Tax Change Update

Blog # 492

Tax Change Update

Since President Biden was elected last November, significant changes have been made from his campaign tax proposals to what is currently being discussed on Capitol Hill. Many of the current proposals have moderated from what was discussed before the election.

As a firm philosophy, we do not think you should generally make investment policy decisions based on proposed legislation, or even based on politics. Stock markets are mostly correlated over the long-term with the earnings of companies and changes in their future earnings expectations, not based on what political party is in control or the direction of individual or corporate tax policy.

We want to update you on what is currently being discussed, in very broad terms. Just as we said last fall, proposals rarely become tax law. There is still a long way to go before tax legislation is enacted, so we are not going to address the many details of the House proposal that was released this week in this post. As the Democratic margin is razor thin, they will need to compromise even within their own party to get any measures enacted.

We encourage you to focus on the trends of the proposals, from what Biden discussed on the campaign to what the House is currently discussing, as well as the historical change/trends of a few major areas of taxes. Viewing tax rates with a historical perspective is quite valuable, as you will see below.

Top Individual income tax rates, for ordinary income: for married filing jointly, for selected years

1980: 70% for income > $215,400

1981: 50%, for income > $86,000

1987: 38.5%, for income > $90,000

1993-2002: 39.6% for income > $250,000, indexed each year higher

2003-2012: 35% for income > $312,000, indexed each year higher

2013 – 2017: 39.6%, for income > $450,000, indexed each year higher

2018-2021: 37%, income > $600,000, indexed (35% for income $400-600K)

Congressional proposal: 39.6%, for income > $450,000; surtax of 3% above $5 million (effective in 2022)

While the Congressional proposed top personal income tax rates are an increase from the Trump personal income tax rates for 2018-present, they would be comparable to the personal income tax rates from 2013-2017 (not including the surtax for earners above $5 million).

Personal top long-term Capital Gains tax rates:

1981-1986: 20%

1987-1992: 28%

1993-2003: 20%

2003-2012: 15%

2013- current: 20%

Biden proposal: same as top ordinary income tax, which would be 39.6%

Congressional proposal: much lower rate than Biden proposal

  • 15%, if your joint income is between $81,000-$450,000 (similar to current law)
  • 25%, if your joint income is > $450K (and potential surtaxes for higher earners to be determined). The 25% tax rate is an increase from the current top capital gains rate of 20%
  • Significantly, the current House proposal has an effective date of September 14, 2021, except for transactions that have already been entered into prior to 9/14/21 and close by the end of the year.
    • This means that if enacted, and that’s a big if, stock sales after 9/14/21 for high income taxpayers would be subject to this higher capital gains rate.

There will be further negotiation and details to be resolved regarding capital gains rates and effective dates, but it appears as of now that the Biden campaign proposal of a 39.6% capital gain tax rate will not be enacted. It appears that Congress will not pass anywhere near that level for long-term capital gains, which is positive for investors and the stock market in general.

Estate taxes (and related matters)

Currently, each person gets around $11 million of estate tax deductions. For a married couple, this means more than $22 million. If your estate is far below these amounts, you don’t need to worry about incurring any estate tax. If no changes in tax laws were made before January 2026, the exemption amounts were to return to $5 million plus inflation adjustments, per person.
House Proposal: inflation adjusted exemption amount of approx. $6 million per person (down from current $11 million+ per person)

  • Under the House proposal, a married couple would not be subject to the estate tax unless their assets were above $12 million, down from the current $22+ million, which was set to expire at the end of 2025.
  • Historically, the House proposed exemption amounts are still relatively high, compared to the past.

Notably, the Congressional proposal does NOT include any change in the current step-up in basis upon death, which had been widely discussed. This is positive for estates and beneficiaries of all sizes.

Remember, good estate planning is not just about tax avoidance. The more important aspect of estate planning is making sure that your documents properly reflect your wishes of what happens to your assets when you die. This may not be easy to deal with, but it is vitally important and should be addressed properly and reviewed every 5 years or so. Contact us if you want to discuss this further.

Corporate Income Taxes:

Reagan: 46% to 40% (starting in 1987)

Reagan: 40% to 34% (starting in 1988)

Clinton: 34% and 35% (1990s)

Bush II: 35%

Obama: 35%

Trump: 21%

Biden proposal: 28%

Congressional proposal: 26.5%

While Biden and Congressional Democrats are proposing increases in the top corporate tax rate, the rates being discussed are still way lower than corporate tax rates over most of the past 4 decades.

Other:

As stated at the beginning of this post, the House proposal covers many other areas, which could impact many clients and taxpayers. As this is just a proposal now, there is no way to know what of the proposed legislation will become law, or what changes will be made before enactment.

  • We will be carefully monitoring this proposal and future changes on behalf of our clients.
  • We suggest that you consult with your tax advisor regarding your specific situation.

We hope that this post provides you with valuable and timely information, which is always our goal. Please feel free to forward this information to others who you think would find this helpful.

Talk to us. We want to listen. We want to assist you, your family members and friends.

If you would like to read our previous blog posts, click here.

Let us know what you think. If you would like to contact us, please email or call Brad Wasserman (bwasserman@wassermanwealth.com) or Keith Rybak (krybak@wassermanwealth.com); or 248-626-3900 (or visit the Contact Us section of our website).

