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Paycheck Protection Program Update April 8, 2020

Dear Business Owner Clients,

A client reports that his loan officer requested a copy of his lease, utilities, date of incorporation and NAICS Description Code. You can get your NAICS Code here.

NAICS Code Description

Client was also informed that until the Bank has everything they need he did not have an SBA Number. We are not sure of the significance of an SBA Number but it sounds important.

We intend to send in our information before the Bank (the same Bank) contacts us.

Thank you for sending me any information that you find.

The CARES Act

Breaking Down the CARES Act

As you know, the coronavirus pandemic has created both a health crisis and an economic crisis.  As of this writing, there are over 160,000 known cases.1  By the time you read this, there will certainly be more – and that number does not reflect those who have been infected but not tested.  The economic cost, meanwhile, has resulted in millions of Americans losing their jobs.  Some economists at the Federal Reserve estimate the unemployment rate could rise as high as 32%!2 

To help address both crises, Congress recently passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act.  It’s a massive, $2 trillion stimulus package designed to help everything from hospitals, to individuals, to businesses large and small.  Time will tell if it will be enough to blunt the impact of this pandemic, but the fact Congress was able to pass something so significant, so quickly, is a rare feat worth celebrating. 

Charles Darwin once said, “It is the long history of humankind that those who learned to collaborate and improvise most effectively have prevailed.”  For many years now, that is not a quote you could usually apply to the United States Congress.  Political partisanship has meant that gridlock usually prevails over collaboration.  Thankfully, both sides of the aisle recently proved the institution still works when people put aside their differences and work together for the common good. 

This is major legislation, with benefits for almost every American.  Some of the bill’s provisions are especially important for retirees.  So, to help you understand what the CARES Act does, and how it will impact you, I have prepared a special breakdown.  As I am sending this to all my clients, some information may apply to you, and some may not.  Please read it carefully, and then let me know if you have any questions.      

 We at Vaughan & Co. Securities Inc, hope you and your family are staying healthy and safe.  Please let us know if there is anything we can do for you!                                  

Important Provisions of the CARES Act

The CARES Act is designed “to provide emergency assistance and health care response for individuals, families, and businesses affected by the 2020 coronavirus pandemic.”3  Think of it as a kind of massive care package.  Just as an actual care package is meant to get somebody through a tough time, that’s what the CARES Act is designed to do.  Because so many people have either lost their job, seen their hours cut back, or experienced drastic changes to their daily lives, many Americans must now contend with potential cashflow problems.  The CARES Act contains a number of provisions to help individuals and businesses handle those problems, at least for the short-term.

What follows is a brief overview of the provisions that could affect you and your finances.  Let’s start with:

Direct Payments4

What’s the quickest way to ensure people get the money they need?  Pay them directly.  Perhaps the most newsworthy aspect of this bill is that many taxpayers will receive a one-time direct payment to help them cover expenses. 

Here’s a breakdown of how it will work. 

Individuals who made up to $75,000 in 2019 will receive $1,200

Heads of Household (single parents, for example) who made up to $112,500 in 2019 will receive $1,200.

Married couples filing a joint tax return who made up to $150,000 in 2019 will receive $2,400.

On top of this, each taxpayer will receive up to $500 for each child they have under the age of 17.  So, for example, a married couple with two children would receive $3,400.

Note that payments decrease for individuals and married couples with income above their respective thresholds.  Specifically, payments shrink by $5 for every $100 earned above the $75,000/$150,000 limits.  The payments disappear entirely for individuals who made $99,000 or more, and for married couples who made $198,000 or more. 

So, when will this money actually arrive?  It’s unclear.  The IRS could start issuing payments sometime in April or May, but an official schedule has not been released.  (The CARES Act itself only mandates that payments be made “as rapidly as possible.”4)  It’s likely that those who filed their 2019 tax returns with direct-deposit information will receive payments first.  

If you haven’t filed your tax return for 2019 yet, please let me know.  We would be happy to work with your tax preparer to expedite the process. 

Speaking of tax filing…

New Tax Deadlines5

This isn’t technically part of the CARES Act, but I’m going to cover it anyway because it’s important.  Due to the pandemic, IRS has extended this year’s tax-filing and payment deadlines.  Now, taxpayers have until July 15 – up from the standard April 15 – to file their 2019 tax returns.  The deadline to make IRA and Roth IRA contributions is now July 15 as well. 

Note that this new deadline applies to everyone, not just those who are sick, under quarantine, or materially affected by the coronavirus in some way.  And if you’ve already filed your return, you should still receive your refund around the same time you would during a typical tax season.

Unemployment4

Let’s get back to the CARES Act.

I said a moment ago that direct payments were the most newsworthy aspect of the bill.  But for the overall economy, the bill’s unemployment provisions are probably the most important.  Unemployment claims rose by 3.28 million between March 15-21.  That’s the highest weekly surge in history.  The previous record?  695,000.6 

To help combat this, the CARES Act provides approximately $260 billion in unemployment assistance for those who lose their jobs.  This includes freelancers, independent contractors, and other self-employed workers.  That’s a major change, because under normal circumstances, they can’t apply for unemployment benefits. 

Generally, workers who lose their jobs will receive $600 per week for four months, in addition to what their state unemployment program pays.  The CARES Act also adds an additional thirteen months of federal unemployment insurance on top of a person’s state benefits.

If any family members lose their job, please let me know.  We would be happy to answer their questions or provide any assistance we can. 

