Positive Things Happening in “Our Towns”

The 4th of July holiday arrives next week.

It’s a time to be with family, attend a parade, have a barbecue and enjoy some fireworks. Maybe take a vacation. I will be doing all that next week.

I have been reading Our Towns, by James and Deborah Fallows. James Fallows, a well-respected journalist, and his wife, document their travels to 29 cities over the past 4 years in their own private airplane, exploring how small communities and individuals have used ingenuity, resilience and self-sacrifice to re-develop these communities across the US.

Our Towns illustrates how these cities and towns have worked to reinvent theirdowntowns, overcome industrial decay and reinvigorated their communities.  It is also a great travelogue of communities in the US, many which would be great to visit.

This is a positive book. It does not include visits to towns which do not have success stories. So journalistically, it may not be wholly accurate or balanced. But balance was not their intention. The book provides examples of how civic and business leaders, educators, developers, and others can work together to make a difference and improve their regions.

In an Atlantic Magazine article, James Fallows wrote about Our Towns, he explained the process he and his wife used in their travels and encourages others to visit new places with their spirit of curiosity. “I suggest the following test…: Through the next year, go to half a dozen places that are new to you, and that are not usually covered by the press. When you get there, don’t ask people about national politics…if it’s on cable news, don’t ask about it. Instead, ask about what is happening right now in these places. The schools, the businesses, the downtowns, the kind of people moving out and the kind moving in, and how all of this compares with the situation 10 years ago. See where that leads you…..”

There are great examples and vivid stories in this book. It made me want to visit many of the towns and geographic areas they colorfully describe. Our Towns makes me want to re-visit Holland, Michigan, which I have been to several times. I was not aware that the city has 5 linear miles of sidewalks that are heated to melt snow in the winter. This was partially paid for by one industrialist and matched by the city.

While I may never visit Caddo Lake, Texas, which borders Texas and Louisiana, their description of the efforts made to save and rejuvenate the lake and surrounding area certainly makes a trip sound worthwhile.

This is not an investment book. But the narrative of Our Towns represents similarities to our philosophy of investing, as the towns featured are patient and focused on the long term. The community leaders and others profiled did not always listen to conventional wisdom, as they were focused on their goals and were resilient in their efforts.

One of the most interesting sections was how the Fallows’ noticed that each community has a way of asking “the Question.” This is the Question that gets asked when you meet new people, after you ask, “How are you?” or some version of this. The interesting part is the second question, the conversation opener, which they realized is very different for each region. In Greenville, SC, the question is “Where do you go to church?” In Chicago or Boston the question would be “What’s your parish?” In St. Louis, it’s “Where did you go to high school?” In the Detroit area, though not in the book, this would be the same question, especially in my parent’s generation. In some major cities, the Question would be “Where do you live?” or “What do you do?” as a status identifier.

This is not a political book.  Our Towns is about the “big plans” local leaders have strived to achieve and have accomplished, by working together as a community.

Our Towns describes the stories, challenges, manufacturing efforts and what makes each community go. They profile who helped to re-invigorate a city, how and why. Our Townsis a story of hope, of what can happen when communities work together, when leaders, business people, educators and others focus on renewal, resilience, take risks and make sacrifices for the communal good.

Before the 4th of July last year, I featured a very moving and wonderful book by historian and author David McCullough, The American Spirit, Who We Are and What We Stand For. McCullough selected 15 speeches from the hundreds he has given in all 50 states over the past 25 years for this collection. I would still highly recommend this book, if you have not read it.

We hope that you and your family have a safe and happy 4th of July holiday. We hope that you maintain a positive attitude about your community and our country!

What we know and don’t know

We focus on what we know, which is what we can control.

We know that good long term performance is highly correlated to lower costs, so we utilize very low cost asset class mutual funds.

We don’t know the future of a single stock, the exact direction of interest rates, the future price of oil or how the current trade tariff issue will play out, so we don’t try to make bets or guesses with your money about these things.

We know that the vast majority of money managers and mutual funds do not outperform their benchmarks. We know that when clients transfer money to our firm from their former advisors, they are usually transferring in accounts or mutual funds that have failed to keep up with benchmarks over time.

