Investment Newsletter for the End of July, 2018

All of you had a great month. Portfolios have recovered all past upsets and are at the highest point for the year. In fact, highest point ever. Obviously, this rally will not last forever. At some point there will be a reversal. We, mere mortals, do not get to know when.

The Dow went up about 2.8% YTD, but you are not invested in the Dow Jones Industrial Average. Nobody is. It is just 30 stocks out of the thousands in the market. It is a fast snapshot of the market. It is the first thing I look at every morning.

The S&P 500 Industrial average went up 5.3% for the seven months, much nicer. It is still not representative of how you are invested. I bias the portfolios towards small cap. The S&P is very large industrial companies. It is interesting that it did so much better than the Dow. I guess the Dow is the wrong 30 stocks.

The Nasdaq went up 6.8%. This index is mostly high-tech stuff. This area is always exciting. It is also difficult to understand the fundamentals behind many of the companies. Come on, Tesla does not even have a glimmer of hope of making a profit and the stock is at $300 per share. The risks in this index is also high. The cost of this high level of return is that every so often you get your tail handed to you.

The Russell 2000 index went up a sweet 8.8% for the YTD. This index represents smaller companies and particularly those with a value tilt. It is similar to how I invest. Most of you have a substantial investment in DFSVX (DFA US small cap value). This fund and the Russell 2000 have heavy overlap. They both hold similar positions. Over long periods of time (many year periods), small cap will out-perform large. It does not always do so. This YTD was certainly nice. There is no promise for the next five months. This higher return has a cost in that it swings around more than the bigger indexes.

On another topic, there is a tax proposal to mention. I do not think it will be enacted but it has been a conservative goal for decades. Capital gains are currently not indexed for inflation. You buy a thing (land, stock, whatever) 30 years ago for $100. Because of inflation, you can now sell it for $200. Inflation was 100%. You are now no better off than you were 30 years ago in terms of purchasing power. But, you now have capital gains tax on the $100 in gain. The proposal is to adjust out of the gain the portion that is pure inflation. You would only be taxed on the part that beats inflation. The problem is that it drops tax revenue, a lot. It is hitting the news again. I am watching for it. I am not judging right and wrong in terms of policy, but if it is out there I will take advantage of it for you.

I am still waiting for many of the details for the tax legislation from late last year. It appears to cut taxes for almost everyone. Obviously, there are some groups that win more than others. It is not just about rich groups and poor groups although that is the popular conception. My world is about details. I am the guy who reads the little print at the back first. Most of the regulations have not yet been released. I should know much more by late in the year in case any of you have questions.

Thank you for your attention.

Dan


Investment Fee Schedule

Rate Assets Under Management
1.44% Below $125,000
1.00% Between $125,000 and $750,000
.85% Between $750,000 and $1,250,000
.80% Between $1,250,000 and $1,750,000
.75% Between $1,750,000 and $2,500,000
.70% Between $2,500,000 and $3,250,000
.65% Between $3,250,000 and $4,250,000
.60% Above $4,250,000

A single rate is applied to the whole account. Compared to my old fee structure, under the new fee structure the cost for a $1 million account would be $500 lower per year and the cost for a $1.5 million account would be $1,500 lower per year. I will still waive personal tax return fees for accounts over $1 million. All services stay the same. I am just lowering my upper end fees. For accounts that are above $5,250,000, we’ll need to discuss a custom rate.


As I’m writing these to help my readers, I would be very appreciative of any input in regards to what I should write next. If you want me to write about a particular topic, please contact me. Please contact me if you would like to submit a post to my blog.

If anything that I mentioned above interests you, please consider downloading my free e-book. The book contains my thoughts on investment management and some information that I think everyone should know. You can also download it below.

E-Book Download

Questions for the comments

Did my newsletter make sense? Do you agree or disagree with what I said?

Learn About My Business

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Investment Newsletter for the End of June, 2018

The market this month was essentially flat. For the quarter, it was way better than flat. Almost all of you show nice profits. The exceptions concern some clients who just started and some clients with concentrated stock positions that went the wrong way (positions I am not allowed to touch).

Today, I wish to write about bubbles. Bubbles are when prices go up to irrational levels. By definition, the price increases make no sense. A mania occurs where the greedy herd of investors rush in so that they can be there before the next guy. Prices then go up because of the demand. In economics, we call this “the greater fool theory.” Of course, the price does not keep going up forever. Bubbles eventually pop. The problem is that there is no way to determine in advance when they will pop or how. They could blow fast or hiss out over years. Maybe it starts now and maybe it starts next year.

