The Accountable Super Tuesday Platform for Saving America (and some money)

Photo by www.dronethusiast.com

Next week is “Super Tuesday”. Voters in 12 states, including Texas, will participate in determining who the nominees will be for the Presidential election in November. It’s refreshing to be relevant, as the past several cycles seemed to have been all but determined by the time the Lone Star State got to weigh in.  

You may be thinking, “Isn’t this a financial blog?” Well, yes, this isn’t meant to be a political forum, but many of the policies being proposed by the candidates are grounded in fundamental disagreements in how to be more successful financially. What is most striking is both parties’ unwillingness to just admit that life is hard and that the best solution for most problems ailing society is to look in the mirror and be accountable to yourself.

At the risk of alienating both the left and right, this week’s Accountable Update lays out the @ATXAdvisor stump speech if I were running for President.

Build your resume, not a wall. Stuck in a job paying less than you feel you deserve? Your take home pay isn’t going to increase by building walls unless you are in the wall building business. In fact, waiting for “the government” to do anything, like forcing your employer to pay you more, is a formula for continued disappointment and even unemployment.

If you don’t see a path to the C-suite in your current job, you can blame it on the impoverished immigrant that probably spent their life savings and even risked their life trying to get to the country of opportunity in which you live. Or, you can start chasing that opportunity yourself.

Talk to your boss. Ask them how you can better develop yourself for a promotion. Ask how to get recognized for doing your job well. Take the feedback, write down a plan, then get after it. Don’t discount that you are free to quit to pursue a better job, too; just be realistic about your qualifications and expectations.

Start thinking of your job as a career and not a necessary evil and you’ll be off to a great start. For some tips on building your resume, check out this recent blog article from Austin based recruiting firm, HireBetter.

Everyone is not equal. When our forefathers declared independence from Great Britain, they wrote that “…all men are created equal…” It was and continues to be a wonderful aspiration for our country to strive for the inalienable rights of life, liberty, and the pursuit of happiness. But that’s all we’re entitled to. Would it be nice if we all had exactly the same IQ, knowledge, appearance, abilities, money, connections, inheritance, etc.? Maybe, but we don’t.

So get over it. Instead, here is what you can do to get a leg up.

Quit smoking, or even better, never start. A recent study by WalletHub estimates the cost of smoking in Texas at $1,515,958 over a smoker’s lifetime.

Parents, have frank discussions about sex and relationships. Teach about birth control, where to get it and how to use it. An unplanned birth doesn’t guarantee a life of poverty, but according to the American Journal of Public Health, unintended pregnancy rates are highest among the poorest and lower educated.

Work hard at high school, graduate. Get a secondary education at a trade school or college. Keep working hard, and graduate.

College is too expensive? Apply for grants, scholarships, or (cough cough) get a job. Just don’t fall for the bait and switch scam of calling loans “financial aid”. Borrowing money, then whining about it a few years later will not make the debt go away. You can’t generally even get student loan debt discharged in a bankruptcy.

Go ahead and get used to saving for purchases tomorrow instead of borrowing today. Your patience will be paid off in greater wealth. You may even be able to survive the inevitable collapse of Social Security and Medicare that is coming during your lifetime.

Want to give your kids an advantage? Sacrifice for their future.

Get a second job, live in smaller house, and drive an older car. Anything that will allow you to put some savings away in a college or retirement account. You may be contributing to the privilege and inequality that everyone wants to feel guilty about these days, but you’ll also be breaking a cycle that should result in more prosperity for you and your family’s future generations.

"Free" is expensive. Nothing sounds better than when someone promises something for nothing. Take "free college for everyone" as an example. It sounds great, we’ll have a better educated workforce, no more crushing debt at graduation, and rainbows and lollypops for everybody too.

What isn’t mentioned is that the teachers that have spent 25-30 years of their lives getting educated, the nice buildings, books, computers, and everything else that is needed to provide that education has to be compensated for. Where will that come from? Those greedy employers that are not paying you enough already?

Go ahead and raise taxes on them, at least you’ll be eligible for unemployment benefits for 26 weeks until you have to find another job.

Of course, you could join the military and serve your country. Yes, you may be called upon to make sacrifices during that service, but you will be paid and eligible for benefits such as the GI Bill which assists service members and eligible veterans in paying for education and training.

It’s not free of risk. You see, the freedoms you enjoy like life, liberty, and the pursuit of happiness, are expensive. You just have to decide if you want to be in the minority that pays the way, in money or blood.

The thing about democracy is whether you sit around and enjoy it or work to pay for it, you get a say next Tuesday. Don’t take that for granted.

