deduction of $24,000 or the new definition of itemized deductions, which are discussed below.

AMT (Alternative Minimum Tax): The House bill repealed the personal AMT. The Senate bill keeps the AMT, but raises the threshold where the AMT affects taxpayers.

In general, the AMT affects those with significant deductions (not including charitable contributions) or capital gains income, relative to their overall income. From a tax standpoint, the AMT generally affects taxpayers with taxable income above $200,000 but usually does not impact very high income levels, as their deductions are a much lower percentage of their AMT income. This is a key item to monitor due to its impact and for the purpose of tax simplification.

State and local taxes: Both bills propose eliminating the deductibility of state and local income tax deductions. If you pay estimated taxes, you should accelerate your 4th quarter estimate for 2017 and pay it by December 31st. This is still being debated and may change, but most taxpayers would benefit from paying 4th quarter state or local estimates in 2017.

Property taxes: Under both bills, property taxes are capped at $10,000 per year, so if you pay more than this, you should pay any outstanding bills by year end, even if they would not be due until sometime in 2018.

The likelihood of eliminating the deductibility of state and local taxes and capping property taxes will mitigate (or offset) much of the income tax rate reductions for many taxpayers, depending on your specific situation, unless you have very high income.

Medical Deductions: Currently, this deduction is used only when someone incurs very high medical expenses, significant nursing care or at home medical expenses. The House bill eliminates the medical expense deduction and the Senate bill continues it for expenses greater than 7.5% of your AGI, if you are able to itemize.

Charitable contributions: Charitable contributions are not changed in either bill and would remain deductible, as long as you are able to itemize. This is one of the major deductions which remains unaffected, as of now. If you do not think you will be able to itemize in the future, you should consider accelerating your contributions into 2017, to get the tax benefit.

Other itemized deductions: As of now, other itemized deductions, which currently are deductible above 2% of your AGI and if you itemize, would not be deductible in the future. This would eliminate deductions for unreimbursed employee business expense, home office expense, investment and tax related expenses.

Child credits: These would be increased but are one of the main topics to be negotiated. They are currently subject to income limitations and that is expected to continue. Thus, if your income is above a certain amount, you do not get the benefit of these credits for children under 16 or 17. Due to budgetary issues, the Senate version would remove the increases in 2026.

Sale of your home: If you sell your home which is your primary residence, the first $250,000 or $500,000 of gain is tax-free (for single and married taxpayers, respectively), if you have lived in and owned the home for 2 of the past 5 years. The proposed change would be to 5 of the last 8 years. Also, you could only have one sale every 5 years which would qualify for the exclusion.

Estate tax: Currently, the estate tax exemption is $5.5 million per person. For a couple, assets above $11 million are subject to the estate tax, which is 40%.

Both plans raise the exemption amount to $11 million and $22 million, for single and married taxpayers, respectively. Estimates are that only 1,800 families per year would be subject at the proposed level, down from the current 5,000 per year now. The House bill repeals this change in 2024, so the exemption level would go back to the current exemption amounts.

From a planning perspective, we would still recommend the importance of estate planning that is focused on how you want your assets passed to heirs or charities, even if you are not subject to the estate tax.

Annual gifting: Both bills would double to $28,000 per person and $56,000 per couple, the annual gift exclusion from the Federal tax on gifts to children and other people.

Pass through income, corporate tax and other changes: At this point, the pass-through income provision is subject to significant change, so we will not be providing guidance on that topic. Corporate tax changes are beyond the scope of this blog. There are many other items which are proposed to be changed, but are not covered in this post. We have tried to cover most of the major changes or items which affect many people.


This week’s takeaway:  As the tax legislation will likely not be finalized until close to the end of the year, we recommend that you take steps now to pay items that will likely not be deductible in 2018, either because you may not be itemizing in the future or the potential changes would eliminate or reduce those items.



Tax rate comparison:


Trust, Winds of Change and Financial Advice

For any relationship to be successful, there must be trust.  This is obviously true for personal relationships, such as with a spouse, family members and close friends.

Trust and confidence in your financial advisor is also critical. 

For those who have worked with us for many years, we hope you have developed a strong level of trust in our advice and investment philosophy.