Bubbles are not restricted to the stock market. They occur in real estate, art work, and anything else that has value. They also occur in bitcoin which never had any value. I have written about the stupidity of bitcoin several times. Bitcoin’s only value is that you think someone else will pay even more for it later.

Two days ago, the San Francisco Chronicle published “Bitcoin bloodbath nears dot-com levels as many tokens go to zero.” They paper called it “one of the biggest speculative manias in history.” It is by the way now down 70%. The dot-com crash many years ago was 78%. There are a lot of reasons for the crash. Regulators around the world stepping down on fake currencies is one, but in my opinion, not the main one. I think the greed ran out of steam. Bitcoin is still worth some money. Ether and Litecoin are worse off than bitcoin. There are apparently 800 other tokens that are now worthless.

By the way, it was not even close to the largest bubble. In Holland several centuries ago, tulip bulbs became a speculative mania. At its height, people were spending the price of small houses for single bulbs, the only reason was they thought someone else would pay even more for them. Of course, the bubble crashed. Tulip bulbs were only worth a few pennies. It seems funny now but then it had ugly results. Holland went into a deep recession for over a decade and many people were financially destroyed. Incidentally, they were a small number of rich families who cashed out their bulbs halfway up, left the country, and were never heard from again. Smart, dirty, and very modern. By the way, does anyone even know who is behind bitcoin?

Bubbles are irrational greed. The opposite is irrational fear. Run for the door screaming. I call it a fear pit. We saw a greed bubble in real estate and in stocks before 2008. The high valuations of both made no sense. It was greed. It was fear that someone else would get your opportunity. In December 2007, the bubble ran out of steam. Both, however, really did have a fundamental value. By late 2009, stocks had declined by half. Real estate dropped about the same. Eventually the fear pit ran out of screaming-for-the-door people. Both markets had a fundamental value. I do not know what this real value was. Certainly, it was more than half. When the fear fit ran out of screaming people, only the bargain hunters were left. And then, both markets boomed.

Dan


Investment Fee Schedule

Rate Assets Under Management
1.44% Below $125,000
1.00% Between $125,000 and $750,000
.85% Between $750,000 and $1,250,000
.80% Between $1,250,000 and $1,750,000
.75% Between $1,750,000 and $2,500,000
.70% Between $2,500,000 and $3,250,000
.65% Between $3,250,000 and $4,250,000
.60% Above $4,250,000

A single rate is applied to the whole account. Compared to my old fee structure, under the new fee structure the cost for a $1 million account would be $500 lower per year and the cost for a $1.5 million account would be $1,500 lower per year. I will still waive personal tax return fees for accounts over $1 million. All services stay the same. I am just lowering my upper end fees. For accounts that are above $5,250,000, we’ll need to discuss a custom rate.


As I’m writing these to help my readers, I would be very appreciative of any input in regards to what I should write next. If you want me to write about a particular topic, please contact me. Please contact me if you would like to submit a post to my blog.

If anything that I mentioned above interests you, please consider downloading my free e-book. The book contains my thoughts on investment management and some information that I think everyone should know. You can also download it below.

E-Book Download

Questions for the comments

Did my newsletter make sense? Do you agree or disagree with what I said?

Learn About My Business

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Investment Newsletter for the End of May, 2018

When I was thinking about what to write this month, I was certain the market was down. I have been hearing trade tariff this and that, the market has been swinging up and down, and clients have been calling about the turmoil. Well, the emotion is not correct. It comes from fear. The market was actually very decent this month.

The Dow was up 252 points, about 1%. Very Large Cap Index.

The S&P 500 Index was up 35 points, about 1.3%. Large Cap Index.

The Nasdaq Index was up 376 points, about 5.3%. Technology Index.

The Russell 2000 Value Index was up 78 points, about 1.4%. Small Cap Value Index.

A few observations are appropriate here.

Fear is magnified by the news cycles. It sucks up everybody. It has a side effect of toxic stupidity. The real answer to long term profits is discipline to a system. Unless you can predict the news cycle, do not try to time the short market swings. If you can predict future news events, please give a call so we can start a company together. We will not invite anyone else.

All four indexes are up two months in a row. Your portfolios are all well up also. The large cap indexes have not recovered all of the beginning of the year decline but have made a very significant dent. The Russell 2000 Value Index and Nasdaq have recovered everything and then some. I have slanted your portfolios towards small cap value. The Russell 2000 Value Index is the appropriate measure to compare against. Remember, the Dow is convenient and fast to look at but THE DOW IS NOT THE MARKET. The Dow is a small slice of the market.

