A second bite at the apple

A second bite at the apple -Originally written January 8th, 2023
 

"I know now, after fifty years, that the finding/losing, forgetting/remembering, leaving/returning, never stops. The whole of life is about another chance, and while we are alive, till the very end, there is always another chance."

-Jeanette Winterson

 
2022 In numbers
 
During the past year we experienced violent tumult in financial markets not seen since the financial crisis of 2008-09.  Here are a few of the most important markets and indicators that impacted clients.
 
Bonds:  The iShares Core U.S. Aggregate Bond ETF: AGG faced a price decline of -14.38% in 2022 which was eclipsed in downside magnitude by the Vanguard Long-Term Bond Index Fund ETF: BLV with its -28.37% decline. I believe that the indices these funds represent have an unparalleled influence on all other risk assets.  Given these historic declines, the interesting change entering 2023 will be the four-plus and nearly five percent yield of each fund respectively. 
 
Money now having a price above zero, editorializing, will have continued impact on all global financial markets.  Does this price of money increase or decrease will be one of the most important catalysts for the general stock market to answer in the year ahead. 

All data sourced from Schwab Advisor Center, Research.  Charles Schwab and Co., Inc.

 
Inflation: According to the BLS survey data, November 2022 being the last reading as of this writing, inflation ended the year at a 7.1% YoY increase.  While 0.3% higher than the November 2021 reading, this reading represents a 2% decline from CPI’s zenith in June of 2022 at 9.1%.  Furthermore, if you were to annualize the last three months average inflation, you would find the current rate of inflation is annualizing at 3.6%.  
 
The Fed erred in calling inflation “transitory”.  While the word implies short-term that “short-term” isn’t defined to delineate three months from three years.  Close watchers of the sources of inflation could make the argument that certain drivers of inflation have been transitory; however, the drivers of inflation have moved from goods to services keeping overall numbers high.  The continued decline or stagnation of inflation will be another factor driving risk markets in the year ahead as it looks like inflation could cool rapidly.  
All data sourced from CPI Home : U.S. Bureau of Labor Statistics (bls.gov)
 
Equity markets: The S&P 500 suffered it’s fourth worst calendar performance since the 1957 inception of the index at -19.4% with the Nasdaq declining a painful -33.1%.  Stocks did not suffer equally as equites in the Vanguard High Dividend Yield Index ETF: VYM decline only   -3.48% which was nearly mitigated by it’s almost three percent dividend yield.  Emerging markets fell just around -29% depending on the index you choose. 
 
A rebound or lack thereof within the equity markets will dominate the coming year.  According to Twain “Prediction is difficult particularly when it involves the future” thus you will not find me gazing into my crystal ball to make predictions.  An important point to remember is that bear markets can and have persisted for more than one calendar year.  Diversification in asset class and equity type can help mitigate this potential continued bear market. This could be the year that international markets finally outperform given their previous streak of multi-year under performance.  

  
 
“The trick in investing is just to sit there and watch pitch after pitch go by and wait for the one right in your sweet spot. And if people are yelling, ‘Swing, you bum!,’ ignore them.”

-Warren Buffett
 

The most interesting story in risk assets
 
Since I started investing in 2007-08 until the beginning of 2022 interest rates have generally moved in one direction, down.  In 2022 the long-term downward trend in rates, which you could easily argue began in the early 80’s, reversed its course.  The Fed raised rates at each meeting in 2022 including several, aggressive 0.75% rate increases later in the year.  This decisive rate-raising regime led to carnage in the bond market especially on the long-end of the yield curve (see BLV above!).  I especially like the Austrian 100-year bond offering maturing in 2117 that lost roughly 54% of its value in 2022. But, where there is carnage so is there opportunity… 
 
While my favorite ETF for long-term bonds, BLV, declined nearly 30% in 2022, it bottomed in late October and has since rallying nearly 9%.  In fact, not to be pedantic, BLV rallied nearly 17% off the lows of October into early December before retreating to end the year; thus, giving us a second bite at the apple. 
 
This rally was powered by the expectation, still yet to be fulfilled, that the Fed will end its tightening spree.  Perhaps, and a theory I find most plausible, entails the anticipation that Fed over tightening leads to a Fed induced slowdown.  The slowdown then is the tail that wags the dog by forcing the Fed to lower rates in response to recessionary pressures. In this scenario you would not expect downside price pressure on long-term bonds. The question becomes, can long-bonds rally higher in 2023? 
 
What makes long-term bonds (municipal, investment grade corporates, and treasuries, excluding high yield) most interesting is the balance of the risks in differing scenarios.  Let’s examine three of the many such scenarios that could unfold.
 
First, if the economy experiences a “soft landing”, that is no recession with an end to Fed rate raises, the price of long-bonds will be difficult to anticipate.  I would very much doubt the bonds fall in price as in this scenario, the Fed would have “vanquished” inflation which, quite clearly, is their stated goal.  More than likely this would leave us with the current yield of these bonds intact. This representing a relatively decent, diversifying return for the average portfolio at higher yields not seen in many years.  
 
Two other scenarios result in yield of these securities plus a duration trade.  That “duration trade” is the increase in price of these bonds because interest rates decline which adds to an already generous yield.  These two scenarios involve either inflation refusing to subdue easily thus forcing the Fed to continue tightening the economy into a recession or a recession that has already taken root due to the lag in the already steep interest rate increases. 
 
In either scenario we could assume that the long bonds would give the opportunity, while not guarantee, to outperform stocks that might struggle during recessionary pressure or continued inflation. While unknown, this seems most likely as investors would seek to move up the capital structure in times of recession. Moving up the capital structure means increasing the likelihood of recovering your investments if the company you invested in experienced insolvency.  Often this simply means becoming a bond holder versus equity holder especially in a year that equities may struggle. The overriding point is that return may be possible outside of the equity market given our current conditions.  
 