Business Support4

Even those who don’t lose their jobs will still want to keep a close eye on our nation’s unemployment rate.  More people out of work means less people spending money on the economy – which can have a profound influence on the markets.  That’s why one of the most critical things the government can do right now is help businesses avoid laying people off. 

Roughly $350 billion of the legislation’s price tag is geared towards just that.  Companies with up to 500 employees can receive loans of up to $10 million.  Any portion of the loan used to maintain payroll or retain workers – at least through the end of June – will be forgiven.  In addition, businesses can apply for grants of up to $10,000 to cover their operating costs. 

For larger businesses, the CARES Act sets aside around $500 billion in loans and grants, especially for hard-hit industries like airlines.  And for companies that are forced to close or furlough workers, the legislation “covers to 50% of payroll on the first $10,000 of compensation, including health benefits, for each employee.”7

These are all necessary steps to keep our economy going.  Will they be enough?  That’s an open question.  The answer largely depends on how long the pandemic lasts – and how well Americans commit to social distancing to stop the virus’ spread.  Watch this space.             

Retirement Funds4

Certain aspects of the CARES Act’s provisions are especially important for retirees.  Let’s cover those now.

First up, Required Minimum Distributions, or RMDs.  In a normal year, anyone 72 years or older would need to withdraw a minimum amount from their IRA or 401(k).  Not this year.  Under the CARES Act, all RMDs are suspended in 2020.  That means you can leave that money in your retirement account for the year if you don’t need it now.  Note that this applies both to retirement account owners and beneficiaries.

People who have already taken their distribution for 2020 can potentially return the money to their account if they want.  This could be a slightly complicated process, so I won’t cover it here.  However, if you want further information about it, let me know.

The CARES Act also waives the 10% early withdrawal penalty for retirement accounts.  Withdrawals will still be taxed, but spread over a three-year period.  Under most circumstances, my advice is to leave your retirement savings where they are, but it’s nice to know that early withdrawals are an option if you need them.

Finally, the CARES Act increases the 401(k) loan-limit from $50,000 to $100,000.

If you have questions about any of these provisions, or how they apply to you, let’s chat!

Combatting the Coronavirus4

Finally, it should come as a great comfort to know that the brave doctors, nurses, and scientists on the front lines are getting assistance, too.  Specifically, the CARES Act provides $100 billion for hospitals, $1.32 billion for community health centers, $11 billion for coronavirus treatments and vaccines, $16 billion for additional medical supplies, like ventilators and masks, and $20 billion for veterans’ health care.  You should know, too, that the Act includes a telehealth program so that if you can’t leave home, you can still have a virtual appointment with your doctor.

Our hearts goes out to all those giving their time, talents – and sometimes, lives – to keep the rest of us safe.  They are true heroes, and we are so grateful for them.  Let’s all do our part to make their jobs just a little easier by maintaining our distance, keeping clean, and staying home as much as possible.

Conclusion

As you can see, the CARES Act is a loaded piece of legislation.  Time will tell whether more measures are needed, but this is definitely a good start.

Of course, our team will continue poring over these changes.  If there is anything else we feel you need to know, we’ll reach out to you.  In the meantime, if you have any questions about:

·         Getting a direct payment

·         Filing your taxes

·         Protecting your paycheck and/or income

·         Your retirement accounts

Please don’t hesitate to let us know.  Whether we’re in the office or working from our own homes, my team and I are always here for you.

Stay healthy, and stay safe.

Attention Business Owners

Paycheck Protection Program

My first analysis of this loan program is that it will be attractive for  small business owner clients –Your business and Mine.

As first time applicants we will have to learn fast. We will tell you what we find as we go along. Please let us know any Best Practices that you discover.

Here is a Summary of the Paycheck Protection Program.    The business  can borrow from the SBA an amount equal to our  monthly occupancy costs-rent, utilities, employee salary costs  and health insurance. Looks like any employee who earns more than $100,000 is excluded from the calculation.

After the monthly amount is determined then the monthly amount is multiplied by 2.5 to equal the amount of the loan. The loan interest rate is 4% and can have terms of up to ten years.

The program has a powerful incentive since the loan is forgiven as you pay occupancy costs and employee costs. Any of these costs incurred between Feb 15, 2020 and June 30, 2020 will reduce the loan balance.  The forgiven loan is not taxable income.

I have introduced myself to the head of SBA lending at Columbia Bank who was with Atlantic Stewardship Bank.

As a Northern NJ Business Owners who has Never Applied for an SBA Loan  we intend to learn with you.

CPAs will have to do a lot of work assembling the data to support the application-in the middle of tax season!

The program appears to be so attractive that the banks who are SBA lenders may be overwhelmed by applications-an advantage to those who are organized and can act quickly.

The Best information that I found so far is from Gibson Dunn law firm. https://www.gibsondunn.com/sba-paycheck-protection-loan-program-under-the-cares-act/ and a memo from Senator Marco Rubio’s office.

https://www.rubio.senate.gov/public/_cache/files/ac3081f6-14ae-4e6f-9197-172ede28badd/71AB6CB05A08E369E0D488A80B3874A5.faqs---paycheck-protection-program-faqs-for-small-businesses.pdf

Please forward this to any of your Small business Owner Friends and Family.

Regrets We Will Not Have

Four Things Others Will Wish They Had Done – That We’re Already Do

As you know, the coronavirus situation continues to hammer the markets.  All over the world, investors large and small are facing a level of uncertainty we haven’t experienced in over a decade.  But I’m proud to say that, based on the conversations I’ve had with you and my other clients, there may be no group of people in the world who are handling this situation better.  The majority of my clients have all told me some variation of the same thing:

“It’s not fun, but I’m not stressing about it too much.  I know the markets will recover eventually.”