In general, small cap (size) stocks will do better than large stocks and value will do better than growth. It is logical. When you are smaller than Intel, you have more room in front of you to grow. Intel has a much harder time getting bigger. As for value, everyone loves a bargain. Of course, the higher profit is not risk free. You have bigger swings. We all know that swings can last years (both upswings and down swings). To control risk, I use mutual funds and a bond allocation. 

As always, I thank you for your business and trust. Please call me if you have any questions.

Dan


Investment Fee Schedule

Rate Assets Under Management
1.44% Below $125,000
1.00% Between $125,000 and $750,000
.85% Between $750,000 and $1,250,000
.80% Between $1,250,000 and $1,750,000
.75% Between $1,750,000 and $2,500,000
.70% Between $2,500,000 and $3,250,000
.65% Between $3,250,000 and $4,250,000
.60% Above $4,250,000

A single rate is applied to the whole account. Compared to my old fee structure, under the new fee structure the cost for a $1 million account would be $500 lower per year and the cost for a $1.5 million account would be $1,500 lower per year. I will still waive personal tax return fees for accounts over $1 million. All services stay the same. I am just lowering my upper end fees. For accounts that are above $5,250,000, we’ll need to discuss a custom rate.


As I’m writing these to help my readers, I would be very appreciative of any input in regards to what I should write next. If you want me to write about a particular topic, please contact me. Please contact me if you would like to submit a post to my blog.

If anything that I mentioned above interests you, please consider downloading my free e-book. The book contains my thoughts on investment management and some information that I think everyone should know. You can also download it below.

E-Book Download

Questions for the comments

Did my newsletter make sense? Do you agree or disagree with what I said?

Learn About My Business

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Investment Newsletter for the end of April, 2018

The market was decent this month and your portfolios have been recovering well from the first quarter’s mini slump. The Dow has recovered less well than you have. You are not invested in the Dow.

Today I want to discuss risk. Risk and returns are related. As one goes up, so does the other. It is not possible to have a risk free – high return investment. But, there is only a certain amount of risk that works for people. My 94-year-old mother cannot financially handle a two-year stock market crash. The money is needed now for assisted care. Risk is individual and changing over time.

I control risk several ways. I use mutual funds which are large collections of holdings and I allocate a significant portion to bond funds. Short-term bonds do not vary much with the boom and bust cycle of stocks. Therefore, a weighting towards short-term bonds will dampen the overall portfolio fluctuation. It means, however, that my portfolio allocation will not go up as much as the market when the market is hot. It also means my portfolio will not crash as bad when the market stinks. The particular weighting is specific to the client.

When the market is hot, clients often give me grief because of the bond weighting. Many of my competitors are nearly 100% stock. They will generally out-perform my portfolios in great markets. In bad markets, they lose clients. People’s memories are very short. In boom times, I will occasionally lose a client because “your returns are not as good as your competition.” My agenda is not short-term return. I am going for outperforming the market over long periods and is adjusted for risk. I have gradually built an investment practice with about $28 million under management from a starting place of zero. I still have my very first client.

Evaluating risk tolerance is tricky. I can easily put together or purchase a quantitative survey. Client x is 60 years old, with this much money, this much income, etc. The magic box then spits out an allocation towards bonds. The problem here is that there is an emotional component to risk. People react differently to stress and sometimes they lie even to themselves. I do not like treating everyone the same.

My solution to evaluating the emotional side of risk is to use a sensitivity analysis. This question sequence should be familiar to all of you.

Let’s say your portfolio goes down 10%. What are you feeling? Are you comfortable or freaking out? Now, it is down 20%. Same questions. What are you thinking? Now it is down 30%, etc.

My question sequence is attempting to judge emotional reactions to downturns. Most clients have a spot that hurts so bad they cannot stand it. I build portfolios by trying to make sure that spot does not happen in real life. Some clients still lie to themselves. My test is abstract and not in the emotional drama of the news cycle. Also, people change over time. I like to repeat the test each year. That change in risk, however, makes sense. Different ages have different emotional reactions, different cash flow needs, etc. Young people also have more time to wait out cycles.