~ Developing Relationships by Doing the Right Thing ~

Wasserman Wealth Management, 31700 Middlebelt Road, Suite 130, Farmington Hills, MI 48334

www.wassermanwealth.com

Mortgage Planning with Low Interest Rate

Blog #491

Mortgage Planning with Low Interest Rates

Mortgage interest rates have been quite low for many years. This should change the way you think and plan for your mortgage and your long-term financial strategy.

For some people, one of their top financial goals is to pay off their mortgage earlier than expected. This may be a reasonable objective, but it may not be the best long-term financial strategy. With mortgage rates as low as they are (and have been), paying off your mortgage quickly may be a financial mistake.

Let’s consider the current facts. You should be able to get a mortgage with a 15 or 30 year maturity in the 3% range, or even around 2.5%, depending on your specific situation (size of your mortgage, your credit score, etc.).

  • If you still have a mortgage with an interest rate higher than these rates, you should seriously consider refinancing, if you plan to remain in your home for 5 years or longer. Please give us a call to discuss this further.

For sake of this example, let’s use 3% as your mortgage rate. For most taxpayers with a home and mortgage, some of your mortgage payments will be tax deductible as interest, so the after-tax cost of your monthly mortgage payment would be even less than 3%, say 2-2.5%.

Compare the mortgage interest rate cost of 2-3% to the long term 10% historical rate of return in the US stock market (with dividends reinvested). Even if future stock market returns are less going forward, say an average of 8%, that would still be far in excess of the mortgage interest cost.

If you can earn around 10% annually over a long period of time in the stock market, why would you make additional principal payments towards your mortgage? By paying down your low rate mortgage, you are giving up the opportunity to get much greater growth from your money by investing those dollars in the stock market.

Investing and stock market returns are not guaranteed. There is no way to know what returns you will get over the next 1, 3 or 5 years. However, if your mortgage is for longer than that, say 10-20-30 years, stock market returns of the past 50-100 years teach us that you will likely be more financially successful by investing money in the stock market than paying down your mortgage faster.

  • If you invest in a well-diversified portfolio of stocks for the long-term, your investment returns should far exceed your mortgage cost of 3%.
  • Investing the money provides you greater growth opportunities and greater liquidity. Once you pay down your mortgage, you don’t have use of that money, unless you borrow again through a refinance.
  • While stock market returns can be volatile in the short-term, there has not been any 10 year period where a globally diversified portfolio has been negative. You may need to be patient during the down periods, which will certainly occur.
  • Even if you invested money in the S&P 500 (US Large company stocks) in October, 2007, just before the Global Financial Crisis, which caused the S&P 500 to decline by 57% by March of 2009, if you remained invested in the S&P 500through July, 2021 you would have had an average annual return of 10% (with dividends reinvested).*

Our general recommendation is clear: you should not pre-pay or make additional principal payments to accelerate paying down your mortgage.

However, everyone’s financial situation is different. We recommend that you consult with us regarding your mortgage payment strategy. This is one of many services that we can provide to our valued clients, beyond providing investment advice.

We can assist you when you are purchasing a new home, to determine how much of a down payment and mortgage makes sense for you.

As you get older, we can help you evaluate whether a 15 year mortgage may make more sense than a 30 year mortgage. While a 30 year mortgage may be more financially advantageous based on the discussion above, there are very real psychological reasons that people like to know that their mortgage is paid off (or close to being paid off), as they enter the retirement phase of their life.

Times change. Interest rates change. My first mortgage was in 1990 with an interest rate of 10%. Today I’m in a different house, with an interest rate that is well below 3%.

Financial advice and strategies must be flexible and change as financial conditions, tax rates and other factors change. We are here and very willing to talk to you about these matters, to help you evaluate and make the best strategic decisions at the time.

Talk to us. We want to listen. We want to assist you, your family members and friends.

Source:

“A Study in the Virtue of Patience”, Nick Murray Interactive (Newsletter), September 2021. Data was obtained from https://dqydj.com/sp-500-return-calculator/, with dividend reinvested. This return data does not include any trading costs, fees of any mutual funds or ETF’s, or any advisory fees such as WWM charges.

Note:

WWM recommends globally diversified investments to our clients, not just investing in only the S&P 500 Index, which is comprised of US based large companies. The companies in the Index change over time. The Index data used in the essay above are for illustrative purposes only. See above for further disclosures.

 

If you would like to read our previous blog posts, click here.

Let us know what you think. If you would like to contact us, please email or call Brad Wasserman (bwasserman@wassermanwealth.com) or Keith Rybak (krybak@wassermanwealth.com); or 248-626-3900 (or visit the Contact Us section of our website).

~ Developing Relationships by Doing the Right Thing ~

Wasserman Wealth Management, 31700 Middlebelt Road, Suite 130, Farmington Hills, MI 48334

www.wassermanwealth.com

Market and Financial Thoughts – Late Summer 2021

Blog post #490

Market and Financial Thoughts – Late Summer 2021

This year has been strong for most asset classes and stock indices. Despite the ongoing pandemic, most major US stock market indices are within a stones-throw of their all-time highs. This shows that markets are driven and highly correlated to earnings and future projected earnings.

Should current stock levels change your current or future investment perspective?

We think the answer is no. We do not believe you should change your long-term investment policy just because some US market indices are near their all-time highs.

What is our view of the current markets and what is our outlook?