In other words, they know that, while what goes up must come down, what goes down will eventually bounce back up.

I was also proud when a client asked me a very simple, but very smart question the other day:

“When this is all over, what will I wish I had done?”

This question really got me thinking.  Investors are bombarded every day with opinions (informed or otherwise), data (informative or misleading), and news (real or fake).  As a result, many investors have panicked.  When the coronavirus pandemic resolves and the markets rebound, what will they wish they had done?

Here are my answers:

  1. They’ll wish they had focused on the long-term instead of the short.

Investing, by its very nature, is a long-term activity.  Even people who are close to retirement are still investing for the long-term.  That’s why, while bear markets are uncomfortable, they’re also somewhat overrated.  Markets fall over days, weeks, and sometimes, months.  But history has shown that they rise over the course of years and decades, which is good for us, because we’ll be investing for years to come!

Investors who forget this, who think that what’s happening now will happen always, are falling prey to recency bias.  And that never ends well.

  1. They’ll wish they had double-checked our asset allocation before all this started.

Asset allocation – the process of spreading your investments across different asset classes – is one of the most important things an investor can do to balance risk versus reward.  During bear markets, the investors who get burned the most are the ones who “put all their eggs in one basket.”  That’s because they didn’t stop to think what would happen if they let their basket drop.       

Investors who have spread their money across a variety of asset classes – who have truly diversified – know they have plenty of eggs left to cook with.

  1. They’ll wish they hadn’t tried to take shortcuts.

Think of the last time you were caught in a traffic jam.  You’re sitting there, idling in traffic, when suddenly, the lane next to you starts to move.  So, you quickly merge into that lane, only to get stuck again.  Meanwhile, the lane you were just in is now moving…and all the cars that were once behind you are now speeding ahead.

Maddening, isn’t it?

When bear markets hit, investors often panic.  Instead of sticking to their long-term strategy, they sell, sell, sell – at a time when everyone is selling.  This means they are selling low.  In other words, they try to change lanes in the middle of a traffic jam.

But again, we’re in this for the long-term.  The road we’re on stretches for miles.  Sometimes, the speed limit is 75 miles per hour.  Sometimes, it’s only 25.  Trying to take shortcuts just leads to longer delays.

  1. They’ll wish they had positioned themselves to take advantage of when the markets rebound.

It happened after the Great Depression.  It happened after the stock market crash of ’87. It happened after the dot-com bubble burst.  It happened after the financial crisis of 2008.  It happened after the fourth quarter of 2018.  The markets recovered – and climbed to new heights.

Just as bear markets are inevitable, so too are bull markets.  Investors who don’t think long-term, who try to take shortcuts, who don’t try to balance risk and reward, will not be positioned to take advantage of the next one.  Which means that when this is all over and the markets rebound, when they look over at the lane next to them and see people zooming ahead, they’ll be wishing they had done things differently.

But here’s the good news. When this is all over, we won’t be wishing we had done these things.  Why?  Because we’re already doing them!  So, while headlines probably won’t be pleasant over the next several weeks, we can take comfort in this very simple fact:

When this is all over, we won’t need to look back and regret.  All we’ll need to do is keep looking forward.

No matter what headlines you see over the coming weeks and months, always remember that my team and I are here for you.  We’re here to answer your questions.  We’re here to keep an eye on your money.  We’re here to help you hold to your long-term dreams and plans.  So, if there’s ever anything more we can do, please don’t hesitate to let us know.

Because we’re here.

Coronavirus and Market Swings

An Update on the Coronavirus Situation

The Situation

On Thursday, March 5, 2020, the Dow fell 969 points – just the latest in a week of wild swings.1  While monitoring the situation, a headline caught my eye:

“Dow tumbles nearly 1,000 points again, because stocks can’t figure out coronavirus.”2 

To me, this headline illustrates what the media often gets wrong about investing.  But before we dive into that, let’s review how the coronavirus (COVID-19) is impacting the markets.

A wild week

In terms of pure numbers, the first week of March has been one of the wildest in recent memory.  In fact, the Dow had two of its best days ever on March 2nd and 4th…but two of its worst days ever on March 3rd and 5th. 2  Writers have been comparing the stock market to a rollercoaster for decades, but this takes the analogy to a whole new level.

It's not hard to understand why.  The coronavirus outbreak – which as of this writing has spread to over 100,000 people, with over 3,400 fatalities – is putting a major crimp on business activities around the world.3  Global supply chains, which are the networks between a company and its suppliers, have been dramatically affected. As a result, some of the world’s largest corporations have warned shareholders that they may not be able to reach their quarterly profit estimates.  Industries like travel and transportation, which depend on the movement of people and goods, have seen business plummet.  This in turn has impacted the energy industry, as less travel and transportation mean less demand for oil.

So.  Coronavirus is definitely taking a toll on global markets.  The question economists are struggling to answer is, “How will coronavirus affect the global economy?” 

Here in the United States, consumer spending is one of the main drivers of our economy.  There have been over two-hundred confirmed cases of COVID-19 thus far.  That’s a small number in the grand scheme of things.  Economists’ concern, though, is that the virus may spread, causing people to stay home and consumer spending to slow dramatically.  Nations with far more cases, like China, South Korea, and Italy, are already seeing slowdowns.  The worst-case scenario, according to some analysts, is that economic growth for 2020 could be cut in half if the virus continues to spread.4  Should that happen, some nations may well experience a recession.