Thank-you,

Dan


Investment Fee Schedule

Rate Assets Under Management
1.44% Below $125,000
1.00% Between $125,000 and $750,000
.85% Between $750,000 and $1,250,000
.80% Between $1,250,000 and $1,750,000
.75% Between $1,750,000 and $2,500,000
.70% Between $2,500,000 and $3,250,000
.65% Between $3,250,000 and $4,250,000
.60% Above $4,250,000

A single rate is applied to the whole account. Compared to my old fee structure, under the new fee structure the cost for a $1 million account would be $500 lower per year and the cost for a $1.5 million account would be $1,500 lower per year. I will still waive personal tax return fees for accounts over $1 million. All services stay the same. I am just lowering my upper end fees. For accounts that are above $5,250,000, we’ll need to discuss a custom rate.


As I’m writing these to help my readers, I would be very appreciative of any input in regards to what I should write next. If you want me to write about a particular topic, please contact me. Please contact me if you would like to submit a post to my blog.

If anything that I mentioned above interests you, please consider downloading my free e-book. The book contains my thoughts on investment management and some information that I think everyone should know. You can also download it below.

E-Book Download

Questions for the comments

Did my newsletter make sense? Do you agree or disagree with what I said?

Learn About My Business

Logo

Newsletter for the End of March, 2018

Everyone’s portfolio is down for the quarter and flat or a little up for the month. “Say what! The market was lousy this month. How could I be flat?” So, what is going on?

The Dow went down this month by 926 points (3.7%). The S&P went down this month by 78 points (2.9%). You would expect that your portfolio would have gone down by something similar. There are three things here that you are missing.

  1. The Dow and the S&P are not the whole market. They are just what we look at really fast to visualize the market. The turmoil with trade tariffs and threats affected mostly large cap stocks. Smaller companies’ stock prices did not react. I look at the Dow many times every day. But, it is not what you are invested in. Your portfolios have a weighting towards small cap.
  2. A month is a very short period. Stocks and categories of stocks jiggle back and forth constantly. One-month long movements are meaningless noise. Next month could be very different or more of the same. Small cap will outperform large cap, but to really trust the result you need to look at multi-year long periods.
  3. I am magnificent. It is true but alas not for this reason. My input is to keep you steady and disciplined in the market. I try to keep fear and greed out of the portfolios, out of your thinking, I hold to plan. I have no control over whether the market has a fear fit or some politician says the wrong thing. I know to discount nonspecific investment news as meaningless. Sure, the market can go way down for a few days because of a meaningless trade fear. It may even stay down for a few months or longer. But, there is no way for me to predict what portion of the market will be trashed and what portion goes happily forward.

I wrote about the tariff/trade drama last month. I do not count news unless it is specific. General fears, threats without dates and amounts, etc. are not specific. I said last month I wanted to watch. Now we are hearing about countries getting waivers and exceptions (European Union). We are hearing that South Korea renegotiated their trade agreement with the US. In exchange for more imports of US auto parts and a cut in Korean steel exports, South Korea now gets a waiver from the steel tariffs. In short, I do not believe the tariff fear fit meant anything.

The new “crisis” stories are Trump criticizing Amazon for sales tax and shipping issues, Facebook being a jerk about privacy issues, and Tesla running out of cash. Their stock prices sharply dropped as a result. There is always something to scream “the sky is falling” about. And remember, I use mutual funds not individual stocks.

I wish to thank all of you for your business and trust.

Dan


Investment Fee Schedule

Rate Assets Under Management
1.44% Below $125,000
1.00% Between $125,000 and $750,000
.85% Between $750,000 and $1,250,000
.80% Between $1,250,000 and $1,750,000
.75% Between $1,750,000 and $2,500,000
.70% Between $2,500,000 and $3,250,000
.65% Between $3,250,000 and $4,250,000
.60% Above $4,250,000

A single rate is applied to the whole account. Compared to my old fee structure, under the new fee structure the cost for a $1 million account would be $500 lower per year and the cost for a $1.5 million account would be $1,500 lower per year. I will still waive personal tax return fees for accounts over $1 million. All services stay the same. I am just lowering my upper end fees. For accounts that are above $5,250,000, we’ll need to discuss a custom rate.


As I’m writing these to help my readers, I would be very appreciative of any input in regards to what I should write next. If you want me to write about a particular topic, please contact me. Please contact me if you would like to submit a post to my blog.

If anything that I mentioned above interests you, please consider downloading my free e-book. The book contains my thoughts on investment management and some information that I think everyone should know. You can also download it below.

E-Book Download

Questions for the comments

Did my newsletter make sense? Do you agree or disagree with what I said?