While no one can accurately predict what will occur in the next few weeks, months or years, there are strong reasons to remain rationally optimistic for remaining invested for the long term.

As we discussed in our blog post dated April 29, 2021 (Investing at Market Highs), historical financial data shows that when the S & P 500 has reached highs in the past (for data from 1926-2018), the S & P 500 went on to provide positive average annualized returns over the one, three, and five years following new market highs. And those returns were significant, averaging over 14% during the subsequent one year and around 10% over the subsequent three and five-year time periods.

This means that even if certain stocks or sectors may seem high, there is solid justification, based on historical financial data of almost 100 years, that new market highs today are NOT a sign of negative returns to come over the next 1-5 years, on average.

While some asset classes may be at high levels, other asset classes may not be over-valued or have valuations which are significantly below the valuations of US large stocks. This is where our discipline of broad diversification and planning can benefit you.

While we are optimistic about the long-term, there are always issues that confront financial markets and investors in the short-term. Here are some issues that will be discussed and analyzed over the coming months:

  • Will interest rates rise? When and by how much?
  • What will happen with inflation in the coming months and years?
  • How and when will the Federal Reserve change their very accommodative policies that have been in place due to the pandemic?
  • Will tax increases be passed by Congress, and if so, what will the new income and capital gains rates be?
  • What will happen with the pandemic and the Delta variant, in the US and globally? How ill that impact various companies and economies?

We do not have a clear crystal ball to be able to confidently answer these questions. The economy and the future cannot be accurately forecast and financial markets (stocks as well as interest rates) cannot be timed. We know that our philosophy of not developing our investment strategy by trying to make predictions about issues such as these has remained consistent and disciplined since we founded our firm in 2003.

We strive to develop a financial plan and individual asset allocation policy for each client, based on your personal circumstances. If one of these topics (or other type of change) impacts your specific situation, we will address that as the issue becomes clearer. We don’t develop financial policy based on outcomes that are unknown.

One of the key concepts we want to stress relating to stocks: declines are temporary on the long-term upward trend of stocks.

There has not been a decline in US stocks of 10% during 2021, and even in several months prior to that. That is not normal. We want to remind you about the expected volatility that is normal with investing in stocks. While we cannot predict when the next decline will occur, we know it will happen at some point. We want you to be mentally prepared for a such a decline, so you will continue to maintain your appropriate stock allocation.

You should expect in most year’s there will be a decline of around 10% in stock values, from an intra-year peak. This does not mean that the full year will be negative, it just means that at some time during most years there are declines of around 10% and then recoveries. This is the normal volatility we must endure to reap the longer-term rewards of investing in stocks.

There are periods of major market declines of 30% or more, usually every 3-5 years, since World War II. These may be fast (as occurred in February – March 2020 at the onset of Covid) or take a few years to go down and many years to recover. These major declines are normal and should also be expected.

If you can handle the volatility, the positive news is that you don’t need to be able to time the financial markets to have a good investment experience. Over time, capital markets have rewarded investors who have taken a long-term perspective and remain disciplined in the face of short-term noise.

By focusing on the things you can control (like having an appropriate asset allocation, being diversified and managing expenses, turnover and taxes), you can be better positioned to make the most of what global stock markets have to offer.

We hope that information like this, as well as our other guidance, can provide you with a greater sense of security and comfort in dealing with uncertainty and all types of market conditions.

 

Talk to us. We want to listen. We want to assist you, your family members and friends.

If you would like to read our previous blog posts, click here.

Let us know what you think. If you would like to contact us, please email or call Brad Wasserman (bwasserman@wassermanwealth.com) or Keith Rybak (krybak@wassermanwealth.com); or 248-626-3900 (or visit the Contact Us section of our website).

~ Developing Relationships by Doing the Right Thing ~

Wasserman Wealth Management, 31700 Middlebelt Road, Suite 130, Farmington Hills, MI 48334

www.wassermanwealth.com

Large Social Security Increase Projected for 2022

Blog #489

Large Social Security Increase Projected for 2022
There is expected to be a 5-6% increase in Social Security benefits beginning in January 2022, which would be the largest benefit increase in years. The increase would be due to high inflation since last summer.

Social Security benefit increases are based on annual changes from September to September each year in the consumer-price index (CPI) and are announced annually in October. CPI data thus far has produced estimates in the 5% – 6.1% range, which would be the highest annual increase in Social Security benefits since 2008, per a policy analyst of The Senior Citizens League.**

The increases in 2021 and 2020 Social Security benefits were 1.3% and 1.6%, respectively. Over the last decade, cost of living (COLA) increases in Social Security averaged 1.4%. These were much lower than the 3% average increases in the preceding decade, between 2000-2009.

However, some of the benefit increase will likely be offset by higher Medicare health premiums next year. For those still working, the maximum wage base subject to Social Security and Medicare taxes will increase in 2022. These will be announced later in 2021.

Social Security is a vital benefit for most people, and we think this will continue for the long-term. For example, if a couple receives $20,000 per person, that is $40,000 per year. Using what was considered a historically safe withdrawal rate of 4% from a diversified stock and fixed income portfolio, the $40,000 per year income flow would be the equivalent of having $1,000,000 of assets.