This circles all the way back to the earlier point that bear markets can exist for multiple years and require outside the box thinking to overcome.  Utilizing differing asset classes and imagining a multitude of outcomes while pursuing the highest probability opportunities remains our stance at Fiduciary Financial Advisors especially, when you have previewed the upside scenario. Never hesitate to take that second bite at the apple!
 
As always reach out with questions, commentary, or just to say hello!
 
Be well and invest for the long-term,
rob
 
Disclosure: The opinions expressed above are my own and do not constitute investment advice.  When investing in securities, there is always a potential for loss including principal loss. 

3 Steps to Turbo Charge Your Health Savings Account (HSA)

One of my favorite tax strategies for college professors and others is to take full advantage of your Health Savings Account (HSA) offered through your workplace. These accounts are WAY BETTER at saving taxes than 401k and 403b retirement accounts. You probably know that contributions from your paycheck are tax deductible just like contributions to retirement accounts. However, unlike retirement accounts, withdrawals are tax free for qualified medical expenses. Another unique advantage of HSA contributions is that they are exempt from social security taxes. Here are three steps to increase the value of your HSA.

Step 1: Make Maximum Contributions. Many people set their annual contributions to match their annual insurance deductible. For example, your annual medical deductible might be $3,000 so you decide to contribute this amount to your HSA each year. After all, this is what you expect to pay out of pocket for healthcare. If you are lucky and healthy, you might even pay less during the year. So why save more each year? Answer, to build a healthy surplus. No pun intended 😊

Consider this example: Suppose you are married with a family income of $130,000. You choose to make the maximum contribution of $7,300 to your HSA (for 2023). The contribution is not subject to federal income tax (24%), state income tax (4%), social security tax (6.2%) or Medicare tax (1.45%). Your $7,300 contribution saves you $2,600 in taxes this year. But the story gets better!

Step 2: Invest in Stocks and Bonds. You may not realize that you can invest your HSA funds in stocks, bonds, and other investments. Your money does not have to stay in a boring savings account earning less than 1%. These investments will likely provide a better return over many years. Granted, you are restricted to the specific investment options available through your workplace, but it is worthwhile knowing your options.

Step 3: Delay HSA Withdrawals. The final step to really take advantage of tax-free growth is to keep these funds invested for as long as possible. Pay healthcare expenses out of pocket each year, if possible, and let your HSA account continue to grow. Think of your HSA to be a retirement account for healthcare that you let grow until age 65.

Consider the example of a married couple in their 40s who contribute $7,300 each year and invest the account in a conservative portfolio of index funds and exchange traded funds (ETF) that could earn 7% per year. The account would grow to almost $300,000 after 20 years. These funds are then withdrawn completely tax free to pay qualified healthcare expenses during your retirement years. Yes, this is a best-case scenario that will be difficult to achieve but the approach yields benefits even with less rosy assumptions. For example, you may still have a tidy $150,000 for healthcare during retirement by saving half of the maximum contribution each year.

Your Homework: As a college professor, my natural inclination is to assign homework to ensure students take positive actions. So here is your homework! Review your HSA investment options and consider increasing your annual contribution to the maximum.  When possible, pay for healthcare out of pocket and let the HSA account continue to grow tax free. Consider your HSA as a retirement account for healthcare. You will have plenty of healthcare expenses later in life so why not start saving now?

I have been a college professor for almost 30 years and now I teach other professors how to graduate from academic freedom to financial freedom. Sure, investments are important. But it is just as important to minimize taxes, moderate personal debt, live below your means and use insurance wisely to prepare for the unexpected. Review my approach to financial advising and schedule a no obligation introductory call by clicking here. We will discuss your financial worries, answer questions, and then you can decide if working together makes sense.

Inflation Is MUCH Lower Than You Think

The media and the average person misunderstand and misinterpret inflation for two important reasons:

1. They focus on the ANNUAL reported inflation number which tells you what has happened over the past year but not where inflation is headed.

2. The SHELTER component of inflation which measures rents and home prices makes up about one third of overall inflation but lags real-time housing data by up to 12 months.

The most recent inflation report that was published on 12/13/2022 makes an excellent illustration of these two points. Understanding the nuance of inflation reports and where we are headed rather than where we have been is key for setting expectations for how much further and how quickly the Fed will continue to raise interest rates as well as how long rates will remain elevated.

Annual CPI (consumer price index) tells us how much prices have gone up over the past year as a whole.

This is the figure most often reported by the media. As shown in the line chart below, this figure peaked in June of 2022 at just over 9% and has been trending downward ever since to its current level of 7.1% (as of November 2022). This annual figure is calculated by taking all of the monthly increases for the past year (each of the bars in the bar chart below) and adding them together. For example, if you take all of the bars in the bar chart and add them together, you get that 7.1% current ANNUAL inflation.

This is great for telling us what happened over the past 12 months, but it’s a very bad way to measure what is happening right now. On the way up, the annual figure lags the real-time situation making it harder to see inflation heating up, and on the way down it lags the real-time situation making it hard to see inflation cooling down. Later we’ll see how the lag in rent and home price data makes this problem even worse.

A better way to understand what is happening right now is to ignore the ANNUAL number and instead ANNUALIZE the most recent 3-6 months of data. A couple of examples. If you take the most recent 6 months of data (June through November) you get a 4.5% annualized inflation rate. That’s much lower than the 7.1% figure for the past 12 months. If you take 5 months of inflation data (July through November) you get a 2.4% annual inflation rate. If you take the last 3 months of data you get a 3.6% annualized rate. These examples tell us that for the past 3 to 6 months we have been MUCH closer to the Feds official target of 2% annual inflation than most people believe.

It works the other way too - if you had taken the last four months of data when inflation peaked in June, you would have had an annualized inflation rate of 11.4%! This is much higher than the reported 9.1% annual figure.