Learn About My Business

Logo

Investment Newsletter for the End of February, 2018

We had an exciting month. Big declines followed by big increases with another decline on the last day. Everyone lost about the same amount in February that they gained in January, more or less. I personally do not like exciting. Slow and boring fits me much better.

I have a problem with exciting. Peoples’ brains disengage from their wallets. I realize that I have better knowledge of the market than you do. That reason is why you hire me after all. Nonetheless, I wish to share with you how I evaluate news events and market swings.

When there is a large swing in the stock market, everyone’s instinctive reaction is to want to know why. The news outlets will make up stories as necessary. My first reaction is to ask the question is there a specific reason that makes sense? “Someone said something,” “inflation uncertainty,” etc. are all babble. They are not specific nor can anyone explain how that relates to the stock market prices. An actual increase in interest rates, a tower getting blown up, a strike called, etc. are specific. If I cannot see an obvious connection, then I go on the assumption that it is emotional reaction. As I have said many times, emotions overreact.

The market on one day mid-month went down 1,600 points. Some bank official hinted that there might be an interest hike. He had no power to cause a hike. And duh, everyone knows interest rates will have to go up at some point. It did not matter, the news broadcasted “inflation fears.” Investors ran for the door and a bunch more ran after them and the sheep went over the cliff. The computer algorithms that the big quant funds use saw the decline and sold even more. Two days later, it started recovering very nicely. You see nothing changed economically. It was stupidity.

A few days ago, Trump proposed fairly severe import tariffs on steel and aluminum. The market is down 700 points since then. This news is specific but I am uncertain as to the connection to the market. Yes, I understand that users of these metals will have higher prices and those higher prices will filter eventually through the economy. Please explain how these tariffs relate to the stock price of Home Depot, Shell Oil, Tyson Foods, Intel, etc. These companies do not use these metals. The future connection is fairly remote. The second part of the argument is that it will ignite a trade war. China, etc. will now not take our imports. That part is a non-specific maybe at some point in the future. Fear.

In general, I do not like tariffs for I think they yield a net loss but the story isn’t simple. They reduce the national economy. The effect, though, is long term not in the next year or two. The story is different in terms of some local economies. In places such as Ohio, Pennsylvania, etc. a steel tariff might enable people to pay their mortgages. The tariff would give those people more buying power and thus they would be able to contribute more to the economy. My point is that predicting the future consequences of an event such as a tariff is very difficult and must be done with caution.

On this news, I am going to wait for more details before I react.

Dan


Investment Fee Schedule

Rate Assets Under Management
1.44% Below $125,000
1.00% Between $125,000 and $750,000
.85% Between $750,000 and $1,250,000
.80% Between $1,250,000 and $1,750,000
.75% Between $1,750,000 and $2,500,000
.70% Between $2,500,000 and $3,250,000
.65% Between $3,250,000 and $4,250,000
.60% Above $4,250,000

A single rate is applied to the whole account. Compared to my old fee structure, under the new fee structure the cost for a $1 million account would be $500 lower per year and the cost for a $1.5 million account would be $1,500 lower per year. I will still waive personal tax return fees for accounts over $1 million. All services stay the same. I am just lowering my upper end fees. For accounts that are above $5,250,000, we’ll need to discuss a custom rate.


As I’m writing these to help my readers, I would be very appreciative of any input in regards to what I should write next. If you want me to write about a particular topic, please contact me. Please contact me if you would like to submit a post to my blog.

If anything that I mentioned above interests you, please consider downloading my free e-book. The book contains my thoughts on investment management and some information that I think everyone should know. You can also download it below.

E-Book Download

Questions for the comments

Did my newsletter make sense? Do you agree or disagree with what I said?

Learn About My Business

Logo

Investment Newsletter for the end of January, 2018

The market continued upward this month and all of you have very nice gains. Of course, the reality is we do not know why. Market fluctuations can be blamed on a lot of things and sometimes the explanation is more art than science.

The easiest explanation is that the market is reacting to Trump’s economic expansion. Of course, this reason is very easy to debunk. Most of his regulatory changes (which I support) have not had any effect yet. Likewise, the tax changes have barely started having an effect. It is absolutely true that the US economy is booming. What is not clear and cannot be determined is whether the economy is booming because of a future Trump expectation or because of a delayed Obama effect. Or maybe it has nothing to do with either one of them.

Traditional Efficient Market Theory states that stock prices are based on future expectations. The pricing is always rational. I do not completely buy into this idea. It is essentially correct but assumes that stupid people become smart when in a large enough group. It ignores greed bubbles, fear pits, and all the madness of the crowd. We know the crowd can be stupid. Look at the run-up and collapse of Bitcoin. All of you have seen market booms and busts. Of course, we cannot predict the timing of a bubble start or collapse. We cannot predict how dramatic the collapse will be either.