If you are receiving more than $20,000 per year (the maximum individual benefit will be around $40,000 per year in 2022), or your future projection is to receive more than that, the equivalent asset base would be much greater than $1 million. This income stream should not be under-valued, especially as the benefits are risk-free and not subject to any financial market volatility. And since interest rates have been very low since around 2008, the value of the Social Security income stream may be even greater.

Even if you are many years from when you may begin to collect Social Security, this 2022 increase in benefits will be beneficial to you when you start to receive your benefits, due to future compounding. If there is no change in the future benefits calculation, someone who begins to collect Social Security 20 years from now will receive $1,600 – $2,000 more every year for the rest of their life, if instead of the projected 6% increase for 2022, it had been an increase of only 1.5% (assuming 2% subsequent annual increases in the future).

It is widely accepted that the true cost of living generally increases more than the COLA calculation of benefit increases from Social Security. This raises the importance of striving to maintain your purchasing power through having your assets grow over the long term at a rate that exceeds inflation. This is why we recommend having an appropriate long-term allocation to stocks (based on your specific circumstances), as the long term returns from stocks have far outpaced the rate of inflation.

While stocks are volatile, and will continue to be in the future, you should focus on the long-term benefits of stock ownership in a diversified portfolio. We plan so you can strive to have a solid “fixed income foundation” while you are in retirement, to provide stability for your near-term financial needs.

Though it can be difficult, patience and discipline are required to maintain your stock allocation, but it has been rewarding to do so over the long-term. Your focus should be on the long-term, not on the next few months or years, but on the rest of your life, and that of your spouse and other family members.

Social Security planning

If you are not yet receiving Social Security benefits, or are years from receiving Social Security benefits, you should verify your projections regularly at SSA.gov. Check your earnings and projected benefits every few years.

If you delay starting Social Security from your full retirement age (age 66-67, depending on your year of birth) until age 70, your benefits increase 8% per year, for each year you postpone beginning to receive Social Security benefits. This decision should be evaluated closely, based on your health, family life expectancy and your financial situation.

Benefits are based on a 35-year average of your earnings, which is weighted toward your later years of earnings. Also, it is important that you, and a spouse, earn credits for as many years as you can. For example, for 2021, you earn one credit for each $1,470 of earnings, up to 4 credits per year. You need to earn 40 credits, or 10 years of work, to be eligible for retirement benefits.***

Even if you or your spouse only work part-time for a significant number of years, there is still a long-term benefit of earning some amount of money, to earn these credits, and the resultant years of Social Security benefits later in life.

Social Security is a valuable benefit and should be considered in your long-term planning as a source of income that is not subject to financial market fluctuations.

Focus on the long-term. Adhere to your plan. Talk to us about your planning. Make good decisions.

As always, we are here for you, and family members or friends who could use our guidance and assistance. Talk to us.

 

Sources:

** https://www.aarp.org/retirement/social-security/info-2021/cola-2022-increase-forecast.html

***Data per Social Security website, SSA.gov.

 

If you would like to read our previous blog posts, click here.

Let us know what you think. If you would like to contact us, please email or call Brad Wasserman (bwasserman@wassermanwealth.com) or Keith Rybak (krybak@wassermanwealth.com); or 248-626-3900 (or visit the Contact Us section of our website).

~ Developing Relationships by Doing the Right Thing ~

Wasserman Wealth Management, 31700 Middlebelt Road, Suite 130, Farmington Hills, MI 48334

www.wassermanwealth.com

Cost of NOT staying in the market

Blog #488

Cost of NOT staying in the market

We have often talked about the importance of staying in the market. Think long-term. Stick with it, through the good and bad markets, to reap the long-term benefits that investing in stocks can provide.

It can be hard to remain invested in stocks (appropriate to your personal stock allocation), especially when stocks are declining. It can be particularly difficult to remain invested in stocks during periods of great uncertainty, such as in the spring of 2020, at the onset of the Covid pandemic, or in 2008-09, during the Great Financial Crisis.

We want to share some thoughts and data with you, while markets are good….so you can be mentally prepared the next time markets decline significantly in the future.

Missing only a few days of strong returns can drastically impact your overall investment performance.

While we recommend a global and broadly diversified allocation mix of stocks, for purposes of this discussion, we are using the S&P 500 Index, from January 1, 1990 – December 31, 2020. Note that the companies in the S&P 500 Index are primarily US Large companies, and the companies in the Index change over time, as the economy changes, as companies grow, merge, are bought or their financial performance declines and they are removed from the Index.

As the chart below reflects, if a hypothetical $1,000 was invested in the S&P 500 in January 1990, it would have grown to $20,451 by the end of 2020. The increase over this 30 year period, including all kinds of economic and societal changes, most of which could NOT have been anticipated in advance.

  • Staying invested and focused on the long term would help you to better capture the benefits that the stock market has to offer.

However, if you had missed only a few of the best performing days during this 30 year period, the growth of the $1,000 would be dramatically less. If you had missed the best 25 days over the last 30 years, $1,000 would have only grown to $4,376, which is only 21% of what you would have had if you had left the money in the S&P 500 the entire period. Let’s review the results**:

There is no proven way to time the markets – trying to target the best days and to get out of the markets to avoid the worst days. History argues for staying put through the good times and the bad.