Chart of annual cpi from bls cpi bulletin december 2022

chart of monthly cpi from bls cpi bulletin december 2022

Looking through this lens and understanding how annual inflation data lags what is happening right now shifts the narrative surrounding inflation. It didn’t just burst onto the scene a year ago and it hasn’t remained “stubbornly high” as the Fed has taken measures to push it back down to an acceptable range. According to the data, what actually happened was:

1. Inflation accelerated quickly as our economy reopened following the pandemic, particularly after the vaccine rollout in early 2021. The 3 month annualized rate (red line below) reached its first peak at 9.2% in June of 2021 while the annual rate that is broadly reported (blue line below) had just surpassed 5%. The Fed and many economists believed inflation would be transitory and inflation was not yet a “mainstream” topic.

2. Inflation remained elevated through it’s eventual peak in June 2022 but it wasn’t resisting the Fed’s efforts, the Fed just wasn’t doing anything. As the annual inflation rate caught up to the 3-month figure and gas prices spiked in January 2022, inflation became a hot mainstream topic (as evidenced by google search data).

3. As the Fed began to raise interest rates (yellow line below) in earnest with it’s first 0.75% increase in July 2022, the 3-month annualized inflation rate plunged into the range of 3% to 4% while the annual rate has lagged substantially in the 8% to 9% range. Ignoring this dramatic near-term decline and focusing on the much higher annual number would lead you to believe the Fed has “a lot of work left to do” when in reality the work may be nearly finished and the (lagged) data just hasn’t caught up yet.

chart was created using data from bls cpi bulletins dec 2018 - dec 2022, fed funds rate data from st louis fed

Home and rent prices accounts for a massive one third of CPI - but the way they are measured lags reality by UP TO 12 MONTHS

This is according to a paper written by the Bureau of Labor Statistics in conjunction with the Cleveland Federal Reserve Bank. An excerpt from their paper explains how large of an impact this has and why it’s such a big deal:

“Shelter is by far the largest component of the Consumer Price Index (CPI), accounting for 32 percent of the index. Accurate inflation measurement therefore depends critically on accurate rent inflation measurement, which is the primary input to both tenant and owner equivalent rent. It is therefore concerning that rent indices differ so greatly. For example, in 2022 q1 inflation rates in the Zillow Observed Rent Index (ZORI; see Clark (2020)) and the Marginal Rent Index (Ambrose et al. (2022)) reached an annualized 15 percent and 12 percent, respectively, while the official CPI for rent read 5.5 percent. If the Zillow reading were to replace the official rent measure in the CPI, then the 12- month headline May 2022 CPI reading of 8.6 percent would have read more than 3 percentage points higher.” (emphasis mine)

As the authors explain, if CPI had accurately reflected real-time data on home and rent prices, inflation would have peaked near 12%! Piling this huge lag for such a major component of CPI on top of a focus on the annual vs. near-term inflation rate puts policy makers and investors very out of sync with economic reality. Had the Fed paid more attention to the shorter-term trend and real-time data on rent and home prices sky-rocketing in the spring of 2021, they may have moved to raise interest rates 6 to 9 months sooner and curbed inflation at a rate of 5% to 6% rather than the near 10% rate we ultimately suffered.

This home and rent price lag is now working in reverse to create the illusion of higher inflation.

chart from st louis “Fred” website - data is published with a lag - sep 2022 most recent reported

Taking the principle above and applying it to our current situation, the rent & home price component of CPI today largely reflects the economic condition one year ago. At that time, the Fed had not even begun to increase rates and the average 30 year mortgage was around 3%. From June of 2021 through June of 2022, US home prices shot up by nearly 20% per the Case Schiller Index. That massive increase (which in reality happened in the past) will continue to feed through into CPI data making the rate of inflation look much higher than it really is. The reality is that From June 2022 through September 2022, home prices dropped by 2.6% or an annualized rate of 10.4% (September is the most recent data published by the Fed - the irony of this lag is not lost on me). So while home prices in reality are dropping, CPI data will continue to show robust price increases for its hugely important “shelter” component.

If you adjust the annualized 3-month inflation rate using CURRENT home price data, you see that inflation has slowed much more than official CPI data indicates.

If you replace the high growth rates the official CPI data use with zero growth in home prices over the past 3 months, the 3.6% annualized CPI rate we discussed earlier drops to just 0.85%. If you include the drop in home prices that the Case Schiller Index shows, the 3 month annualized rate of inflation drops even further to 0.2%! Both of these are well below the Fed’s target inflation rate of 2%.

Even if you strip out the recent price decreases for gas, energy, and used cars… without the lagged shelter component you’re still at just a 2.4% annualized inflation rate. All of this tells us that while some contributors to inflation like food, transportation, and some service industries may prove stickier and harder to bring back below 2%, if the current trend continues and no major geopolitical event occurs REAL inflation (ignoring that pesky lagged real estate component) is likely to remain in the 2% to 4% range.

The economists at the Fed aren’t stupid, they’re aware of the lag and impact of the real estate component. Heck, their own team wrote a paper on it! This should mean they factor it into their policy decisions and look through the noise in the data to the REAL economy. If they do, I’d expect the upcoming 0.5% increase to be the last large hike with the “final” rate topping out around 4.5%. Coincidentally, this is what the bond market is also predicting based on the current yield curve (12/13/2022).

MORE TO COME - I’ll be following this post shortly with another breaking down what this could mean for stock and bond markets in the coming year. In the meantime, I hope you enjoyed this trip down the rabbit hole of Inflation and CPI. Always remember, the media is a business. They are out for clicks and traffic, not to educate you. Scary headlines and political narrative sell. I encourage everyone to seek out the data and let it speak for itself or rely on trusted advisors who do the digging for you.

Footnotes

All CPI data is from official Bureau of Labor Statistics bulletins

Case Schiller home price data and Fed funds rate data is from the St. Louis Federal Reserve website

My own calculations of annualized data modified by adding/removing/adjusting specific components is based on archived CPI bulletins published by the Bureau of Labor Statistics from 2018 through November 2022.

Current 3-month and 6-month annualized calculations were based on the November 2022 bulletin detailed categories data from the BLS.