The Federal Reserve responds

For weeks, analysts expected the Federal Reserve would act at some point.  That’s exactly what they did on Tuesday, March 3rd, when the Fed announced they would cut interest rates by 0.5%.5  The Fed figured lower interest rates would prompt more spending and lending.  Think of it as giving the economy a dose of Vitamin C.

But the markets fell anyway.

There are a few reasons for this.  While a rate cut was expected, the Fed acted much sooner than many anticipated.  So, rather than prompt enthusiasm, it instead prompted concern.  “If the Fed feels like they have to cut rates to keep the economy going,” the thinking goes, “what does that say about the economy?”

Then, too, there’s only so much that lower interest rates can actually do.  To be frank, the Fed has already spent most of its ammunition on this front.  Interest rates have been low for years and have only gotten lower lately.  Furthermore, interest rates can’t fix global supply chains, or replace lost business.  They won’t fill seats on airlines or keep the machinery running in hard-hit factories.  Nor can they stop coronavirus from spreading.

Viruses are no respecter of borders or laws; they’re certainly no respecter of lower interest rates.

Headline-driven investing

Just typing those words makes me shudder!  Headlines are one of the last things that should drive investing, but that’s where we are right now.  The proof is in what happened on Wednesday, March 4th.

The night before was Super Tuesday – when fourteen states held presidential primaries.  Joe Biden won most of these states, which buoyed investors, as Biden is seen as more centrist than his main opponent, Bernie Sanders.

What connection does Joe Biden winning have on stocks?  None right now.  It doesn’t change anything about coronavirus.  It won’t magically increase economic activity.  The election itself isn’t for another eight months!  And yet, the markets rose over 1,000 points on the back of that headline…before giving most of it back the very next day when the headlines changed.6

Which leads me back to the headline I showed you at the beginning of this letter.

“Dow tumbles nearly 1,000 points again, because stocks can’t figure out coronavirus.” 

Look at those words again: Stocks can’t figure out coronavirus.  Stocks don’t have minds of their own, of course, so my guess is the headline really meant investors can’t figure out coronavirus.

But here’s the thing.  For investors, there’s not much to figure out.

Economists, analysts, and pundits try to divine how today’s news will affect tomorrow.  They create projections to help banks, businesses, and politicians make decisions.  It’s a hard job, there’s no denying.

But no investor can accurately predict how bad the virus will or won’t be.  I’ve seen some commentators make claims about vaccines, or how warm weather will stop the virus in its tracks, or any of a dozen other things.  It’s all speculation.  The fact is, no one knows how long this epidemic will last, or how far it will spread.  No one knows who will win the election in November.  No one knows the future!  We can make educated guesses, but we can’t know with any certainty.  So of course investors can’t “figure out” coronavirus.

Even if we could, the situation would likely change the next day!

To me, the problem with the headline above is that it implies investors should be trying to “figure it out.”  But if we could, there would never be any uncertainty.  Investing would become as predictable as grocery shopping.  But investing doesn’t work like that.  That’s why we don’t make investment decisions based on predictions.  It’s why, during times of market volatility, we don’t chase our own tail, trying to time the markets or make risky bets based on what we guess might happen.

In other words, we don’t need to “figure out” coronavirus.  Let’s leave that to the scientists.  Instead, all we need to do is largely what we’ve already done!  And that is:

  1. Determine what kind of investment return you need to reach your goals, and then choose high-quality investments based on the principles of supply and demand. When demand outpaces supply, buyers are in control, and prices are likely to move upward.  When supply is greater than demand, sellers are in control, and prices tend to go down.  That’s why we don’t buy or sell based on predictions or stories.  We look at what is actually happening by examining trends.
  2. When the market is trending upward, we focus on growing your money. When the market trends down, we focus on preserving it.  This is done by putting strict rules in place that govern your investments.  For example, if an investment moves below a predetermined exit point, we sell.  If necessary, we can move entirely to cash if that’s what it takes to preserve your principal.

In the short term, coronavirus will probably continue to impact the markets.  The global economy will continue having symptoms.  But we don’t need to guess what the effects will be anymore than we need to guess what the weather will be like ninety days from now.  Instead, we determine the rules we need to follow to help you reach your goals, and then follow those rules to the letter.  To me, it’s comforting to know that we don’t need a crystal ball to be successful long-term investors.  We don’t need to be virus experts.  All we need to be is disciplined, informed, and prudent.

In the meantime, I expect volatility will continue.  By the time you read these words, the headlines will have changed again.  That means the markets will have probably swung again.  That’s okay.  Because while volatility is never fun, we don’t need to “figure it out.”  We’ve already done that.

While I’m encouraging you to not stress over daily headlines or market swings, I understand that’s sometimes easier said than done.  After all, it’s your money!  So, if you have any questions or concerns about your portfolio, please let me know. I will always be here for you.

How to Apply for Social Security

Retirement Benefits

To apply for Social Security you can either visit the Social Security Administration (SSA) website which can be found at  https://www.ssa.gov/planners/retire/applying8.html, call the SSA office at 1-800-772-1213, or visit your local Social Security office at https://secure.ssa.gov/ICON/ic001.action#officeResults. The closest Social Security office is at Continental Plaza, Second Floor, 401 Hackensack Ave, Hackensack NJ 07061. Their hours are 9:00 am to 4:00 pm Monday through Friday. You can stop by without an appointment but we advise you schedule one to save yourself time.