We further reviewed the best 15 days of the last 30 years of the S&P 500, which are provided in chronological (date) order, in the table below. There are a few key lessons to be learned from these large daily increases:

  • The significant daily gains all occurred during times of great uncertainty and fear among investors, during periods of great volatility.
  • They occurred in three groups, days in 2002 (during the tech meltdown and during a number of corporate scandals, including the Enron crisis), 2008-09, and in the spring of 2020, at the onset of the Covid-19 pandemic.
  • None of the top 15 days occurred during times of relative calm for the US stock markets.
  • None of the top 15 days occurred during times when markets had been rising for a few years.
  • Some of the days were during bursts of market rebounds, shortly after a bottom had been reached (but few would have known it was the real the bottom at that time).
  • However, a number of the days occurred during huge downturns, but the markets continued to decline even further after these large gain days, before they eventually recovered.

Financial history teaches us that is important to be patient and stay the course during times of economic crises, when stocks are falling, to reap their long-term benefits.

We do not know when financial markets will next incur a significant decline. Hopefully reviewing data like this, when we are not in the midst of a scary period of stock decline, will provide you with the mental fortitude to adhere to your planned stock allocation when future downturns occur.

 

Talk to us. We want to listen to you. we want to assist you, your family members and friends.

Source and disclosures:

** “The Cost of Trying to Time the Market”, can be found at this link Dimensional Fund Advisors, www.dimensional.com, 7/6/21. The missed best day(s) examples assume that the hypothetical portfolio fully divested its holdings at the end of the day before the missed best day(s), held cash for the missed best day(s), and reinvested the entire portfolio in the S&P 500 Index at the end of the missed best day(s). Annualized returns for the missed best day(s) were calculated by substituting actual returns for the missed best day(s) with zero. S&P data © 2021 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved.

***Information provided to WWM by DFA.
As noted above, WWM generally invests in globally diversified portfolios for their clients, which would include various US, International and Emerging Market asset classes, not just US Large Companies, as represented by the S&P 500 Index. The use of the S&P 500 Index in this article is for illustrative purposes only. The Index does not reflect the expenses associated with the management of an actual portfolio, including any advisory fees that WWM would normally charge.

If you would like to read our previous blog posts, click here.

Let us know what you think. If you would like to contact us, please email or call Brad Wasserman (bwasserman@wassermanwealth.com) or Keith Rybak (krybak@wassermanwealth.com); or 248-626-3900 (or visit the Contact Us section of our website).

 

~ Developing Relationships by Doing the Right Thing ~
Wasserman Wealth Management, 31700 Middlebelt Road, Suite 130, Farmington Hills, MI 48334

 

How does your financial advisor invest?

Blog post #487

You should want to know and understand how your financial advisor invests his or her own money, and whether they invest it in a manner that is consistent with the recommendations that they make for you.

This is an important matter that you should ask about. Surprisingly, very few clients or prospective clients ask us about this.

Our answer is a clear yes. The partners of our firm invest our assets in stock and fixed income mutual funds or ETFs that are the same or consistent with the investments that we recommend to our clients. And relatives of the partners who are clients are invested in the same manner as well.

If you are not a client of our firm or have an account with a major brokerage firm or bank, the answer from those brokers and advisors may likely be very different than ours. If your advisor is investing differently than their recommendations, that should concern you. It should lead to more questions. Maybe that should lead to a conversation with us.

Investing our money alongside our clients is one of the guiding principles we have had since the inception of our firm. For example, I own the same US large, US small value and International large value fund that we recommend for your portfolio (or ones that are very similar in investment strategy and philosophy). If you own an International Core fund, I likely own the same one. You get the picture. The exact allocation of the investments that I own may be different than yours, as the allocations are based on each person’s specific situation. The same goes for Keith, my partner.

We feel this is a vital distinction. Our investments and interests are aligned with yours. We have the same skin in the game as you do. If you are making money, we are making money. If your accounts are going down, our accounts are going down.

I learned many years ago, prior to forming our investment advisory firm, that this was not always the case. In various situations, I realized that some brokers were making recommendations but not investing their own money in a manner consistent with how they advised their clients.

I asked this question when meeting with the brokers who managed my prior firm’s profit-sharing plan. I was very surprised to learn that the brokers, who were close in age to myself (so should have had similar objectives, goals and time-frame), did not own investments or have portfolio allocations that were consistent with what they were recommending to our firm. This made no sense to me. This was a defining lesson for me.

We don’t make recommendations to you and then do the opposite for ourselves. As a guiding principle, we follow the same philosophy and recommendations for ourselves that we provide to our clients. We are consistent in this manner.

This is another reason that you should be confident and comfortable with our firm and our principles.

Your financial future is based on our recommendations and financial advice. Our financial future is dependent on the same investments, strategy and philosophy.

Shouldn’t it be this way?

 

Talk to us. We want to listen to you. we want to assist you, your family members and friends.

If you would like to read our previous blog posts, click here.

Let us know what you think. If you would like to contact us, please email or call Brad Wasserman (bwasserman@wassermanwealth.com) or Keith Rybak (krybak@wassermanwealth.com); or 248-626-3900 (or visit the Contact Us section of our website).

~ Developing Relationships by Doing the Right Thing ~

Wasserman Wealth Management, 31700 Middlebelt Road, Suite 130, Farmington Hills, MI 48334

www.wassermanwealth.com

 

Opportunity, Faith and Optimism

Blog post #486

Opportunity, Faith and Optimism

Next weekend, we celebrate the annual 4th of July holiday. We should be thankful every year for the freedom and opportunities which our country provides to so many of us, but this year has even more significance, compared to the state of the country last year.