Home Renovations & How to Get the Biggest Return on Your Investment

Shauna Speet, owner of Shauna Speet Interiors, and Leanne Rahn, Financial Advisor with Fiduciary Financial, have teamed up to tackle some of the most burning questions when it comes to your house renos and their corresponding investment returns.

Shauna and Leanne fill you in on all the things like how to decide what to renovate, how much renovations cost, cash versus home equity loans, your realistic investment return, and so. much. more.

Jump into the conversation with them and leave feeling informed, educated, and motivated (with just maybe, a demo hammer in hand).

//

How do I decide what to renovate in my home?

Shauna recommends making a master list - every house project that will require either time or money goes on the list. Then prioritize that list based on need vs. want, and the space that is functioning the poorest/or with the most worn-out materials gets the very top priority.

Other factors to consider when deciding what you want to renovate are:

1.  How long do you plan to stay in the house? 

2. What is the top value your house could be worth? You don’t want to out-renovate your neighborhood.

What are some tell-tale signs that I should renovate my space?

First, is it a want or a need? Does the space need to be renovated due to worn-out materials or poor function? If so, it would get top priority on Shauna’s list. 

If the space functions well and the materials are in good shape overall, Shauna would recommend a purely cosmetic update and save the renovation budget for a more pressing area.

What if I don’t know if I’m going to stay in my house long-term? Does it still make sense to renovate?

If you aren’t planning on staying in your home for the long term, Shauna’s opinion is this: she does not think it’s worth the cost/life disruption to renovate if you plan to move in 5 years or less.

UNLESS - you can do a lot of the work yourself. If you need to hire out 90% of the labor, there goes your profit margin along with it! Sweat equity is what you can count on getting back.

Realistically, what is the return I can actually receive from renovating? 

In Shauna’s experience, less than in the past. Things are more expensive now, and homes are selling for record highs even without the updates. So talk to your realtor before renovating the kitchen just to sell the home, it is probably not worth it. (BUT - if you are thinking of removing a wall to open up the kitchen, or ADDING a bathroom, those improvements yield a significant return.)

Is putting money into my home considered a good investment? 

Leanne challenges you to ask yourself this: what are you after? Is it renovating to stay in the home longer? If yes, what is your current mortgage interest rate? It might make sense to renovate and stay in the home longer than to sell and buy a home with a higher interest rate.

Maybe is it renovating to add more value to your home to be able to sell it? If that is the case, how much will it add to the selling price? What is the market like?

These are just a couple of scenarios. This answer is definitely very situational. Investing in your home can be a very good investment! It really depends on what your goal is.

How can I estimate how much the renovation will cost?

Google! Google the average square footage of everything you can. Things like the Flooring/tile/counters/backsplash you want and then multiply that by the surface area of each material. That will get you a ballpark for materials.

Once you have that number, add 75% - 100% of the cost of materials for the labor to install all those items (if you plan to have a builder manage the project for you).

Lastly, add in the cost of the appliances/bathroom fixtures you want, as well as an approximate cost for cabinetry (also by googling!), and that gives you a rough preliminary budget.

Should I save up the full amount prior to starting a renovation or should I take out a home equity loan/HELOC?

This is a very situational answer and depends on what the alternative is. Maybe you have been in the home a few years and built up some equity, your mortgage rate is good, and renovating by utilizing a home equity loan/HELOC would allow you to stay in the home for a few years. Looking at today’s rates, Leanne might say it may make more sense to take out a home equity loan/HELOC and keep your current mortgage rate rather than go out and buy a home (which has a good chance of being priced higher) at a higher interest rate. 

Maybe you are debt adverse and you have the extra cashflow plus your renovating timeline isn’t a rush. Then it may make sense to just aggressively save up for your renovations. 

Overall, the main variables Leanne thinks affect this answer would be your timeline, your mortgage rate, the current housing market, the home equity loan/HELOC rates, your cashflow, your feelings toward debt, how much equity you have in your home, and your renovation estimated costs.

What are the steps to start saving for a renovation? 

1. Know a rough estimate of costs (like Shauna mentioned, Google!).

2. Get on the same page as your spouse and be transparent about the all-in costs and your realistic savings timeline. Take a look at your budget and cashflow - are there ways to cut expenses to reach your goal sooner? If there aren’t ways, take that into consideration when determining your realistic timeline or be creative on how you can earn extra income to throw at your savings goal.

3. If you have a timeline longer than 3 months, consider chatting with Leanne about ways you can give your savings a chance to grow. If you have a more immediate timeline, look to utilize high-interest-earning checking accounts (think LMCU and Consumers Credit Union to name a few).

4. Stay motivated! A big savings amount can feel daunting and you may feel impatient with the thought of saving. Write out your goals and hang them on your fridge, create a mood board and hang it up in your office, schedule “money dates” with your spouse to go over your budget and get an update on your savings. Being intentional about this is key!

   //

Maybe your demo hammer is staying in the garage a little bit longer or maybe it’s in hand right now. Either way, Shauna and Leanne are here to support you and give you guidance.

Be sure to check out shaunaspeet.com for renovation guides that walk you through the whole planning and hiring process of a renovation as well as a Custom Home Analysis. Shauna personally analyzes your answers you provide to a questionnaire she sends, as well as images of your home and your Pinterest boards. She then provides you with a custom report on your personal design style and the architectural style of your home.

Leanne is ready to build new relationships by giving you personal, tailored guidance on cash savings, home equity loans/HELOC, helping you grow your savings, and preparing for the short AND long term.

What are you waiting for? Dream like Joanna. Demo like Chip.

Fiduciary Financial Advisors, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any securities. Investments involve risk and are not guaranteed. Be sure to consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein.

About Shauna…

Shauna Speet, owner of Shauna SpeetInteriors, is an interior designer focused on studying and educating homeowners on the function of a home. She has devoted her focus to identifying functional pain points and creating solutions to solve them.