When applying for our Social Security, it is necessary to have the following documents to complete the application:

  1. Birth Certificate: to prove your date of birth and location of birth
  2. Marital Status/ Divorce Documents
  3. Birth Certificate of Spouse
  4. Social Security number for you and spouse

During the application, your spouse should be in attendance and it is always a good idea to bring proof of identification with you. For more information about the documents required please visit https://www.ssa.gov/hlp/isba/10/isba-checklist.pdf. If you have questions, need advice or know someone who has questions about their benefit, please contact us.

The Decade In Review: 2010-2019

Every January, I send my clients a letter titled The Year in Review, where together we look back at the year that was.  What were the highlights?  What were the “lowlights”?  What did we learn?

But this January doesn’t just mark a new year.  It marks the beginning of a new decade.  (Unless you are a strict observer of the Gregorian calendar system, in which case the next decade begins in 2021.  But I digress.)  So, for this letter, we’re going to look back at what shaped the markets in the 2010s – and what lessons we should take with us into the ‘20s.

2010-11: Aftershocks of the Great Recession

The best way to see how much can change in a decade is to remember how things were at the end of the last one.  In 2010, we were coming off the worst decade for stocks since the 1930s.  The Great Recession had devastated the retirement savings of millions of people.  Many of the world’s most famous financial institutions had collapsed.  And the national unemployment rate was near 10%.1

It was a scary and uncertain time.  Many investors had fled the markets entirely by 2010, some for good.  As a result, they missed a remarkable recovery that was just around the corner.  Not only that, they missed the longest bull market in history.

In hindsight, it might seem obvious that there was nowhere to go but up.  But just as the start of a recession is very hard to see coming, the ending can be equally hard to wait for.  People can be forgiven for thinking the worst was still to come, because in 2010 and 2011, there were still a lot of ominous headlines to deal with.  Remember any of these terms?

Sequestration   ●   U.S. Debt Ceiling   ●   European Debt Crisis ●   Bailouts   ●   Austerity   ●   The Fiscal Cliff

For the first few years, fear abounded as to whether the global economy would be able to recover at all.  Nation after nation dealt with spiraling debt that couldn’t be paid off.  Remember how often Greece used to be in the news?  Some analysts speculated about the possibility of a second recession. 2011 was an especially tenuous year for the stock market, especially when the United States’ credit rating was downgraded for the first time in history.

2012-14: The Federal Reserve intervenes

During this time, however, the world’s largest central banks were working behind the scenes to keep the recovery going.  In the United States, for example, the Federal Reserve embarked upon a massive bond-buying program, to the tune of $85 billion per month.  This accomplished two things.  First, it flooded the money supply and kept interest rates historically low.  Lower interest rates made borrowing less costly, which meant businesses and individuals could borrow and spend more, thereby pumping more money into the economy as a whole.  This, of course, equaled growth.  Slow growth, but growth nonetheless.

The second thing the Fed’s bond-buying did was drive more investors into stocks.  Low interest rates often lead to lower returns for fixed income investments, so it was into the higher risk, higher reward stock market that investors went.  All this had been going on for years, but the results were only then becoming apparent.  So, it came almost as a surprise when the markets reached new highs, even though the economy still seemed to be licking its wounds.  It was in mid-2013 that the Dow hit 15,000 for the first time, rising to 16,000 by the end of the year, and then 17,000 the year after.

2015-16: Waiting for the other shoe to fall

But that didn’t mean the markets were immune to volatility.  Despite the economic recovery, many experts spent the decade in near-constant fear of another bear market.  Every wobble, every market correction, was watched with fearful anticipation.  It was like standing next to someone’s hospital bed, thinking every next breath will be their last.  Some of this was probably a form of post-traumatic stress caused by the Great Recession.  The rest came from the spasms of an ever-changing world.

Oil prices plunged dramatically around this time, hurting both oil-producing nations as well as the energy industry.  China’s stock market crashed.  The Greek debt crisis reared its ugly head again, prompting fears that “financial contagion” would spread and create another global recession.  And then came Brexit.  The news that the United Kingdom would leave the European Union sent shockwaves around the world.  And here at home, one of the most bitterly contested presidential elections in U.S. history had both sides of the political aisle forecasting economic ruin if the other side won.

But despite the dire predictions, these developments only slowed the recovery’s march rather than derailing it completely.  In fact, by July of 2016, the Dow once again hit new heights.

2017-19: The longest bull market

While most of the decade had seen slow-but-steady growth, the horse started picking up speed as it neared the finish line, buoyed by tax cuts, increased government spending, and corporate earnings.  Nowhere was this truer than with the Dow.  Comprised of thirty of the largest publicly-traded companies, the Dow hit 20,000 for the first time early in 2017 – and closed well above 28,000 on December 31, 2019.2

Exactly ten years before, the number was only 10,428.  That’s an increase of over 170% - the culmination of the longest bull market in history.

Of course, it wasn’t all smooth sailing.  The trade war with China is an ever-present concern, with rising tariffs often leading to brief, but dramatic downswings in the market.  2018 was actually a down year for the S&P 500, the only one of the decade.  And as the 2010s drew to a close, many economists warned of a slowing economy – with maybe even a mild recession in store.

Despite these warnings, investors did what they had done for most of the decade: Act startled, and then head right back into the markets.  Some pundits call it a market “melt-up” instead of the usual meltdown.

