Wednesday, November 23, 2016

Pro-business vs Anti-business Presidents

We are two weeks out from the presidential election, and as the world begins to adjust to Donald Trump's shocking upset win stock market investors seem to be feeling comfortable that his presidency will be good for business.  All four major indexes reached all-time highs this week, and while rising rates have hurt bond prices in the short term in short order higher interest rates will mean more cash flow for investors in bonds and CDs as well.  So it looks like the outlook for our investments is good for the next four years, right?

Not exactly.  The chart below was published on this summer, and it shows that supposedly pro-business Republican administrations have seen S&P 500 returns significantly lower than their supposedly anti-business Democrat counterparts.

Or course this particular time frame includes horrible returns entering the Great Depression for the GOP and corresponding tremendous returns for the Dems coming out of that era.  But even dropping off those two outliers, Democratic presidents still have had a historical annualized advantage of about 9% to about 6% in market returns during their time in office.

Is this proof that Democrats are better for the economy than Republicans...or did the pro-business policies of the Republican presidents come to fruition in the ensuing years of Democratic presidents?  

Was George W. Bush a terrible president whose governance caused an eight-year drop in stocks...or was it that after four terms of returns in the mid-teens markets we were bound to have a pullback and Bush simply had the bad luck of being in office at that time?  

Did President Obama rescue us from destruction...or was he fortunate to be president after an eight-year correction and simply presided over the inevitable comeback?

The answer for me is - and should be for your financial decision-making - that it doesn't matter.  Whether you love or hate the current administration, the gains in the market during the Obama presidency are indisputable.  And whether you are excited or fearful of the next administration, we should expect lower stock returns over the next four years...because that's what always happens.

We know that history tends to repeat itself.  

And we know that predicting the future is impossible to do other than by luck.  

If we can remember (and follow!) these two simple truths, a successful investment experience is bound to follow

The key to financial success is having a plan and sticking to that plan.  That's easy to say but hard to do, especially when it's your own financial future on the line.  If you think fiduciary advice with no product sales could help you achieve financial success, we would be happy to help.

Tuesday, October 25, 2016

Answer: A person you have never heard of who actually has a chance to be elected President on Nov 8.

Question:  Who is Evan McMullin?

A client turned me on to the website FiveThirtyEight (thanks, Jeff!), which has all kinds of data-driven  articles.  I subscribe to their daily 'Significant Digits' email with quirky figures and statistics, and find it an interesting diversion.

One recent article on their site explained how independent Presidential candidate Evan McMullin has a legitimate chance of becoming President.  While they characterize his chances as 'slim-but-not-none', the article details how if the conservative, Mormon McMullin could win Utah he has perhaps as much as a 3% chance of becoming our next President.  Not likely, but also not something you hear about in the mainstream news.

The article is a really interesting peek into the process and potentially arcane rules of electing our President. And at a minimum it's a welcome break from politics as usual!

Whether or not you would prefer that we elect an unknown quantity to either of the two known evils main candidates, knowing who Evan McMullin is and how the 12th Amendment could allow him to become our 45th President with only a tiny percent of the popular vote will make you the most popular conversationalist at your Halloween party this weekend!

Wednesday, October 19, 2016

Presidential Candidate Tax Issues - Net Operating Loss

While there have been no shortage of splashy news stories during this year's presidential campaign, one major story has been about Donald Trump's $900 million business loss in the mid-1990's.  A New York Times headline exclaimed that he 'could have avoided taxes for nearly two decades' and in the following article stated that he used  'tax provision that is particularly prized by America’s dynastic families, which, like the Trumps, hold their wealth inside byzantine networks of partnerships, limited liability companies and S corporations.'

To which I say:  poppycock!

Any outrage against him for using a special loophole that only benefits the wealthy to avoid paying taxes for 18 years is simply uninformed.  To help understand why, here is a little background on the rules for the tax strategy he used, a Net Operating Loss (NOL), from accounting author Steven Bragg, CPA:

The basic rules for using an NOL are:
  1. Carry the amount back to the preceding two tax years and apply it against any taxable income, which can generate an immediate tax rebate. You can waive this action and instead proceed directly to the next step; if so, attached a statement to your tax return in the year in which the NOL was generated, documenting the waiver.
  1. Carry the amount forward for the next 20 years and apply it against any taxable income, which reduces the amount of taxable income in those years.
  1. After 20 years, any remaining NOL is cancelled.
Some version of the NOL provision has been in the tax law since 1918 and all Trump did was use it when he qualified to do so.

That's all well and good, but the fact that something is plainly legal does not mean it's not a quirk in the tax law that is 'prized by America's dynastic families.'

So then how, exactly, is NOL not a fat-cat loophole?  Here is a simple example:

Consider a farmer who struggles in a year when corn prices are down and loses $200,000 that year.  If farming is his family's only source of income, they pay no taxes that year but don't get any kind of a tax break for being out 200 large.