The US has much to be proud about. The scientific innovations and efforts to develop the Covid vaccines, as well as the vast distribution efforts, have enabled much of our country to return to normalcy. However, like most other countries, companies, institutions and individuals, there is room for improvement. We can all strive to be better.

We should be grateful for the incredible thoughtfulness and priorities of our country’s core, guiding principles in the Constitution and Bill of Rights.

We should celebrate capitalism and the opportunity that it has provided to so many of us.

We should celebrate innovators of all types, as well as the people who protect and serve our nation, both past and present.

Having faith and being optimistic about the future are some of the key ingredients to the success of our country, as well as for each of us individually. These are key characteristics that we think are vital in striving to be successful long-term investors.

You must have faith in the future and be rationally optimistic to handle the ups and downs of the stock market. You must have a positive long-term view of the ability of companies to innovate and respond to challenges that continually arise, many of them unexpected.

We should celebrate the freedom of many of the choices that we have, including the freedom to get an education, choose a career (or a few of them), earn, save, spend, take risks and invest money freely, without the government controlling each of our actions.
We hope that you celebrate and reflect upon the vast freedoms, choices and opportunities which our country enables us to have.

If you are sometimes overwhelmed by all these financial choices, you know that you can rely upon our firm to help guide and advise you in making sound financial decisions.

We hope you enjoy the 4th of July holiday weekend with your family and friends!

 

Talk to us. We want to listen to you. we want to assist you, your family members and friends.

If you would like to read our previous blog posts, click here.

Let us know what you think. If you would like to contact us, please email or call Brad Wasserman (bwasserman@wassermanwealth.com) or Keith Rybak (krybak@wassermanwealth.com); or 248-626-3900 (or visit the Contact Us section of our website).

~ Developing Relationships by Doing the Right Thing ~

Wasserman Wealth Management, 31700 Middlebelt Road, Suite 130, Farmington Hills, MI 48334

www.wassermanwealth.com

 

 

 

 

 

Inflation: Our thoughts

Blog post #485

The headlines are everywhere….inflation is rising.

The US Labor Department reported on Thursday that consumer inflation climbed “strongly in May, surging 5% from a year ago, to reach the highest annual inflation rate in 13 years.”*

We want to address a few of the issues surrounding inflation and the impact this issue may have on your financial future:

  • What is happening with inflation and how does it compare to the past?
  • What should we (as your advisor) and you do about this, as it relates to your investment portfolio?
    • What is the impact on your stock portfolio?
    • What is the impact on fixed income investments?

What is happening with inflation and should you be concerned?

Clearly, prices of most or all categories of consumer goods are increasing, but perspective is needed. It is not surprising that prices are increasing over last year, as prices were depressed a year ago, as the US and world were in the midst of pandemic shutdowns. Most of the consumer price increases have been in the energy, used vehicles and transportation services sectors.

The automobile sector is having a very significant impact on the inflation. Prices for used cars and trucks increased 7.3% in May, from April, 2021, which accounted for 1/3 of the overall May inflation index increase. Much of this is likely temporary, as car makers are not able to ship certain vehicles due to computer chip shortages, which is putting price pressure on used cars.

It is not surprising that inflation has increased from a year ago, given the pandemic impact. It is not surprising that gas prices at the pump were down last spring and summer from 2019 levels, as most people were driving much less than normal a year ago.

Let’s look at the price per barrel of oil (which correlates with the price of gas at the pump) over the past two years, which I think is a key perspective.  The price per barrel of oil, as reported by WSJ.com, shows over the past two years a huge increase from 2020, but a much more reasonable increase from pre-pandemic level of June 2019, as follows:

Oil per barrel:

June, 2019                    $57-60

June, 2020                    $37-40

June, 2021                    $68-70

In an excellent WSJ article** on Monday, economics reporter Jon Hilsenrath wrote about the importance of a two-year time perspective for viewing inflation and other economic data (including corporate profits), versus making conclusions based on only 2020 data.  He feels that using pandemic-related data (the 2020 base) will distort many economic statistics, including inflation.

While the May inflation increase of 5% in certainly large, as the accompanying chart reflects, “the consumer price index rose 3.5% every two years during the decade before the Covid-19 crisis. That was within a range between 5.8% in 2012 and .8% in 2016. In April this year, the index was up 4.5% from two years earlier.”**

 

Hilsenrath wrote Monday, prior to the release of the May inflation data, “the message from this perspective (taking a two-year view) is that inflation is trending a bit higher than usual but not exceptionally so as of April.” **

We think that future inflation is something that should be monitored, but it does not seem like we are headed towards a period of hyper-inflation, where prices are increasing anywhere near the inflation levels of the 1970s. During that time, inflation increased many years above 6% annually and there were 3 years above 12%, including 1980.

 

 

 

What is impact on your portfolio of these inflation concerns?

One of the best long-term inflation hedges that you can have is investing in stocks and maintaining your long-term stock allocation. That is what we recommend you continue to do. As the data below shows, concerns about inflation is more of a reason to be invested in stocks, not a reason to sell stocks, as the long-term performance of stocks has far outpaced the cumulative rate of inflation.