What have we learned?

So.  A remarkable decade filled with twists and turns.  But what did we learn? 

When I looked back at the last ten years, one thing that struck me was how interconnected the world has become.  So many of the storylines that drove the markets originated far beyond our shores.  We truly live in a global economy.  We invest in other countries, buy products in other countries, loan money to other countries (or apply for loans, as the case may be) and trade with other countries.  We might be separated by the world’s biggest ponds, but the ripples near one shore are always felt near the other.

That means two things.  One, for an advisor like me, it means there’s more than ever to keep track of.  But two, it means we should react less and less to the headlines of the day – or to each individual ripple.  A butterfly might flap its wings in Beijing and cause a hurricane in Topeka, as the saying goes, but there are butterflies flapping their wings everywhere.  That’s one reason why we saw many storms but fewer hurricanes in the 2010s.

Another thing we learned?  Sometimes, most times, slow and steady really does win the race.  We were all taught the truth of this as children when we learned the story of the tortoise and the hare.  The past decade proved it.  Everyone loves growth that comes fast and hot.  But when something burns fast and hot, it tends to burn out faster, too.  One reason we never saw the recession so many people feared is because the economy recovered as slowly as it did.  It’s a lesson we can apply to our own financial decisions.  While it’s always tempting to chase after windfalls and jackpots, it’s so much smarter to prioritize steady progress over short-term whims.  The race to your goals is a marathon, not a sprint.

A third thing we learned is how often things don’t go as predicted.  In 2010 and 2011, many experts predicted a gloomy decade for the stock markets – and they had good reason to think so!  But it didn’t happen.  When, say, Obamacare became the law of the land, many experts predicted economic disaster.  As of this writing, it hasn’t happened. When Brexit became a reality, many experts predicted a global catastrophe.  As of this writing, it hasn’t happened.  When President Trump was elected, many experts predicted a market meltdown.  As of this writing, it hasn’t happened.  We all have our opinions on whether events like these were good or bad, of course.  But it’s a good thing we didn’t base our investment decisions on any expert’s predictions!

Because if there’s one thing we learned this decade, is that a prediction is like a person’s appendix – pretty much useless.

2020 and beyond

With that in mind, I won’t make any predictions for the coming decade.  If history is correct – and it always is – another market correction, another bear market, another recession will come eventually.  Whether it’s this year, or next, or the one after that, I can’t say.  What’s more important is that we remember this: It’s when we fly that we should have the healthiest respect for gravity.  But it’s when we’re on the ground that we should raise our eyes to the skies.

Investing is like trying to find our way in the dark – and our strategy is our North Star.  It’s so much more valuable than any prediction!  We may bump into the occasional obstacle.  Sometimes, we may even trip.  But if we hold to that star, we will keep moving forward in the direction we want to go.

We will make this decade whatever we want it to be.

My team and I can’t wait to spend the next decade with you.

Family Meeting Series Part 1

Dad Needs Memory Care Assistance

Long-time client, his wife and two adult children came to the office recently.  Dad was a long-time corporate executive who ran U.S. operations for a multi-national company.  He handled all of the Family finances.  Mom ran the house and the Family but had no interest in the Family finances.  (My mistake was to allow this situation to continue for too long.  Today, I would no longer allow Mom to be absent from their Annual Meeting.)  The children were unaware of their parents’ financial situation other than to be thankful for the generous gifts to the grandchildren.  Retirement was destructive both financially and physically to this couple.  Health issues and accidents accumulated.  The Big House, the vacations and country clubs were maintained for many years after the couple could no longer afford them.

When Dad started to develop memory issues the financial problems became apparent.  Mom had to learn fast but Dad would not give up control, a symptom of his memory problems.  Although the children were aware of the memory issues, they were not aware of the financial issue.  What should the Family do?

One of the most demanding topics for a family to deal with is the development of a memory loss by the family matriarch or patriarch.  This problem can be compounded in a situation where the memory loss issue develops in the family member who has always handled the family finances, and perhaps even had created the family wealth.  Interestingly, my experience has been that the memory loss can initially develop around financial matters.  The family member has been very strong on finances and was very comfortable maneuvering numbers and financial projections in their own mind.  Suddenly the family member has trouble calculating the tip at dinner.

What should the family do?  How might the family address the matter in a family meeting?  Typically, two related topics.

First, what healthcare services may be needed for the family member? And second, how will the family pay for those healthcare changes?  What changes might take place in the financial and  the family investment program to respond to these needs?  To start, the Family should develop an approach to the medical care that is necessary.  It is common for these problems to linger.  The spouse of the person with memory loss may wait longer than they should before seeking help.   The caretaking spouse can even do some damage to their own health in the caretaking process.   There is a good chance the Family will not agree on what is appropriate.  The Family should have these conversations about managing expectations far earlier than the actual implementation of the strategy.  There also should be some conversation about expected contributions by children in both time, effort, and management of parental health and financial needs.  As always, conversations in advance of the events can be developed before there is an emergency.

The Family should evaluate the circumstances.  If the caretaking spouse is unable to do routine activities, such as make appointments, see friends, take care of their own financial matters.  These are all indications that professional help is needed.  Daycare or home healthcare aids may be necessary.  It is very useful to have family meetings on these matters early in the process.  The cost of home healthcare help can start at a reasonable level.  When the help advances to all day care, you can move into the hundreds of dollars per day cost.