We don’t know how innovation will affect specific companies or industries, so we don’t try to make bets on specific companies or sectors.

We do know that owning a broadly diversified portfolio will enable you to benefit from innovation and the growth of companies that successfully evolve and handle change over time.

We do know that over the long term, investing in a globally diversified stock portfolio has been rewarding.

We do know that investing in a diversified manner, with our investment strategy and philosophy, will help prevent big mistakes.

We know that we act in your best interest. We know that brokers and financial consultants at major brokerage firms and banks do not adhere to this same high standard. We know that our higher standard does make a real difference to the benefit of our clients.

We do know that having a consistent investment philosophy makes sense.

We know that having a consistent long-term investment philosophy which our clients can understand should help them to be more confident and comfortable about their future.

We do know that working with a financial advisor can be very valuable.

If you are not yet a client, we know that we can provide value to you and your family, in all kinds of different ways.

Talk to us.

Fed Reserve, Stock Market Actions and a WWM Milestone

The Federal Reserve again increased short term interest rates by a quarter of a percent on Wednesday. It signaled that it will do the same twice again later this year.

This is good news, as the Federal Reserve’s actions to regularly increase interest rates is reflective of the strength in the US economy. The Fed noted that economic activity has risen “at a solid rate,” which is an upgrade from their May statement, when they called economic activity “moderate.”

Federal Reserve Chair Jerome Powell stated in a press conference that the US economy is in “great shape” and that “most people who want to find jobs are finding them.”

It is important to understand the Federal Reserve actions and comments are not considered stock market forecasts. They are economic updates and future economic guidance, which are not always accurate.

The Federal Reserve actions are reflected in the significant rise in short term interest rates over the past year, as shown in the table below. However, as the Federal Reserve cannot directly control longer term interest rates, those rates have risen, but not nearly to the same degree as short term interest rates.

June 2017
June 2018
2 YR
US Treasury Note
10 YR
US Treasury Bond
30 YR
US Treasury Bond


Note that the current spread is quite small between the 2 year interest rate and 10 year interest rate, of only around .4% (2.96%-2.56%). There is hardly any increase or premium in the interest rate between the 10 and 30 year maturities. This is what is referred to as a flat yield curve, as there is not much of an increase being paid to hold longer term fixed income securities.

In a more normal, steepening yield curve, the interest rate would gradually increase as the maturity lengthens. In a steep yield curve environment, the 30 year bond would pay much more than a 10 year bond, which would pay more than 5 or 2 year maturities.

What does this mean and why?

Some forecasters say that a flattening yield curve is a sign of a future economic downturn, or a recession. We do not necessarily believe this is the case, at least in the near term.

This situation will present a challenge for the Fed if longer term rates do not increase in the next 6 months. If the Fed increases short term interest rates .25% in September and again in December, or faster, then short term rates would be around 3%, which is equal to or greater than long term rates now. This would be called an inverted yield curve, when short term rates are higher than long term interest rates. If this were to develop, it is not necessarily indicative of a problem or a bad thing, it is just unusual for a healthy and growing economy.

As it affects our clients and our investment strategy, rising short term interest rates provide an opportunity for those who own fixed income investments, such as bonds or CDs, to earn more interest on their fixed income allocation. This has been a long time in coming.

As your current fixed income investments mature, we will reinvest them at greater interest rates than before, so your interest income will increase. Over time, this should be a significant increase in interest income.

We do not place major bets on the direction of interest rates by bunching maturities all in one year. We always evaluate the interest rates and various maturities which the market offers at that time, for the most beneficial combination. It is possible that we would buy a little bit shorter maturities now than we would have a few years ago, as there is not much premium to hold fixed income investments beyond 5 years. But fixed income markets can change quickly and we would react as appropriate.

As a reminder, when interest rates rise, the value of your fixed income investments will decline temporarily in value/price and then that price will recover as they near maturity. You should not be concerned about these temporary declines, see our recent blog post, Why Bond Fluctuations Should be Ignored.

The US stock market has been strong in the second quarter of 2018, with small and value asset classes outpacing the large company S&P 500. International and Emerging Markets have trailed these asset classes during the current quarter.