S & P 500 annual return, 1926-2020 :                                                  around 10%

Many other asset stock classes, such as small and value:                 greater than 10%

Long term Consumer Price Index (CPI):                                              little less than 3%

 

While we believe in broadly diversifying among many stock asset classes, both in the US and Internationally, the S&P 500 provides a good illustration of the benefits of long-term stock ownership, as a solid hedge against inflation.  Since 1960, the S & P has increased by more than 71 times, while inflation has increased by only 9X. Over a very long term period, and certainly with many ups and downs, owning stocks has provided an excellent way for your money to grow at a rate that far surpasses the rate of inflation, so you are not losing spending power due to inflation.

S & P 500,    1960:                   58

S & P 500, June, 2021:                        4,200+   That is an increase of 71X

Inflation,   1960:                      30

Inflation, June, 2021:                          268        That is an increase of 9X

 

Stocks may be impacted by higher inflation, as pricing pressures throughout the economy impact companies and their earnings. There is no way to predict this, especially in the short-term. We cannot predict the future rate of inflation, nor how long inflationary pressures will exist above the Federal Reserve’s 2% long-term inflation target.

We focus on your long-term goals. We don’t make major changes in client portfolios based on things that we cannot predict, as well as things we cannot quantify or know their duration.

Inflation can have an impact on your fixed income portfolio, if inflation causes interest rates to rise. However, due to Federal Reserve actions over many years, even before the pandemic, interest rates remain very low on a historical basis. For example, the US 10-year Treasury Note remains around 1.50% today, while it was at 1.745% on 3/31/21. It has increased from under 1% at the beginning of 2021 but is still far below the 2.8% – 3.2% range in the second half of 2018.

It is particularly interesting that the 10-year rate has declined from 3/31, from 1.745%, to around 1.50% today, as inflation concerns have increased recently. If bond traders thought inflation was going to continue to increase significantly over the long-term, one would think a 10-year Note interest rate would be increasing, not decreasing. This is why we don’t make interest rate bets, but would rather build diversified fixed income portfolios for our clients, with varying high quality investments and maturities.

 

We have structured your fixed income portfolios to be defensive, by holding short term bonds and bond funds/ETFs. Generally, most fixed income investments that we recommend will have maturities that range from a few years to a duration of 6 years (the shorter end of intermediate maturities). We do not recommend holding longer term fixed investments, say 10 years or longer, due to inflation and interest rate risk. We have also added, and will be continuing to evaluate, adding other inflation protected fixed income investments to certain portfolios, as considered appropriate.

 

We hope that this information is beneficial to you, as you read and hear about increased inflationary pressures on various segments of the economy. We remain optimistic about the future of corporate earnings, as successful companies are always innovating and dealing with change.

 

Talk to us. We want to listen to you. we want to assist you, your family members and friends.

 

If you would like to read our previous blog posts, click here.

 

Let us know what you think. If you would like to contact us, please email or call Brad Wasserman (bwasserman@wassermanwealth.com) or Keith Rybak (krybak@wassermanwealth.com); or 248-626-3900 (or visit the Contact Us section of our website).

 

~ Developing Relationships by Doing the Right Thing ~

 

 Wasserman Wealth Management, 31700 Middlebelt Road, Suite 130, Farmington Hills, MI 48334

 

Sources:

*“U.S. Consumer Prices Rose Strongly Again in May,” Gwynn Guilford, June 10, 2021, 8:54 am, WSJ.com.

** “For Inflation, Looks Can Be Deceiving,” Jon Hilsenrath, June 7, 2021, Wall Street Journal print edition, page A2.

Conversations You Should Have

Blog post #484

Hopefully many of you will gather with your family or extended families this Memorial Day weekend. The discussions at these gatherings are generally the same: updates on kids, grandchildren and relatives, health, politics, sports, food and restaurants. We can even include future travel plans this year!

In most families, however, the topic of money is rarely discussed. These types of discussions should be occurring.

We all have unique and different family backgrounds and stories about money. I did not get an education about money or investing from my parents. We grew up as a lower-middle income family. I know that my mom struggled financially and worked very hard to support me and my three sisters. As there was no extra money to invest, I did not get the opportunity to learn about investing from my parents.

While in high school, I often talked with my mom about how I would pay for my college education, how much I had to work and save for my college education.

Fast forward 40+ years… and now I advise people professionally about their money. We have many discussions about your finances, your goals and how to deal with the volatility of the world and financial markets. These discussions are critical, and the educational aspect of these conversations hopefully makes you, our clients, better and more successful investors.

I want to emphasize having conversations about money between generations. These can be uncomfortable discussions, but they don’t need to be. Start gradually. Find a topic to begin with. Dip your toe in the water. If these discussions take place, great sharing and important long-term benefits can result. They can be some of the most memorable family conversations you can have.

  • Talk to your children or grandchildren about your financial successes, as well as your financial mistakes. Be willing to share the good and the bad.
    • Be vulnerable.
  • Share with them how you were able to save money. When did you start saving?
    • What kind of sacrifices did you make, for your long-term future?
    • We gave up extravagant trips when my children were young, in order to save money for their college educations. They have benefited from that today, which we have talked about, as they don’t have student loans.
  • Talk about what types of investments have worked out (individual stocks or mutual funds?) and what types of financial advisors you have used.
    • Why were some successful and some not as good? What was the difference?
  • You can talk about credit cards, reward points or password security. Just begin the conversation.