For those who are considering working with our firm, but have not yet made the decision to make a change to us as your financial advisor, trust may be a key factor in your decision. The other factor which you may need to overcome is dealing with a major change.

As I started writing this post, I saw a letter written by T. Boone Pickens, an 89 year old billionaire who decided to sell his huge 65,000 acre ranch in northeast Texas. In discussing his decision to sell this property, he said that “one of my keys to success has been the ability to accept and embrace change. That has been especially true in the fourth quarter of my life.”*

We view trust and change as elements which go together. As we reflect on the financial advice we have provided over the past 15 years, we are confident that our core investment philosophy and guiding principles led us to good decision making during a period of great change. Our clients have significantly benefited from our advice, consistent philosophy and discipline.

If the world, financial markets and technological change are happening so rapidly, how can you trust us to be able to handle these in the future?

We utilize an investment strategy which is quite adaptable to change, even if we can’t predict what the changes will be. By owning broadly diversified portfolios across countries, companies and industries, you will benefit from owning the companies which are successful in the long run. You will benefit from the long term economic progress which continues to occur both in the US and abroad.

Over time, we have reviewed portfolios of prospects who primarily owned stocks which we refer to as either legacy stocks (think of IBM and GE) or stocks which were purchased primarily for income and dividends, such as energy and gas stocks, telecommunication or other sectors.  These two categories, in general, have significantly underperformed major US and International stock benchmarks for many years.

These people have a choice. To paraphrase T. Boone Pickens, do you have the ability to accept and embrace the change which is necessary to switch advisory firms and modify your portfolio for a much better future? For those who were able to do this, they became clients. We worked with them, transitioned their portfolio and it has been very beneficial for them (and every one of our clients has done this at some point, when they first became clients!). They recognized that their former investments were not performing as well as possible and they recognized the rationale of our investment approach.

The winds of change: If you were using an investment advisor or mutual fund manager 5-10 years ago who was trying to pick stocks (let’s call them “active”), could that active manager or broker been able to accurately predict the seismic shifts which have affected vast parts of the economy? Would they have predicted the demise of numerous retail stocks over the past 10 years? Would they have predicted the drop in energy prices and vast underperformance of so many energy stocks? Would they have predicted which major financial institutions would outperform or underperform major benchmarks? Did they accurately recommend the correct technology stocks to own 10 year ago?

The winds of change are hard to predict, which is why we so strongly believe in the diversified investment philosophy we utilize. It is logical, disciplined and provides you with confidence.

Real energy change occurring: The following is another incredible example of change which is hard to predict, but which is occurring and affecting all sectors of our economy and lives.

A fascinating WSJ article on November 30th describes the transformation occurring in the energy sector. It describes how wind and natural gas usage are rising dramatically, causing record low electricity prices and the closure of older coal and other generating plants.**

The wholesale price of electricity in Texas last year was $25 per megawatt hour. A decade ago it was $55. In the Midwest, wholesale electricity prices are the lowest since 1999, which is as far back as the data goes. For a Midwest power grid, 8% of electricity was generated by natural gas in 2006. In 2016, that 8% grew to 27%. This is causing the closure of older coal and nuclear power plants.

For the Southwest Power Grid, which covers Louisiana to Montana, all the new power generation in 2016 was from wind, gas and solar. Wind is the fastest growing source of power even in Texas. Wind, which already generates 15% of the electricity in Texas, is expected to surpass coal as the 2nd largest source of electricity there by 2019.

What does this mean for you, as an investor? If major changes are rapidly occurring in the energy sector, how can someone accurately forecast which companies will either benefit or be hurt by these changes? If you own a portfolio of stocks, is your portfolio focused on companies which are reliant on the oil or gas business? Do you own stocks which are related to the production of wind turbines?

One of the major benefits of our investment strategy is that we do not have to be concerned with these issues. We are not trying to pick the winning stocks, hoping we will be right. We are focused on larger issues as part of structuring very diversified portfolios for our clients.

As we have often stated, we cannot predict the future. We do remain rationally optimistic and confident that in the long run, a globally diversified portfolio of stocks will be beneficial to you. We hope you share in our trust and confidence, and will benefit from our advice.


This week’s takaway: You must have trust and confidence in your investment advisor and their strategy. If you have the ability to accept and embrace change, you will be more successful. Major changes are occurring in the energy sector, especially the growth of wind generated electricity.