Shauna lives in the lakeside town of Holland Michigan with her husband, two children, and their energetic golden retriever Coby. They all enjoy being on the sandy shores of Lake Michigan in any season - especially Coby! 🐶

W: shaunaspeet.com

IG: @shauna.speet.interiors

About Leanne…

Leanne Rahn is a Fiduciary Financial Advisor working with clients all over the US. If you don’t know what a Fiduciary is, Leanne encourages you to look it up (or even better - check out her website!). She swears you won’t regret it. Women entrepreneurs, newlyweds & engaged couples, and families who have special needs children are Leanne's specialties. 

She loves a good glass of merlot, spending time with her hubs and baby boy, and all things Lake Michigan. She could listen to the band Elevation Worship all day long and is a sucker for live music.

W: https://forfiduciary.com/meet-leanne

E: leanne@ffadvisor.com

Here, at Fiduciary Financial Advisors, we take our fiduciary oath seriously. We hold these five principles:

1. I will always put your best interests first

2. I will avoid conflicts of interest

3. I will act with prudence; that is, with the skill, care, diligence, and good judgment of a professional

4. I will not mislead you, and I will provide conspicuous, full, and fair disclosure of all important facts.

5. I will fully disclose, and fairly manage, in your favor, any unavoidable conflicts

Home for the Holidays Magazine - Seeking Peace with Leanne Rahn

Leanne Rahn had the privilege to be featured in Real Estate By Aubree’s Home for the Holidays Magazine to talk to readers about “Staying the Course”.

With a Christmas twist, Leanne emphasizes the importance of not just your destination but your journey and the steps you take along the way. Leave feeling encouraged, confident, and motivated while understanding the value of remaining steadfast on your current course.

Leanne, Aubree, along with many other West Michigan businesses are wishing you a very Merry Christmas!

---

Boring Is Better

With holiday season in full swing and many more festive gatherings to come you may find yourself having conversations around the state of our economy, the cost of living, possibly even how your portfolios may be preforming, or more likely, how they are not preforming.

As we have watched the market react through this cycle of underperformance one thing has remained true, there is beauty and pride in proven investments. To paraphrase investor Jim Grant: Knowledge in some fields is cumulative. In other fields it’s cyclical (at best).

Let’s create some context, In the 19th century it was common for surgeons to reject the concept of micro bacteria, also known as germs. There was no process of sterilization when preforming surgery, which led to many infections and later a general knowledge of germs. This seems unfathomable to you or I reading this now but, like many things in life, it took countless mistakes to create a form of “Cumulative Knowledge” in the field.

For some reason this form of knowledge seems to pass over a large majority of the investment community. Although we have vast knowledge, an abundance of research and thousands of examples of different investment philosophies and strategies over time. Time and time again human behavior has not drastically varied through market cycles. The majority of investors participate in this form of “Cyclical Knowledge” mentioned by investor Jim Grant.

Let’s look at this mathematically -

 We have spent the last decade in a flourishing economy where nearly anyone from anywhere could create wealth in the equites market, in the last 12 months this entire concept has drastically changed. The majority of stocks are down year to date and all of the main indices listed above have suffered losses, although not in equal proportions.

Those boring old blue-chip stocks that pay a nice dividend and have strong cash flows are looking as bright as ever. Rather than the trendy investments in crypto currencies, blockchain, robotics, cyber security, and many more innovative concepts. It is time to be more methodical and rational in our investment philosophies.

Success in the stock market should look boring! You will not be sitting at the dinner table talking about your hot stock tip that doubled this year. Or how someone you work with got rich overnight on a hot investment.

This is not a proven way to create wealth. Diligence and patience are the greatest tools you possess in order to create lasting wealth. This sort of thing takes decades not weeks.

Invest continually over long periods of time, keep fees to a minimum, and wait patiently over years and decades to effectively build wealth.

This is not a declaration that index funds are the only answer to success in the realm of investing. I too enjoy variations of asset allocation; yet, this is a reminder of the importance of these strategies when considering the portions of your financial plan that are crucial to your retirement. As well as a reminder to be diligent in where your money is and who is in charge of it.  

My encouragement to you, as you hear those stories of large gains and news articles of the next big thing, find a way to stay true to the fundamentals. Understand although someone may be holding a hot stock up 80% odds are the rest of their holdings are suffering, they just failed to mention it. Exciting investments may have had their time in the spotlight but one thing will remain true over centuries. Boring investments do not have an ego, boring investments always have been and always will be sexy. 

Wealth is Built Over Time.

 Fiduciary Financial Advisors is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any securities. Investments involve risk and are not guaranteed. Be sure to consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein.

Why Is Your Cash In The Bank?

Why is your cash in the bank? This question may sound absurd… where else would it go? Under my mattress? The truth is, few people understand bank deposits and bonds well enough to know that they have other options, and those options may actually (at the moment) be much better.

Typically, people keep money in the bank for three reasons: safety, return (interest), and accessibility. In the current environment, bonds actually beat banks on two of those three criteria and aren’t far off on the third.

SAFETY - Treasuries are even safer from default than bank accounts.

This is especially true if you have a large amount of cash. Don’t get me wrong, FDIC insured banks are a very safe place to keep your money. The FDIC automatically insures up to $250,000 per depositor with the full faith and credit of the United States government. However, above that limit, cash is only secured by the faith and credit of the bank institution itself.

In contrast, every treasury bond is backed by the full faith and credit of the US government with no limit.

What about all that debt our government is racking up, how can I trust that they won’t default? I won’t get into this argument other than to say that the US government is almost universally considered to be the least likely institution in the world to default. Further, if you don’t trust the US government to pay their debts, you shouldn’t trust FDIC insurance either. Remember, FDIC Insurance is just a promise by the government to pay depositors (up to $250k) if the bank fails to do so.

The net out is that for the first $250,000, banks and treasury bonds have essentially the same risk of default and above $250,000, treasury bonds have less risk of default.

RETURN - Bonds (finally) offer a decent return while interest paid by many banks has hardly increased.