Of course, the cost to maintain memory care is easiest to bear when the family has significant financial resources.  All day care can move from a couple of thousand a month up to a $8,000 or $9,000 per month.  It is important to recall that the care amounts are in addition to ordinary monthly living expenses.

Alternatively, long-term care insurance may have been purchased many years ago.  In many cases, these long-term care policies were issued at very reasonable premium structures, but recently, they have become much more expensive with shorter terms for benefits.  All these programs must be purchased well in advance of any memory issues developing.  If a family does not have the financial resources to address the medical care, then they must immediately begin planning towards less expensive alternatives, such as Veterans facilities, and possibly the use of Medicaid facilities.  It is beyond the scope of this memo to discuss the full range of requirements to qualify for Medicaid.  However, there are elder care lawyers that specialize in this area, and their expertise can be crucial.  Medicaid can be available and will allow the spouse to live in the family home.  Support of the spouse is also allowed by Medicaid.  Assets cannot be transferred from the spouse with the memory issue within five years of eligibility without penalty.  It may be useful for any caretaking spouse who is working to make significant contributions to a retirement plan or 401(k) plan and accumulate assets in their own name.  The joint funds from the spouse's IRA who's having memory issues can be used to support the couple.  Investment strategy, where if the family is concerned about resources, might be changed.  The Family may decide to adopt a more aggressive equity-oriented strategy.  The approach might be that if the markets move against them, their qualification for Medicaid may come sooner, and if the markets move in their favor, the family may be able to pay for the care.

The investment strategy change could apply to the caretaker’s spouse in that she might decide to have a more equity-oriented approach.  Her money has to last a very long time, and Medicaid would not attach her retirement assets.  The family should also keep in mind that the family home is typically exempted from Medicaid planning attachment.  The caretaking spouse may decide to pay down the mortgage.  Expenses of living can come from the parent who has memory loss issues and has  potential medical care.

Our firm has developed a significant expertise in helping families think through these issues on their own.  We also have an extensive relationships with elder care counsel and primary care home healthcare providers that could also assist them, independently of the medical care for the patient.

Please contact us, to setup your family meeting today.

Maximize Your Social Security Benefit

4 Thoughts to Maximize Your Social Security Benefit

How long are you and your spouse going to live?  My clients’ answer, “Forever!”  My long-time client and I were reviewing his investment program when he mentioned that he had just returned from his Aunt’s funeral in Florida.  She lived to age 101.  My client’s mother had also lived to age 101.  His Aunt was actually a Grand Aunt!

Of course, Social Security works best for those who live the longest.  But Social Security Benefits are also maximized for those who wait longer to receive them…Survivor benefits are also maximized.  Consider Social Security as insurance if you live too long!

What will the inflation rate be in the future?  My ability to predict the future is precisely as flawed as your ability.  Recently we have gone through a period of long-term averages of 2 to 3% per year.  Social Security Benefits under current law are increased (but not decreased) for inflation.  Consider your Social Security Benefits as part of your investment plan that will increase with your increasing cost of living.

 

What will your investment return be in the future on other assets?  The future continues to be unknowable.  It is tempting to look at the past investment returns for guidance.  However, just because the past is measurable does not mean that it is useful to us.  As our disclaimer states, “Past performance does not predict future results”.  However, can you rely on Social Security payments in the future, or at least most of them?  Maybe your Social Security Benefits can be part of your overall fixed-income investment allocation.  This approach may allow for an increase in your stock or real estate allocation.

 

How long will your spouse live after you are gone?  The survivor of you and your spouse will receive the greater of your individual Social Security Benefits.  Consider making your Social Security Benefit decision with the goal of maximizing the survivor benefit.  This approach might be particularly appropriate for Social Security recipients where the benefits are a small portion of a monthly income.

 

Jim Vaughan and Vaughan & Co. Securities, Inc. provides individual analysis of Social Security designed to maximize your benefits for your personal retirement income investment plan.  Contact Jim at jdviii@vaughanandco.com

What is an Inverted Yield Curve?

If you ask an economist what makes them toss and turn at night, chances are they’ll tell you, “Fear of missing the warning signs of a recession.”  After all, for anyone who studies the economy for a living, few things could be worse than a sudden economic slump catching you by surprise.

That’s why many economists rely on certain indicators to predict if there’s rough weather ahead.  Historically, one of the most reliable indicators is the inverted yield curve.  This is when the yield on long-term bonds drops below the yield on short-term bonds.  Why does this matter to economists?   Because an inverted yield curve has preceded every recession since 1956.1

Long-Term Bond Yield Hits Record Low2
Stocks Skid as Bonds Flash a Warning
3
The Wall Street Journal, August 14, 2019

On August 14, the yield on 10-year Treasury bonds dropped below 1.6%, officially falling beneath the yield on 2-year Treasury bonds for the first time since 2007.4  That’s an inverted yield curve.  The markets responded the way children do when a hornet gets inside the family car – they panicked.  The Dow, the S&P 500, and the NASDAQ all fell sharply, with the Dow plunging over 700 points.3

The obvious question, of course, is “Why?”

It’s a smart question!  To the average investor, the term “inverted yield curve” probably doesn’t sound very scary.  So, why does it have the markets freaking out?  Let’s break it down by answering a few basic – but also smart – questions.

  1. What’s a bond yield, again?

A bond yield is the return you get when you put your money in a government or corporate bond.  Whenever an investor buys a bond, they’re agreeing to loan money to the issuer of that bond – the government, in the case of Treasury bonds – for a specific length of time.  Typically, the longer the time, the higher the yield, as investors want a greater return in exchange for locking up their money for years or even decades.  That’s why the yield on long-term bonds is almost always higher than on short-term bonds.  When these trade places, we have an inverted yield curve.