*T. Boone Pickens, LinkedIn post, November 29, 2017


Giving Thanks

As we will celebrate Thanksgiving Day next week, we hope you appreciate the good fortune that so many of us have, simply by being born and able to live in the US.

Warren Buffett has often cited what he calls “winning the ovarian lottery,” which he feels Americans win the day they are born in the US. In lengthier speeches on the same topic, he cites the many aspects of your life which are determined at birth: the political and economic system you are born into, your health, gender, skin color and your level of intelligence.

While our country is certainly not perfect, we are thankful for its many virtues and the opportunities it has provided to so many of us.


We are truly thankful and positive, and hope you are as well.


We are thankful for our clients, who have placed their trust in our firm. We do not take your loyalty for granted.

We are very thankful for the referrals that our clients and friends have made to people they care about, so we can assist them and better their lives.

We are thankful for the clients who have requested our advice on matters in addition to  investing and financial planning, such as helping them with life transitions, estate planning, real estate transactions and the sale of businesses.

We are thankful that our clients understand the importance of focusing on their long-term goals, and not on short-term market swings, as this will provide them better long-term investment results.

We are thankful for our business partners and relationships, which help us to be successful and operate our business efficiently.

We wish all of you a very Happy Thanksgiving, and hope you are able to share it with those who are most important to you.


Note: As next week is Thanksgiving, there will not be a weekly blog post email next Friday. The next email will be December 1st.

This time it’s different….or not?

Is this long term bull market different from those of the past? No.

Are things really different this time around? No.

This phrase comes into play when markets go through periods of major declines and gains. Think of the losses during 2008-09 or the huge tech increases in the late 1990s.

History and academic research teaches us that “it’s not different this time,” even if you may feel that it is.

As in the past, patient and disciplined investors will do best by adhering to their investment plan and a well thought out strategy.

Those who actively trade or try to time the market will most likely do worse than those who focus on the long term.

Investors who focus on low costs and diversification, such as asset class funds like we recommend, will have a greater chance of success. Data shows that lower investment costs are correlated with better performance.

Will this market end up in a bubble? It is possible. But no one can accurately predict exactly when this may occur. Even if they could, would they also be able to predict the bottom to get back in?

A bubble or temporary peak is somewhat normal for stock market activity. So are declines and corrections. The highs are generally too high and the lows are too low. Over time, the world’s stock markets continue to reach new highs and investors reap the rewards, even if they are interrupted by sharp, temporary declines along the way.

Investing may seem easy today, when markets are increasing. When the next major decline occurs, and major declines will occur again and again in the future, remember these words. It will not be different then. Each decline may seem scary and unexpected. How and when the market will recover may seem unclear. Negativity and fear will be everywhere. Most people will think it is actually different this time. But you will know it is not truly different. Just the specific circumstances will be different. That is when this historical perspective will come to your aid. We will provide you with rationality during the uncertainty. We will remind you that optimism is the only realism.

The stock market today has some individual stocks which appear to be quite overvalued. This has been the case for some individual stocks for many years. But individual stocks are not a game we feel is worthwhile to play with your serious money. Investors who buy these hot large cap growth stocks may be successful, but they also are at much greater risk when the next downturn occurs or when one of these companies incurs an earnings miss.

At the same time, there are many asset classes and individual stocks which are more reasonably valued. As no one can accurately predict in advance when an individual stock or asset class will rise or fall, we will continue to recommend that our clients remain invested in a globally diversified portfolio using asset class mutual funds, according to their personal Investment Policy Statement.

This time is not different. There will be a correction at some point. But we have not advised our clients to wait on the sidelines for that to occur. In the words of legendary mutual fund manager Peter Lynch, “far more money has been lost by investors preparing for corrections or trying to anticipate corrections than has been lost in corrections themselves.”

Our goal is to provide you with advice which will enable you to secure a real-life outcome superior to that achieved by the vast preponderance of your peers. This is different.

This week’s takeaway: Stock markets increase over time. Corrections and significant declines will occur, but they will be temporary and the markets will recover. The cause and timing of these corrections cannot be predicted. During these times, when the markets are down and many others say “this time it’s different,” it will not really be different.