As of 11/10/2022, the average savings account yielded 0.18% APY (per bankrate). Fortunately some banks pay a higher rate up to 3% or 4% but typically the amount allowed to earn this higher rate is limited to $10,000 or $15,000. These can also come with obnoxious requirements to have enough direct deposits or debit card purchases. CD’s are better, yielding on average 1.15% with the best available rate at 4.1% per bankrate.

In contrast, as of 11/22/2022, 1-month treasuries yielded 3.97% and 1-year treasuries yielded 4.75% (per treasury.gov). Unlike many high interest bank accounts, there is no limit on how much you could invest at those rates and no special rules or hoops to jump through.

ACCESSIBILITY - Bonds can be sold and converted to cash in a matter of days.

It’s hard to beat a bank account for convenient storage and access of your cash. That’s what modern checking and savings accounts are for. However, this convenience and accessibility comes at a price. Because you can demand your cash from the bank at any time, they must keep a large amount of money in reserve. They can’t lend or invest those reserves which means they can’t generate profit from them. This is at least part of the reason banks offer pretty stingy rates on your accounts or cap the amount that can receive a high interest rate (think LMCU or Consumers Credit Union).

CD’s take a different approach. You promise the bank you won’t touch your money for several months or years and, because they know when you will receive your money back, they can use your deposit to lend, invest, and otherwise make money. In return, they pay you a higher rate. The major drawback is the contract you make not to touch your money until the term is up. Your money is essentially locked up so you better know you won’t need it until the agreed-upon date.

This is where short term Treasuries at today’s rates shine. There is a large and highly liquid market for US treasuries, meaning they can easily and quickly be sold and turned into cash if needed. This process should take only a few days. So, not only do short term treasuries currently have a higher return than CD’s, they’re a much better investment if you may want or need your money within the next few months or years. Some typical situations that require this are cash set aside for a home purchase or business investment, for a future tax bill, or to generate some return while buying into the stock market over time (dollar-cost-averaging).

The value of your bonds can go down if they’re not held until the end of their term.

This is a major difference from bank accounts or CD’s where the value of your account doesn’t fluctuate based on markets or interest rates. When interest rates rise quickly as they have this year, bond prices drop. This is because new bonds being issued as rates continue to rise pay a higher rate than bonds issued 3 months, 6 months, or 1 year ago. Naturally, if you want to sell your old bond that’s paying a lower rate than bonds issued today, buyers demand to buy them at a discount so that their total return if they hold the bond until the end of its term is the same as a bond purchased today.

Here’s the good news, this risk of your bond dropping in value only exists if you sell it before the end of its term. If you hold your bond until it matures you know exactly what your return will be because the US government will pay you its initial value plus your interest. This is one reason holding actual bonds can be preferable to bond mutual funds or etfs. Bonds are more complex to buy and sell but you can lock in specific terms, return rate, and you are in control of if and when to sell a bond or hold it to maturity.

Some more good news, short-term bonds for 1 month, 3 months, or 6 months change much less dramatically in response to interest rates than longer term bonds like 10-year or 30-year treasuries. AND, to top it off, short term bonds are currently paying higher rates of return than long-term bonds (thanks to an inverted yield curve which is a somewhat rare phenomenon and a topic for another time).

Lastly, this price movement can also work for your benefit. If interest rates drop, the value of your bonds will increase meaning you could sell them prior to maturity for a better return than you expected. The net out is that if you’re willing to hold a treasury bond until the end of it’s term - you know the minimum return you will receive, the only risk of loss is if the US government defaults on its debt, and your bond has the potential to do better than expected if interest rates drop.

Don’t just throw away your investments and strategy to go buy short-term bonds!

Yes short-term bonds are currently a great option FOR A SPECIFIC PURPOSE. If you’re looking for a place to safely park cash that you may need in the next few months or years and make a decent return… short-term bonds sure seem to beat the bank. If you’re saving for a far-off goal, 4% to 5% return likely isn’t the best you can do. Over long periods of time, stocks and long-term bonds have historically outperformed short-term bonds. If you have a strategy, stick to it. If you’d like a strategy, please reach out. You can reach me by email at ryan@ffadvisor.com or cel phone: 616.594.6205.

Footnotes

Bank & CD Rates per bankrate on 11/22/2022

Bond rates per Daily Treasury Par Yield Curve Rates on treasury.gov - 11/22/2022

How Travel Nurses Qualify for a Mortgage

Advice From A Mortgage Loan Officer

Macatawa Bank’s Mortgage team welcomed Alex to the team in 2016. Before joining the Mortgage team she served as a Commercial Credit Analyst. Prior to her work at Macatawa Bank, Merz was a Customer Service Representative at Chemical Bank. Alex holds her Bachelor's degree from Davenport University, where she double majored in Marketing and Finance, and played both basketball and golf. When she’s not fitting her customers with the perfect mortgage, Alex cheers on the Detroit Lions, no matter how bad they might be playing.

616.502.8044 akiel@macatawabank.com Website

---

H: I’ve heard travel nurses say they haven’t been able to get approved for a mortgage loan. What is a bank looking for to qualify travel nurses to obtain a mortgage?

A: Ideally, an underwriter is looking for a 2+ year history of being a traveling nurse with back-to-back contracts. If the potential borrowers are able to save up for a down payment during this time and build their credit, they will end up most likely with a better interest rate and lower monthly payments once they do qualify.

H: What if the travel nurse is looking to buy a house before that 2+ year limit? Does the amount of time they worked as a full-time employee at a hospital before they started travel nursing count at all?

A: If they are not able to wait 2 years to buy, they could consider a co-borrower and then refinance the loan into their own name solely once they have the two-year history. A bank may consider an income exception if the borrower has excellent credit, a good down payment, and a low debt-to-income ratio. They would need to see at least a one-year history of income being a traveling nurse though. This is not guaranteed, but the borrowers could apply for a pre-qualification after at least one year of income and have the bank take a look at the application. The exceptions would be on a case-by-case basis, and a strong co-borrower usually helps.