Then the next year corn prices spike because of a drought in Europe.  His farm business booms, and he ends up making a profit of $300,000.  After deductions and exemptions, it's likely that the farmer's effective federal tax rate is around 25% - or $75,000 on an income of $300,000.

Now look at this farmer's business over the past two years if there was no such thing as Net Operating Loss carryforward:

                                Income / (Loss)                 Taxes Paid
Year 1                     ($200,000)                             $0          
Year 2                      $300,000                               $75,000
TOTALS                  $100,000                              $75,000

The farmer put $100,000 in his pocket over two years, not a great result but at $50,000 a year probably still a lower-middle class wage.

But his taxes on that income was $75,000 - a 75% effective tax rate! 

No one in their right mind thinks this is fair.  Which is where the NOL comes in.

Using NOL provision allows the farmer to carry his loss from the first year and apply it to reduce his profits in the second year, resulting in him being taxed only on the $100,000 he actually put in his pocket over the years.  His effective tax rate would then be much lower at $100,000 of taxable income, but even at 25%, having him pay $25,000 on $100,000 of profits is at least a reasonable result.

The takeaway is certainly not that Trump should be exonerated on the issues that showed up on just three pages of one tax return. There are plenty of reasons to criticize Trump - running a business that loses almost a billion dollars is a failure of mind-numbing proportions, and as Allan Sloan pointed out in an article in the  Washington Post, other entries on the pages which have been made public point to true loopholes at which the public should be legitimately incensed.

But anyone who says that his use of the Net Operating Loss carryforward is an example of a loophole that only benefits rich folks is just plain wrong.

If you need someone to help you sort through the hype and find tax strategies that work for real people, we can help keep more of your hard-earned money in your own pocket.  Schedule a phone call to talk with us today.!

Tuesday, September 27, 2016

Gold Will Still Double From Here!

I was cleaning out my 'to read' pile recently and found notes I took at an industry meeting back in 2012.  One of the notes I had written down was a quote from a presenter and read as follows:

Gold will still double from here, use GLD & gold stock mutual funds.

I have no idea as to the full context of the presentation - although unsurprisingly it was from a presentation by a firm that is a gold dealer - nor why I jotted down that particular comment.  But it caught my eye as I reviewed my notes from that conference, and since we didn't take any action to include gold in our portfolios I decided to take a look at how gold has played out and see if we might have missed out on something.

We dug into some data and found that the exchange traded fund SPDR Gold Trust (ticker: GLD) traded in the $40-50 range throughout 2005 and then shot up over the coming years, topping out by spending most of 2012 in the $155-180 range.  So GLD had tripled in the seven years preceeding the conference session when I had jotted down that pearl of wisdom, as it was right around $165 in mid-November 2012.

Over the last few weeks GLD has been hovering around $125*. . . meaning over the past nearly four years gold has lost 25%.  But at least investors have received  some cash flow in the form of dividends. And GLD doesn't even pay dividends, so that loss has gone right to investors' bottom line.

By contrast, the iShares exchange traded fund that tracks the S&P 500 (IVV) has moved from around $145 in the fall of 2012 to around $215 recently, a cumulative 48% capital gain.  Plus IVV has paid a dividend amounting to something just under 2% per year of annual income.

Put another way, a $100,000 investment in GLD in November 2012 would now be worth about $75,000; the same investment in IVV with dividends reinvested would be worth around $170,000.

So, as it turns out, I'm not sad that we once again ignored a popular investment, we did not jump on the bandwagon and that we stuck to what works based on academic evidence.  Although, in fairness to that speaker, and to make sure that the title of this blog isn't clickbait, I do need to circle back and say that I agree with him:  I have no doubt that gold WILL double from where it was in fall of 2012 to over $300 and beyond.

It's just that I might be retired, sitting in a rocking chair with a shawl over my shoulders before that happens!

*Amusingly, when I googled GLD this morning, one of the headlines that popped up was "Gold's SPDR Gold Trust (GLD) Is Ready to Rally"! It was all destined to double at $165 and now six years later at $125 it's ready to rally...I guess gold bugs are counting on a broken clock eventually telling the right time!

Tuesday, September 13, 2016

One Retirement Housing Risk No One Talks About

A recent discussion in the forums of the Alliance of Comprehensive Planners involved whether or not people should pay off their mortgages when they get to retirement.  I've got my opinions on that, but one side of the argument I had never heard before came from an ACP colleague* and I thought it so important to consider I wanted to share a snippet of her response:

We are often called upon to bring up the subject of awful things that can happen. The "why you should have a mortgage" story belongs in this area. Several years ago my father-in-law bought a home in a half-built housing complex in central Florida just as the housing crash started. The subdivision had new houses standing empty, unsold, when he had a change in his health that required he move. 
We had to sell in a terrible market, we had to sell under duress, he lost all his equity, but he didn't lose more than that. The mortgage on his house served as a stop-loss in that situation. The bank shared the risk.
Whether it's because enemy armies are tramping across your land, or the local nuclear power plant developed a leak, or you have a stroke: sometimes you simply have to get out of Dodge. Having a material portion of your wealth tied up in an illiquid asset is simply bad planning.