4 Letters Worth Repeating, T-I-M-E

This week, there was a story on a major "financial" network that predicted not only that the US stock market would peak on a particular day in March, but that it would happen after lunch. Appropriately, that network refers to itself with a 4-letter word.

But really, how considerate of them? With that level of detail, we should all be able to ride our unicorns down to Wall Street after sleeping late and enjoying a nice brunch, with time to spare to put in our sell orders before the bottom falls out.

I can think of a couple of 4-letter words for that kind of "news".

John Maynard Keynes is credited with uttering, “The market can stay irrational longer than you can stay solvent.” The famous (or infamous to some) economist made that observation after he had lost most of his money in ill-timed currency trades using borrowed money in early 1920. He was supposedly betting against the German Deutschmark as Deutschland struggled to recover after The Great War. Of course, in hindsight, he was right to see the black clouds building over the Weimer Republic that ultimately ended in hyperinflation and the rise of the National Socialist German Workers' Party (also known as the Nazis).

It turns out he was right about everything but, WHEN.

Decades later, investing legend Peter Lynch observed, "Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves." I suppose, though, that practical advice is much less likely to keep you glued to your TV set.

The reason it is so hard to know in the short run how any asset may perform is that the market reflects the aggregate expectations of all market participants, all the time. Folks that are willing to buy an asset are competing with folks who want to sell. When they agree on a price, they both feel that they are making the best deal. The buyer anticipating the asset will increase in price faster than other investment alternatives, the seller that the money will be more effectively invested elsewhere.

At ATX Portfolio Advisors, we believe that while the market incorporates all available information to drive stocks to fair value, we also believe that stocks may have different expected returns. In other words, there are certain characteristics that have resulted in returns that are greater than average that have persisted over time and across markets.

For stocks, there are four characteristics, or dimensions, that compelling evidence shows persistently over time. First is the market itself—stocks have higher expected returns than T-bills. Other characteristics include—company size (small vs. large), relative price (value vs. growth), and profitability (high vs. low).

The chart below documents the historical premiums that the size, relative price, and profitability dimensions have produced over time frames that reliable data is available. As you can see, the premiums have persisted over long time frames across different types of markets.

The next chart shows the yearly relative performance of dimensions in US stocks. The blue bars indicate years in which the market, small cap, value, and profitability premiums were positive. The red bars indicate years in which the premiums were negative. A positive premium indicates out-performance (e.g., small cap stocks outperform large cap stocks); a negative premium indicates under-performance (e.g., small cap stocks under-perform large cap stocks).

Over these periods, positive premiums have occurred more frequently than negative premiums across all dimensions. BUT, the premiums can and do vary widely from year to year and can experience extreme and prolonged negative relative performance. In other words, there is no free brunch.

This is why we say you should take a longer-term view and stay disciplined during periods of volatility or under-performance of any premium. Over longer periods however, we have observed a higher frequency of positive premiums.

This next chart documents the relative 5-year annualized performance of return dimensions in the US equity market. When looking at longer time spans, observations of premiums are more consistent compared to one observation in any given year.

As you can see, there are fewer negative (red bars) 5-year periods versus positive (blue bars) periods. The difference is even more pronounced in historical observations of 10-year premiums as illustrated below.

Please remember that despite the higher frequency of positive premiums, outperformance may not be consistent, even over longer periods of time. Long-term investors should consider that premiums are never guaranteed and can undergo periods of negative returns in both relative and absolute terms.

All we have to do is look at the last 10-year period to remind ourselves of these facts, as many of the premiums have been smaller than historical averages.

If the first several slides show why we stick to our strategy of indexing the total market with weightings tilted to those dimensions that have demonstrated historical premiums. It is this last chart that illustrates why our philosophy isn't likely to change when short term divergences from historical averages occur. It suggests strongly that the longer our investment period was, the more likely we were to see a premium in all of the dimensions. That's not nearly as exciting as screaming about market tops or bottoms, but it is pretty compelling evidence to stay the course no matter how loud the carnival barker chorus.

If nothing else, all of this reminds us of the old adage, “Time in the market is more important than timing the market.” T-I-M-E, now that's a 4-letter word worth worth repeating.

If you or someone you know lacks the time to plan and manage your portfolio, let's get acquainted.

Obama's Budget - Indecent Proposals or Glimpse of the Future?

Photo by frankieleon

This week, President Obama presented a $4 Trillion budget proposal to Congress for the 2017 fiscal year. Considering this is the final year of the Obama administration, it being an election year, and both houses currently being controlled by Republicans, it is unlikely that many (or any) of the tax reforms contained in this budget will be implemented in the upcoming year.