H: You mentioned back-to-back contracts. It can be hard to start another travel contract the very next week so a lot of nurses take a few weeks off in-between contracts. Would that still count as back-to-back? Any recommendations in the timeframe between contracts if someone is looking to obtain a mortgage?

A: A few weeks off would likely still be considered back-to-back. It’s understood that the industry norm could have a week or two in between contracts. Once a nurse starts approaching a month between each contract, there may be an explanation required for the gap in employment. Since the time in between each contract could vary, that’s another reason a two-year history is helpful to see the average income and the average amount of time worked year over year.

H: A decent chunk of travel nurse income comes in the form of tax-free stipends for housing and food. Does the bank consider this when evaluating the debt-to-income ratio?

A: The stipend would have to be documented and consistent to be considered income. The structure of income needs to remain the same year over year to be calculated as an average. If not every contract has a stipend, it may be difficult to consider it as income. However, when calculating the debt-to-income ratio, items like food expenses are not necessarily counted against the borrower. For example, the total debt considered in that ratio are items like loans from the credit report, property taxes, homeowners insurance, the proposed new loan, and HOA payments if applicable. Items like food expenses, gas, utilities, etc. are not counted as a debt payment each month. So the stipend portion of payment could go towards personal expenses and not necessarily considered to help with the loan repayment.

H: What percent would you recommend for a down payment?

A: Most of our loan options require at least a 5% down payment. If you don’t have 20% down, that is okay, but there will be PMI payments required. PMI stands for private mortgage insurance and is an extra portion of the monthly payment that does not go toward the principal balance of the loan. The more one puts down, the lower the PMI payment will be. I would never recommend someone use all of their liquid funds towards the down payment in case a large expense comes up unexpectedly. If someone can’t come up with 20% down, it shouldn’t necessarily stop them from buying a home.

H: I’ve heard it is not good to take out a new credit card or loan before applying to get a mortgage. Any other things that nurses should try not to do?

A: That is true, if the loan can wait, don’t apply for it until after the home purchase. Also, don’t apply for these things during the loan process either. If one does, the new loans have to be counted in the debt-to-income ratio on the mortgage application. Try not to save your down payment in cash under your bed. We cannot accept funds for a mortgage in cash because we have to source where those funds came from. Have the funds deposited in a savings, checking, or money-market account.

H: How soon would you recommend a travel nurse start talking with a mortgage broker when they want to start the process of getting a home mortgage loan?

Each scenario is different for each person. If someone is serious about trying to buy a home in the future, they can truly reach out to a mortgage lender at any time. The lender can explain if they couldn’t get approval now, what it would take to get approval and what the borrower should be working on. The lender could also go through options that would involve a co-borrower if the income of the traveling nurse can’t be considered at that time. They can also review how much income would be required based on the purchase price desired.

---

---

Fiduciary Financial Advisors, LLC is a registered investment adviser and does not give legal or tax advice. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any securities. The information contained herein has been obtained from a third party source which is believed to be reliable but is subject to correction for error. Investments involve risk and are not guaranteed. Past performance is not a guarantee or representation of future results.

How to Save Money on Your Next Family Vacation

This month, I had the opportunity to sit down, interview-style, with Travel Advisor, Sarah Allen, and get all the secrets on how to save money on your next family vacation. She shares some amaaazzing tips that will help you decide how to choose your destination, the best way to book flights, how timing can play an impact, and more. Keep reading and by the end of this, you’ll be packing your bags!

//

L: Sarah - how in the world does a travel addict decide on their destination? Give us all the tips!

S: There are a few things to consider when choosing a travel destination. Time of year and weather may help guide your decision. Would it be too hot to enjoy hiking in Sedona in July? Christmas at Disney is beautiful but it will be very busy so if you don’t like crowds you should go during an off-season time.

You should also consider the age of your children. Are they too young for long hikes? Would they enjoy the museums in a large city? I suggest making a bucket list of all the trips you’d like to take. Then decide how much money you have to put towards travel each year.

Next, plot these ideas in a calendar based upon your budget and life stage. 

L: Okay, so once a destination is decided, how far in advance should someone start planning?

S: It really depends on where you are going, how flexible your dates are, and if you need time to save up for your trip. Cruise lines and major theme parks release dates over a year ahead of time and if you book when those dates are released you will have the best chance of booking the resort and room category you are looking for. Prices will likely be the lowest when dates are released and a good Travel Agent will watch for promotions that can be applied to your stay if money can be saved.

If you are traveling at a busy time of year like Christmas or Spring break or even summer break I would suggest booking at least 6 months ahead of time. Trips can be booked last minute but there may not be as many choices if you wait too long.

I have always enjoyed the anticipation of the trip almost as much as the trip itself so we tend to book early. This gives us plenty of time to save up the money we need and plan all of the details!

L: Let’s talk about the specifics: what are the benefits of booking your trip early? Would there ever be a benefit to booking late?

S: There are benefits to booking your trips early. You will have the most choices for accommodations and room categories if you book when dates are released. It is also a great way to save money on trips to places like Disney, Universal, and for cruises. If you book when dates are released you will likely get the best price available. If you use a Travel Agent they will watch for promotions that might save you money and can call in and modify your reservation for you at any time. Booking early also gives you time to save up for your trip, do your research, and anticipate all the fun you will have.

Conversely, you can sometimes find an amazing deal last minute. These don’t leave a lot of time for planning or saving money but if your life situation allows you to pick up and go at any moment it is definitely a budget-friendly way to travel.

L: Speaking of timing, are there certain times of the week or year to avoid OR take advantage of when it comes to airfare? Other secrets on how someone can save dollars on flights?

S: There are a couple of ways to save money on flights. Airlines generally release their flights about 6 months before your trip.  I start off looking at sites like Kayak and Google flights to get an idea of what is available and then to the Hopper app to see the best time to book.  Setting an alert on these services will let you know when prices drop.

If your dates are flexible you could also use a flexible date search tool and easily find the cheapest days to fly out.