Like many things in personal finance, there is no one correct answer to this mortgage question, and a lot of it has to do with personal temperament and personality - as another colleague said 'I can calculate correct thing for you to do, but a spreadsheet doesn't have to sleep at night!'.  

But it is important to consider as many sides of a question as possible before you can decide which answer is right for you.

* If you know anyone in New England who could use unbiased, fee-only advice from an expert in financial and tax planning, you'll be doing them a favor by sending them to check out Wendy Marsden of ProsperiTea Planning.

Tuesday, September 6, 2016

Be Like a Duck This Week!

The official start of autumn might be a few weeks away, but everyone knows that summer really ended yesterday with Labor Day.  That holiday is a touchstone for me on the calendar - the long, carefree days of summer are over; and fall means the start of a new school year, football season is back and beautiful fall colors (& hunting season!) are near.  Then just around the corner will be "The Holidays" with Halloween, Thanksgiving, Christmas and New Year's packed into nine weeks.

But Labor Day also means that we still have 17 weeks left in the year - a full 1/3 of the calendar still ahead of us.  Which makes it a great time to dust off those New Year's goals, and see what we can still accomplish in 2016.

So often we set a goal, make progress on it, and then when life takes over our goal falls to the wayside and doesn't get revisited.  I had done a really good job early in the year of tracking the action items I needed to do on a daily and weekly basis to reach my goals, but then I lost momentum (see 'long, carefree days of summer' above!) and now it's been many weeks since I've looked at my goal tracking checklist.

Take some time this week to think about what you want to accomplish yet in 2016.  If you had some New Year's goals for the year back in January, review them.  You might be surprised at how much you've actually accomplished - human genetics means we tend to focus on the negative which often causes us to overlook the positive - and it's important to celebrate even little victories.

For me, one 2016 goal was to get my weight down where I felt better about it, and I had a specific number in mind.  As of this week I'm about halfway to my goal, which is good - but I was 75% of the way there earlier this year but then gave some of my progress back (once again, see 'long, carefree days of summer' above!).  This week I'm working on appreciating more the progress I've made so far and re-focusing my mindset on the little steps I need to take to be successful.

A great idea for this week is to be like a duck!  Don't be afraid to adjust your goals to make them realistic - and this is a great time to do so.  Learning taekwondo might not be achievable anymore this year, so you could scratch that off of your list and focus on your other achievable goals.  Or you could make your goal be to sign up for a class and have taken a lesson by year end.

Either way, having a list of goals that are actually real, current goals can be a powerful catalyst for progress.
One of my 2016 goals was to blog twice a month, starting with a goal-setting post in February.  That obviously didn't happen, and there's no way I can hit that goal now.  But I can adjust that goal to make it achievable by the end of the year and turn a shortcoming into a success.
Remember a goal is most effective when it's SMART - Specific, Measurable, Achievable, Realistic, and Timed (has a deadline).

What does this have to do with personal finance? For one, many goals have financial implications - maybe you will want to set a goal of paying down debt, building up cash liquidity, or increasing retirement savings by the end of the year.  

But more importantly for us, talking about goals is central to our mission at Trinity Financial Planning:  helping people improve their lives.  When we help people move toward their dreams - in the area of finances, family, health or otherwise - we are making progress on accomplishing that mission. 

Let us know if we can help you or someone you know improve their lives.

Tuesday, August 30, 2016

Do You Own the 10 Best Dividend Stocks?

Last week Barron's came out with an article that identified what it says are '10 companies with above-market (dividend) yields, below-market price/earning ratios' and other favorable characteristics that 'could reward shareholders in multiple ways in coming years.'  The stocks they identified, in order of highest current dividend yield (4.3%) to lowest (2.4%) were:

  • Verizon Communications (VZ)
  • MetLife (MET)
  • AbbVie (ABBV)
  • Dow Chemical (DOW)
  • Qualcomm (QCOM)
  • Cisco Systems (CSCO)
  • Target (TGT)
  • Carnival (CCL)
  • JPMorgan Chase (JPM)
  • U.S. Bancorp (USB)

Despite the fact that 'expert opinions' are just as likely to be wrong than right, the description of these stocks certainly sounds appealing.  Fortunately, at Trinity Financial Planning we don't have to worry about whether we should buy these stocks now or not.

Our clients all already own them.

It's reassuring to know that we own every one of those stocks as part of our globally diversified index-based investment philosophy.

And that when they get overheated from a run-up in their sector, we are selling them at incrementally higher prices.

And that when they sink because of market sentiment, we are adding more at attractive prices.

And we are doing that all through a disciplined investment process including systematic rebalancing - not in any way relying on predictions, forecasts, hunches or other guesses.

Do you already own these attractive stocks, or maybe are thinking of buying them with bond yields so low now?  Leave a comment and let us know your thoughts.