Nearly three-quarters of the budget is committed to expenses such as servicing the national debt, Social Security, Medicare, and Medicaid. The reality is that these “mandatory” expenditures will continue to increase due to demographics over the next few decades, leaving our leaders little wiggle room between the unpleasant choices of raising revenue (taxes) or cutting spending.

The “easy” tax hikes are the proposed closing of some of the “loopholes”. Unfortunately, many of our clients look at these “loopholes” as common sense incentives for saving and investing and use them to be Accountable to themselves and their families for financial security. This is why we pay attention to proposals, even those that are unlikely to be enacted today, as they may signal changes on the horizon that could result in stealth tax increases and fewer incentives to invest.

If nothing else, some of these proposals remind us that we shouldn’t take anything for granted when it comes to politicians writing checks that we ultimately will be asked to cash by paying our “fair share”.

Following is a quick summary of some of the provisions that are being proposed and lessons we should take from them:

CLOSING THE “BACK DOOR” ROTH IRA CONTRIBUTIONS

The “Back Door” Roth IRA contribution strategy has been around since 2010, when income limits on Roth conversions were removed. Before that, high-income earners couldn’t make a Roth IRA contribution, nor convert a traditional IRA into a Roth. Under the current rules, it is possible for high earners that exceed eligibility thresholds for contributing to a Roth IRA to contribute to a non-deductible traditional IRA and complete a Roth conversion of those dollars – effectively achieving the goal of a Roth IRA contribution through the “back door”.

The proposal would limit a Roth conversion to only the pre-tax portion of an IRA. Thus, a non-deductible contribution to a traditional IRA would no longer be eligible for a Roth conversion. The “back door” will effectively be closed.

The lesson – If you are above the income thresholds for a deductible Traditional IRA and/or Roth IRA, you should look into the “back door” technique while you can.

LIMITING CONTRIBUTIONS FOR RETIREMENT ACCOUNTS OVER $3.4 MILLION

The budget proposes a rule that would limit any new contributions to retirement accounts (IRAs, 401ks, 403bs, etc) once the balance across all of your retirement accounts exceeds $3.4 million. This is the amount the government estimates that a 62 year old needs today to purchase a joint-and-survivor annuity producing $210,000 a year of income. The proposal allows for inflation indexing and adjustments for annuity costs over time, so these dollar amounts would change over time.

The lesson – In addition to having some insight into what is considered “enough” by some in the government, it should encourage you to maximize those retirement contributions now.

ELIMINATION OF TAX LOT ACCOUNTING FOR SECURITIES AND A REQUIREMENT TO USE AVERAGE COST BASIS

Under current tax law, investors that hold multiple shares of a stock or mutual fund can choose which lots are sold. In other words, if you bought a share for $10 on day 1, followed by another share purchase for $20 on day 2, you would have two “lots” of shares. If you decide to sell one of those shares when the price is $15, you could elect to declare that you are selling purchase from day 2 which cost $20. The net result being a $5 loss on the sale.

The President’s budget proposes the elimination of the specific lot identification method for “portfolio stock”, along with other techniques currently available such as FIFO and LIFO cost basis. Instead, the proposal would require you to use average cost basis. In the example above, the average cost of the share is $15 so the sale at $15 would result in no gain nor loss.

The impact of this change is limiting the ability to tax-loss harvest, or “cherry pick” the most favorable shares from year to year.

The lesson – Harvesting tax losses can reduce tax burdens in current years when it may be most favorable to you. In your taxable accounts, it is a strategy that should be considered while it is a viable option.

Other proposals:

• Required Minimum Distributions (RMD) for Roth IRAs
• Changes to IRA distributions for non-spouse beneficiaries
• Repeal of the Net Unrealized Appreciation (NUA) rules for stock in an employer retirement plan
• Changes to Estate Planning rules:

o   Elimination of Grantor Retained Annuity Trusts (GRATs), installment sales to Intentionally Defective Grantor Trusts (IDGT), and Dynasty Trusts
o   Limiting the total of Present Interest Gifts through Crummy Powers
o   Replacing Step-Up Basis with a Required-Sale-At-Death rule
o   Limitations on Transfer-For-Value Rules, particularly for Life Settlements transactions

• Limiting 1031 Like-Kind Exchanges on real estate transactions
• Subjecting S Corporations to the 3.8% Medicare Surtax

You can read all of 2017 revenue proposals in the Treasury Greenbook.

The lesson – Even the best financial plans (investment, retirement, estate, etc) are subject to change, often for reasons out of our control such as new rules or laws. This is why we encourage you to review your plans regularly to ensure they are current and effective. If you need to review your plan, let’s get acquainted.