Stock prices are high right now. Pretty darn sweet, in fact. Are we in a bubble? There is no way to tell until after this theoretical bubble pops. Will the stock market go down 10%, 20% this month, this year, or three years from now? That question has no answer although it is easy to make one up. For example, “I predict steady gains for the remainder of the year, followed by uncertainty causing declines of a minimum of 10%.” This type of garbage is presented constantly by TV talking heads, stock experts, brokerage firms, etc. Clients demand it. The truth is no one knows.

There are more fanciful answers. When the market was poor a few years ago, the prevailing wisdom (excuse me while I cough) was that the bad economy in Greece, Spain, etc. was causing the market to collapse. Of course, Greece still has a bad economy but no one talks about that one anymore. It does not fit the story. The best I heard was two years ago. There was a big market decline after Thanksgiving. The reason in the press was that black Friday sales were poor in China. Of course, they do not have Thanksgiving or much of a black Friday in China. Also, most US companies do not care about consumer sales in another country. That explanation was gone by lunch time. Even the experts were embarrassed.

Since we do not know why something is happening, it is hard to determine what to do. Should you change your plan? The answer here is to change nothing. While the crowd will eventually run screaming for the door, we do not know when that will happen. Stick to the plan.

I have had a very good year in business. I wish to thank all of you for your support.

Dan


Investment Fee Schedule

Rate Assets Under Management
1.44% Below $125,000
1.00% Between $125,000 and $750,000
.85% Between $750,000 and $1,250,000
.80% Between $1,250,000 and $1,750,000
.75% Between $1,750,000 and $2,500,000
.70% Between $2,500,000 and $3,250,000
.65% Between $3,250,000 and $4,250,000
.60% Above $4,250,000

A single rate is applied to the whole account. Compared to my old fee structure, under the new fee structure the cost for a $1 million account would be $500 lower per year and the cost for a $1.5 million account would be $1,500 lower per year. I will still waive personal tax return fees for accounts over $1 million. All services stay the same. I am just lowering my upper end fees. For accounts that are above $5,250,000, we’ll need to discuss a custom rate.


As I’m writing these to help my readers, I would be very appreciative of any input in regards to what I should write next. If you want me to write about a particular topic, please contact me. Please contact me if you would like to submit a post to my blog.

If anything that I mentioned above interests you, please consider downloading my free e-book. The book contains my thoughts on investment management and some information that I think everyone should know. You can also download it below.

E-Book Download

Questions for the comments

Did my newsletter make sense? Do you agree or disagree with what I said?

Learn About My Business

Logo

Investment Newsletter for the end of December, 2017

The market continued upward this month and all of you have significant gains for the quarter and year.

Well the tax bill passed and I have a few observations. Virtually every tax payer ends up with lower taxes. I have been running tax projections all week for tax clients. Only one client had their taxes go up. Everyone else had their taxes go down. The single young person with just a W2 (down over $700), the small business owner (down over $6,000), retired couples, and my favorite CPA CFP (yours truly). I have not found in my small sample that there was any bias for the rich against the poor. In fact, the one client whose taxes went up had very high income.

The $10,000 limitation in state and local taxes does not seem to be the big issue. The lowering of tax brackets is far more significant. Also important, however, is the 20% pass-through deduction. I own three pass-through; a CPA practice organized as a sole proprietorship, an investment practice organized as an S-Corporation, and a rental. Let’s pretend my pass-through profit totals $100,000. I could take 20%, $20,000, as a deduction from income before taxes are calculated. This deduction is a very big issue for many of you. LLC’s and farms are also considered pass-through by the way.

I am not concerned that the individual reductions are temporary. The next congress will mess around with the rules, the one after will change it still more. I am only concerned with how my clients and I do this year. The argument that the individual cuts are temporary and the corporate cuts are permanent is bunk. ABSOLUTELY ALL tax changes are temporary. There is no such thing as a permanent tax change.

The tax bill plus official explanations is 1,100 pages. I got through 700 pages before I thought I was going to die. Pure legalese, references to other code sections, etc. In short bad writing. I do not know why government (both political sides do the same) write tax bills to be unreadable. I hate jargon because it seems to be designed to put the recipient into a junior place. Many professionals (accountants even) use overcomplicated writing and speech so as to control the conversation. I think that is what happened here.