  1. Okay, so why have bond yields inverted?

Bear with me here, because I’m about to get a little technical. 

Bond yields have an inverse relationship with bond prices.  That means when prices go up, yields fall, and vice versa.

What do I mean by price?  Well, investors must pay to buy bonds, of course, and when more people buy them, the price of these bonds goes up.  (It’s the basic law of supply and demand: When the demand for something increases, so does the price.)   When that happens, yields drop.

Investors often see bonds as safe havens of sorts, especially during economic turmoil.  Stocks, on the other hand, tend to be seen as “higher risk, higher reward” investments.  In this case, investors are selling their stocks and plowing more and more money into long-term bonds, pushing prices up and yields below that of short-term bonds.  The fact investors are doing this suggests they’re not optimistic about the near-future health of the economy and are seeking safe places to park their money.

  1. Why are investors so worried about the economy?

On the home front, it’s largely because of the trade war between the U.S. and China.  As the two nations engage in an ever-growing battle of tariffs, the fear is that businesses in the U.S. will have to raise prices, thereby hurting consumers.  On August 13, President Trump decided to delay the most recent round of tariffs until December, saying he didn’t want tariffs to affect shopping during the Christmas season.5  Previously, Trump predicted tariffs would not hurt U.S. businesses, so this sudden about-face suggests even he is worried.

Investors are also worried about a slowdown in the global economy.  Two of the world’s most important economies, China and Germany, have both shrunk.  Put all these things together and it’s not hard to see why investors worry about a recession in the near future.

Fears the recent news about inverted yield curves will only stoke.

  1. So is a recession imminent?

As I mentioned earlier, inverted yield curves have preceded every recession since 1956.  This includes the Great Recession of 2008.  But does this mean a recession is just around the corner?

No!

There are two things to keep in mind here.  First, a brief inverted yield curve is not the same thing as a sustained one.  While inversions have preceded every modern recession, inversions do not always lead to a recession.  Think of it this way: You can’t have a rainstorm without dark gray clouds.  But dark gray clouds don’t always lead to a rainstorm.  Make sense?

You see, correlation does not equal causation.  By this I mean that while inversions and recessions are often seen together, one does not actually cause the other.  An inverted yield curve is like a sneeze: It’s a symptom, not the disease itself.  And while a sneeze can mean you have a cold, it doesn’t lead to a cold.  Sometimes, we sneeze because we got pepper up our nose.

Second, let’s assume for argument’s sake that this recent inversion is a warning sign of a future recession.  That doesn’t mean a recession is imminent.  Some analysis suggests that it takes an average of twenty-two months for a recession to follow an inversion.1  That’s a long time!  A long time to save, invest, plan and prepare.

  1. So does an inverted yield curve even matter, then?

I’ll put it simply: It matters enough to pay attention to.  It doesn’t matter enough to be worth panicking over.

Make no mistake, we’re in a volatile period right now.  There’s a lot of evidence to suggest that volatility will continue.  But while comparing the markets to the weather has become something of a cliché, it also makes a lot of sense.  When storm clouds gather, we pack an umbrella or stay inside.  We don’t run for the hills.

The same is true of market volatility.

Remember, an inverted yield curve is an indicator, not a prophecy.  Economists can toss and turn about such things, but you and I are focusing on something much less abstract: your financial goals.  More important than any indicator, more important than the day-to-day swings in the markets, is the discipline we show.  If you think about it, market volatility is really a symptom, too – a symptom of emotional decision making.  Investors see a good headline, and they buy, buy, buy!  That’s a market rally.  Investors see a bad one, and they sell, sell, sell!  That’s a market dip.

Investing based on emotion leads to one thing: Regret.  Regret that we bought into the hype and bought when we should have waited for a better deal.  Regret that we fell into fear and sold when we should have held on longer.  We invest by being disciplined enough to buy, hold, or sell when it makes sense for your situation.

That’s the best way to stay on track toward your goals.  That’s the best way to not toss and turn at night.  We don’t make decisions based on predictions.  We make decisions based on need.

My team and I will keep watching the indicators.  We’ll keep doing our best to explain the twists and turns in the markets.  And we’ll keep doing our best not to overreact to any of them.  In the meantime, please contact me if you have any questions or concerns.  We always love to hear from you!

 

 

 

1 “The inverted yield curve explained,” CNBC, August 14, 2019.  https://www.cnbc.com/2019/08/14/the-inverted-yield-curve-explained-and-what-it-means-for-your-money.html

2 “Long-Term Bond Yield Hits Record Low,” The Wall Street Journal, August 14, 2019.  https://www.wsj.com/articles/bond-rally-drives-30-year-treasury-yield-to-record-low-11565794665

3 “Stocks Skid as Bonds Flash a Warning,” The Wall Street Journal, August 14, 2019.  https://www.wsj.com/articles/asian-stocks-gain-on-tariff-delay-11565769562

4 “Dow tumbles 700 points after bond market flashes a recession warning,” CNN Business, August 14, 2019.  https://www.cnn.com/2019/08/14/investing/dow-stock-market-today/index.html

5 “U.S. Retreats on Chinese Tariff Threats,” The Wall Street Journal, August 13, 2019.  https://www.wsj.com/articles/u-s-will-delay-some-tariffs-against-china-11565704420