We remain confident in our long term investment strategy and philosophies, as they continue to be profitable for our clients.

This week marks a writing milestone, my 200th blog post since I started writing weekly four years ago. This is the 4th straight year that I have written nearly every week since June, 2014.  Prior to that, I had sporadically written 145 essays between 2009 and April 2014.

Writing weekly is one of the most important services our firm provides to our clients, as we can communicate in a very timely and regular manner to you. We can convey and reinforce our investment philosophy, principles and beliefs in real time.

These are intended to be relevant and informative.  Reading these blog posts regularly, you should have greater clarity about your investments.  You should have more confidence in our philosophy, especially when the financial markets are challenging.

Hopefully, you better understand the benefits of being rationally optimistic, focusing on the long-term and on what you can control, rather than on the day-to-day news and market volatility.

I am convinced that we are better financial advisors by writing these weekly blog posts.  We are passionate about being excellent advisors.  Writing makes me think.  We are more aware of questions and issues our client raise, as these are likely future blog topics.  We are more curious.  We research topics to provide information which will be useful to you.

When I committed to writing every week, it took courage.  I didn’t know if I would be able to do this every week.  I didn’t know if I would have the discipline.  I enjoyed writing earlier in my life as a high school newspaper editor.  The weekly commitment gave me structure, which led to developing greater capability.  The more blog posts I completed, the greater my confidence has grown.

This concept also applies to each of you, as our clients.  At one time each of you made the decision to work with our firm as your financial advisor.  This took courage and commitment.  It was likely a significant change for you.  As you become more comfortable with our capabilities, your confidence in our advice and philosophy grew.

Thank you for your confidence and for reading!

Clarity on Charitable Contributions

There is some confusion about the impact of the new tax law, enacted in December, 2017, on charitable contributions.

As we view our role as financial advisors to assist you in a broad, comprehensive manner, we want to provide you with clarity on this topic.

The tax law did not specifically change anything about charitable contributions, with a major caveat.

What the tax law did change was whether you will get a tax benefit for your charitable contributions, which depends on whether you will itemize or benefit from the new standard deduction amounts, which have increased significantly.

If you are married, the standard deduction for 2018 will be $24,000. If you are single, the standard deduction will be $12,000.

You need to compare whether your itemized deductions are greater than your standard deduction amount. Itemized deductions primarily consist of charitable contributions, mortgage interest, and the combination of state income taxes and real estate taxes, which are limited to $10,000 in total for both (a major reduction which will impact many taxpayers). There are other categories of itemized deductions, but these are the most common.

For example, let’s say you are married and your charitable contributions are $5,000, mortgage interest is $12,000, state income taxes are $5,000, and real estate taxes are $8,000.

You would have itemized deductions of $27,000 ($5,000 + $12,000 + $10,000, limit of state taxes and property taxes).

As your itemized deductions of $27,000 are greater than your standard deduction of $24,000, you would get the full benefit of all your charitable contributions.

If we change this example and the total itemized deductions would only be $20,000, then this couple would benefit from using the higher the standard deduction amount of $24,000. In this case, they may have made charitable contributions, but they did not get as much benefit as they could have, as explained below.

The key is to project whether you are going to be above or below the applicable standard deduction amount, whether you are single or married. You should project if you will be consistently above or below the standard deduction amount, and if it’s below, by how much.

If your deductions are going to be far above the standard deduction amount each year,then you should continue with your annual charitable contributions, as the tax law change really will not impact the deductibility of your charitable giving.

If you do not think you will exceed the standard deduction amount each year, then more planning is required. In this situation, we recommend that you bunch your contributions every other year, if that will help you exceed the standard deduction amount every other year. This would mean that for a couple, they may have $18,000 of deductions in 2018, and thus utilize the standard deduction amount of $24,000 in 2018. Then in 2019, if they pay more charitable contributions and have $28,000 of itemized deductions, they would get the greater tax benefit, as they would exceed the standard deduction amount.

If you have questions about this topic, you should consult with your tax advisor and review the figures.

For more advanced or significant charitable tax planning and giving concepts, please contact us. We have advised many clients on charitable giving and the interaction with their investments, estate planning and retirement accounts. This is a high value service we provide.