I do not know yet how the changes will affect the state returns. My Washington and Nevada clients can ignore this paragraph. Many state rules are based on the federal rules and some are not. For example, federal rules will no longer allow miscellaneous employee expenses such as uniforms, tools, union dues, mileage, licenses, CPA fees, etc. (I am only talking about employees taking these expenses. There is no problem if they are run through a business). It is now likely the states will not allow these expenses either.

If your new employer gives you a choice of working as a W2 employee or as an independent contractor, think about being an independent contractor very seriously. Employees do not get the 20% reduction in income listed above in section 1. Independent contractors on the other hand would be considered pass-throughs. Same individual, same job, same pay rate but 20% less taxable income. Nice.

Thank-you all for a good year.


Investment Fee Schedule

Rate Assets Under Management
1.44% Below $125,000
1.00% Between $125,000 and $750,000
.85% Between $750,000 and $1,250,000
.80% Between $1,250,000 and $1,750,000
.75% Between $1,750,000 and $2,500,000
.70% Between $2,500,000 and $3,250,000
.65% Between $3,250,000 and $4,250,000
.60% Above $4,250,000

A single rate is applied to the whole account. Compared to my old fee structure, under the new fee structure the cost for a $1 million account would be $500 lower per year and the cost for a $1.5 million account would be $1,500 lower per year. I will still waive personal tax return fees for accounts over $1 million. All services stay the same. I am just lowering my upper end fees. For accounts that are above $5,250,000, we’ll need to discuss a custom rate.


As I’m writing these to help my readers, I would be very appreciative of any input in regards to what I should write next. If you want me to write about a particular topic, please contact me. Please contact me if you would like to submit a post to my blog.

If anything that I mentioned above interests you, please consider downloading my free e-book. The book contains my thoughts on investment management and some information that I think everyone should know. You can also download it below.

E-Book Download

Questions for the comments

Did my newsletter make sense? Do you agree or disagree with what I said?

Learn About My Business

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Newsletter for the End of November, 2017

The market continued upward this month and almost all of you have significant gains.

I have two main points to discuss. The Dow is not the market and don’t sweat the tax bill.

Over the last two months the Dow Jones Industrial Average (the “Dow”) has gone up 8.3%. It is now at an all-time high. The S&P 500 average went up just over 5% and the small cap indexes went up 3% plus change. The Dow is made up of only 30 big stocks. If three or four have big wins, the whole index is distorted up. The S&P 500 has 500 companies. One or two or ten big companies cannot influence the average as much. The S&P still has primarily big companies, just not as big.

So, what happened right now. A tax bill is being pushed through that benefits big corporations. The Dow is made up of big corporations. In hindsight, we should have all switched to Dow type investments two months ago. But then again, if the tax bill fails, the Dow will plummet. No one can predict what will happen with the tax bill. It still could fail to pass after conference. Risk is real. Also, timing is a very dangerous game.

It is fun and easy to look at the Dow every day and see how the market is doing. Just remember the Dow is a very small sample of the thousands of stocks available.

As for the tax bill, it is too soon to reach conclusions. My world is about the little fine print, the footnotes at the back. The senate bill is 478 pages and has many moving pieces. I have read every summary I can find and the longest has been 2 pages. My organizations will be sponsoring 8-hour seminars with 300-page handouts by this summer.

As for the tax bill, it is too soon to reach conclusions. My world is about the little fine print, the footnotes at the back. The senate bill is 478 pages and has many moving pieces. I have read every summary I can find and the longest has been 2 pages. My organizations will be sponsoring 8-hour seminars with 300-page handouts by this summer.

It also does not matter yet. The senate bill has to go to conference with the house bill (also some 500 pages or so). The differences have to be resolved and then everything has to be voted on again by both the senate and the house. I would rather wait until the final legislation to puzzle out what it means. Also, both bills are not effective until January 1, 2018. This coming tax season, where I complete the 2017 returns, is under the old rules.

There will be winners and losers with the new tax rules, if they pass. The political arguments are starker than is warranted. It will not be a complete give away to the rich on the backs of the middle class. It will also not be the cause of a huge and sudden economic boom. Those are both political exaggerations to score points. The reality will be in between on both arguments. Stick to the plan and you will be fine.