A possibly harder, but important conversation, deals with talking about your estate planning. Once an estate plan is completed, it usually becomes a set of documents that remains locked in a cabinet. Depending on your age, and the age of your next generation of family, you could discuss your estate plan. This can be done in broad terms, without focusing specifically on the numbers.

If this kind of estate planning discussion is relevant to your stage of life, I’m suggesting that parents and grandparents sit down with their next generation, or generations, and talk about their “family finances.” What is your intent? How will things be handled? By whom? I’m encouraging you to make your estate plan real. Make it a living, breathing document and set of plans. Do it now, while you are healthy and able to have the discussion.

Not everyone is comfortable with this type of estate planning discussion. If you want to have this conversation with your family and would like our assistance, we would be pleased to join your family for this discussion.

The telling of stories is how family histories are remembered and past down to future generations. Discussions about money, how you saved and possibly sacrificed, are worthwhile. Sharing the good and the bad, the mistakes and the successes, are important as well. Parents and grandparents should share their financial and investment lessons with their next generations. These would be very valuable, memorable and impactful.

Do it sometime. Anytime. But sooner rather than later.

The Benefits of Small, Value and Patience

Blog post #483

Since our firm was founded in 2003, we have been strong believers in holding widely diversified portfolios, with significant exposure to factors that have historically provided greater expected returns.

In practice, this means building client portfolios with additional weighting of small company asset classes, as well as to value stocks, both in the US and Internationally.

One thing that we can all agree upon is that none of us could have predicted the events, technological and political changes and even a global pandemic that have occurred since 2000. We have experienced 9/11, the Great Financial Crisis in 2007-09, changes in Presidents and Congress, tax increases and tax cuts, iPhones and other technologies, as well as Amazon and changes in shopping.

How has this investment strategy worked over the past 21+ years, through all these changes?

As the data below shows, adding small and small value companies to a portfolio provided significant benefits since 2000, versus a portfolio consisting of only the S&P 500 (US Large companies). Please note that for purposes of this post, we are using indexes, rather than the actual mutual funds we recommend, for compliance reasons. We feel that our investment recommendations would show similar results. Also, this illustration is for US stocks only, and all references below are only to US asset classes.

From January 1, 2000 to March 31, 2021, as the chart below shows, the Russell 2000 Value index (US small company value index) grew from $1 million to $7,662,000, whereas the S&P 500 Index (US large company index) grew to $4,076,000 over the same time period. US small company stocks, as represented by the Russell 2000, would have also significantly outperformed the S&P 500 during this period, as $1 million grew to $5.8 million.

Some of the key takeaways from this chart are:
  • Despite all the events that have occurred over the past 20+ years, staying invested in stocks, large and small, growth and value, was rewarding to investors. It pays to be patient and remain invested for the long-term.
  • Owning US small value stocks was very beneficial, and more rewarding over the 20+ years, than only owning the S&P 500.
  • Owning small company stocks, not just small value stocks, was rewarding.

However, there is much more to this story. It is really three different stories, as the 2nd chart below shows. During the first decade beginning with 2000, small and small value stocks far outperformed US Large company stocks, as represented by the S&P 500. The Russell 2000 Small Value Index grew by 121% from 2000-2009, while the S&P 500 had a NEGATIVE 9% return for the same 10 years.

  • From January 1, 2000 – December 31, 2009, $1 million invested in these indices would have been worth the following as of December 31, 2009:

  • For a decade, those who only owned US Large company stocks were not rewarded with the expected returns from stocks, which averages around 8-10% per year.
  • The expected returns of each asset class does not always appear for extended time periods. That’s why we diversify and own many different asset classes.
  • Around 2010, small and value seemed liked winners and large company stocks were trailing badly.

The next decade, 2010-2019, was very different, as US Large company stocks (+257%, $3,567,000) far outperformed small (+206%, $3,058,000) and small value stocks (+173%, $2,730,000). While all these asset classes were rewarding, some investors were questioning whether owning small and small value made sense, as the technology heavy S&P 500 was doing so well due to stocks like Apple, Amazon, Facebook, Google and others.

To us, and for you, our clients, the real evidence is in the far-right column of this chart. The returns for 21 years plus 3 months, from January 1, 2000 to March 31, 2021 are:

If you were disciplined and patient and kept an exposure to small and small value stocks, you were very well rewarded over the long term. 

We believe in having various exposures to most stock asset classes.

Technology:  we recommend owning them.

Growth stocks:  We recommend owning them.

Mid-cap stocks:  we recommend owning them.

Dividend paying stocks:  we recommend owning them.

You get the idea. All of these are components to a well-diversified portfolio, that we believe should include exposure to small and small value companies, as they have greater expected returns than the above asset classes.

As these charts explain, over varying time periods, certain asset classes will not always perform as expected or provide the best returns. But over the long-term, financial data and real market returns have shown that following these recommendations for building a diversified portfolio can be quite rewarding. 

These are strategies that can provide for your future growth for your retirement, or provide you with the funds to live and have the type of retirement that you desire.

Talk to us. We want to listen. We want to assist you, your family members and friends.

Important disclosures: See disclosures beneath each chart. Additional information provided by Dimensional Fund Advisors. This data does not include costs of the investments or any investment advisory fee, such as WWM would charge a client. WWM did not begin to provide investment advisory services until 2003, but we feel this information is relevant and consistent with our investment recommendations since 2003.