Dan


Investment Fee Schedule

Rate Assets Under Management
1.44% Below $125,000
1.00% Between $125,000 and $750,000
.85% Between $750,000 and $1,250,000
.80% Between $1,250,000 and $1,750,000
.75% Between $1,750,000 and $2,500,000
.70% Between $2,500,000 and $3,250,000
.65% Between $3,250,000 and $4,250,000
.60% Above $4,250,000

A single rate is applied to the whole account. Compared to my old fee structure, under the new fee structure the cost for a $1 million account would be $500 lower per year and the cost for a $1.5 million account would be $1,500 lower per year. I will still waive personal tax return fees for accounts over $1 million. All services stay the same. I am just lowering my upper end fees. For accounts that are above $5,250,000, we’ll need to discuss a custom rate.


As I’m writing these to help my readers, I would be very appreciative of any input in regards to what I should write next. If you want me to write about a particular topic, please contact me. Please contact me if you would like to submit a post to my blog.

If anything that I mentioned above interests you, please consider downloading my free e-book. The book contains my thoughts on investment management and some information that I think everyone should know. You can also download it below.

E-Book Download

Questions for the comments

Did my newsletter make sense? Do you agree or disagree with what I said?

Learn About My Business

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Investment Newsletter for the end of October, 2017

The market continues to go up. This month’s results were great. Obviously, the market will at some point turn back down. No telling when that will be. I am watching.

My topic today is sudden money. Sudden money is inheritances, life insurance proceeds, divorce settlements, legal settlements, sales of property or businesses, etc. The common element is a large amount of cash that you did not previously have.

Everyone wants a piece of that money. You put that money into the bank. The teller then asks you if you want to speak to the bank’s financial planners. The teller IS ON COMMISSION. I have seen an insurance agent testify at an open casket funeral about how the deceased was his best friend (which was false. They only met two weeks before) and then sell an annuity to the widow. There is a big incentive to grabbing the money when it is fresh.

  1. Everyone wants to manage the money and most are on commission.
  2. Annuities are extremely high commission. Most of the time, they are the wrong choice. They convert capital gain to ordinary income (bad tax planning). They lock up your money for years unless you pay a big surrender charge.
  3. Do not make financial decisions while your head is cloudy. The insurance agent above sold the grieving widow with words similar to “I am sorry to bring this up now but this deal is too good to wait.”
  4. Resist the temptation to pay off your mortgage. I have seen widows take the entire life insurance proceeds and pay off most of the mortgage and then have nothing to live on. First, make sure you have enough money to live, then pay off credit cards, then cars, then mortgages.
  5. Sit down and plan out your situation. How much do you have? What is still to come in (wages, social security, future sudden cash, etc.)? What are your expected expenses? Think about how much risk you want. Start with a disciplined process and you will get a better result. I can help you put together a plan.
  6. Do not assume the stock market will always go up. Likewise, do not assume real estate prices will always go up. Every asset class has an up and down cycle. Real estate will go back down and has many times in the past. The stock market also can and will go down. There is no such thing as a sure investment. There is always risk.
  7. Be careful about sudden big spending. The money has to last your life. The market will go up and down. Real estate will go up and down. Your expenses will only go up.
  8. Sometimes, this money is taxable at ordinary rates (expensive tax). Sometimes it is taxable at capital gains rates (cheap tax). Sometimes, it is not taxable at all (my favorite kind). It depends on the situation. Rather than guess, call me and ask.
  9. If you know ahead of time that the money is coming, you can plan in advance. Sometimes, we might be able to change the terms so that it is better for you tax wise.

Investment Fee Schedule

Rate Assets Under Management
1.44% Below $125,000
1.00% Between $125,000 and $750,000
.85% Between $750,000 and $1,250,000
.80% Between $1,250,000 and $1,750,000
.75% Between $1,750,000 and $2,500,000
.70% Between $2,500,000 and $3,250,000
.65% Between $3,250,000 and $4,250,000
.60% Above $4,250,000

A single rate is applied to the whole account. Compared to my old fee structure, under the new fee structure the cost for a $1 million account would be $500 lower per year and the cost for a $1.5 million account would be $1,500 lower per year. I will still waive personal tax return fees for accounts over $1 million. All services stay the same. I am just lowering my upper end fees. For accounts that are above $5,250,000, we’ll need to discuss a custom rate.


As I’m writing these to help my readers, I would be very appreciative of any input in regards to what I should write next. If you want me to write about a particular topic, please contact me. Please contact me if you would like to submit a post to my blog.

If anything that I mentioned above interests you, please consider downloading my free e-book. The book contains my thoughts on investment management and some information that I think everyone should know. You can also download it below.

E-Book Download

Questions for the comments

Did my newsletter make sense? Do you agree or disagree with what I said?

Learn About My Business

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