My last tip is to look at all of the area airports. You might be able to fly out of a smaller airport nearby for less money or on a more convenient day. When it comes to booking the flight I suggest to do so directly with the airline.

L: Are there pros and/or cons to using booking sites like Kayak, Expedia, etc.?

S: I love using sites like Expedia and Kayak for research and sometimes they can save you money. It’s a great tool to get an idea of what hotels are available and I love the map feature! With a quick glance, you can discern the hotels with the locations you desire.

There are a few downsides. Often the rates on their hotel rooms are non-refundable. If I learned anything in the last 2 years it's that things don’t always go as planned and lately I am much more comfortable booking a room that I can cancel. Weigh your options and definitely check the cost of booking directly with hotels for the most flexibility.

If you book a flight with any of these third-party sites it is much more complicated to reschedule a canceled or delayed flight. When there is bad weather or staffing issues and 1000’s of people need to rebook, the airlines will rebook the customers who booked directly with them first. This could leave you stuck at an airport longer.

In this current climate, I suggest booking directly with the vendor.

L: What about travel insurance? Do you typically recommend this to your clients?

S: This is a timely question. Pre-covid, my family rarely thought about purchasing travel insurance. Life was fairly predictable and canceling a trip just wasn’t something you heard about very often. Since covid, my family has had to cancel or reschedule a number of trips. Some we had travel insurance for and some we did not.

I am not an insurance agent so my advice before buying a policy would be to read through the details closely. What does it cover? Consider the cancellation policy where you are going before purchasing additional insurance. If they will let you reschedule for another time, maybe you don’t need travel insurance.

Another thing to think about when buying travel insurance is your health and healthcare coverage. Are you older and traveling abroad? Maybe it would be a good idea to get a plan that would cover an unforeseen medical emergency.

L: Cruise vacations are all the hype. Is there value in them? Why would someone choose a cruise for their next vacay?

S: Cruising is a great option for families, couples, or singles to see and experience different cultures from the comfort and elegance of a massive ship. These boats are floating cities with luxurious amenities. The best thing about a cruise is that food and entertainment are included in the price of the cruise and both will be top-notch.

We went on our first cruise after renting a beach house for spring break. Shopping for and cooking 3 meals a day for my family wasn’t quite the vacation I had in mind. Sitting on the beach and watching ship after ship left got us thinking about other ways to vacation. We were surprised at how affordable a cruise was and no cooking!

Drink packages and excursion options will be an additional cost but you could stick to free beverages or you can stay on the ship and enjoy a quiet day to save money. Many ships also offer kids’ clubs and fun activities which will give parents some time to relax kid-free.

L: Okay, SUCH good info on cruises. What about another popular vacation destination - Orlando theme parks? Share with us your top budget-friendly tips!

S: 1. I had a friend help me plan our family’s very first trip to Disney World.  I had been many times as a child but my family always stayed nearby with my grandparents and we only did one park per trip.  I really didn’t think we could afford to stay on the property for a week. Then she told me about Disney’s value resorts! I had no idea we could stay at a Disney World property for those prices. The value resorts at Disney are not fancy but they are clean and have very fun theming.

2. When we travel to Disney or Universal we always bring simple breakfast foods with us or order groceries to be delivered to our resort.  Having a quick, simple breakfast in our rooms saves us money and time.  The resorts do have breakfast options available but it is often crowded and the cost of that for a family definitely adds up.

3. Brunch for lunch is a great way to save money on a more expensive meal like character dining.  Sometimes we will book a reservation for a late breakfast and consider that our lunch and sit-down meal for the day, choosing a less expensive option for dinner. 

4. It’s important to stay hydrated in the Florida sun but buying bottled water in the parks is expensive.  Bringing in your own water bottles can save you money. I love the stainless steel Brita filter water bottle because you can fill it with ice and then water from any sink.  You can also ask for free water at any quick service or snack location.

5. Souvenirs - set a budget ahead of time and communicate that plan to your kids or let them pick one thing in the parks.  Have them save their money ahead of time for other things they may want while you are away.  It’s good for your kids to learn the value of money and planning at a young age.

6. Purchase things ahead of time - PLAN AHEAD! Things like ponchos and sunscreen are expensive in the parks. We also buy themed shirts at Target, Kohls, or Amazon for our trip versus in the park. 

7. Chase Disney Visa - we have had this card for years and earned 1000’s of Disney dollars to spend in the park.  You can also use points toward flights.  We have all of our recurring bills on this card and charge all of our purchases throughout the month. Please only consider this option if you plan on paying your full balance each month. 

8. Disney gift cards - You can purchase packs of Disney gift cards at warehouse clubs like Sam’s and Costco. This is a great way to save up for your trip as you can use them to pay your balance or in the parks for food and souvenirs. Buying a pack or two a month will ensure you don’t spend that cash on other items. They will usually go on sale around Black Friday and you will be able to purchase them for less than their face value.

L: I’m taking notes! So good. Alright, Sarah, if you had to leave the readers with your TOP 3 tips on how to save money on their next family vacation, what would they be?

S: Number one: Book early with a Travel Agent - not only will you likely get the best price your agent will watch to see if there are any sales and can apply the sale price to your trip.  This also gives you lots of time to save and anticipate!

Number two: Travel in the off-season - if you choose to go to Florida in September right after school starts or January when it may be cooler you will find the off-season rates apply.  It will also be less busy.

Number three: Drive to your destination if it’s close enough and time allows.  Buying airfare for our family of 5 adds up quickly.  We look forward to our drive each spring break and even with gas, food, and a hotel stop we still end up saving about $1000 plus then we don’t need a rental car when we get there.  A bonus is your kids get to see a lot of places while you are on the road.

L: Last but not least, Sarah: If someone wants to work with you, what does that look like? How can you help them plan their dream vacation?

S: I specialize in Disney trips, Universal trips, cruises, and all-inclusive resorts and have completed certification in each of these areas of expertise. When you book a trip with Fairytale Journeys by Sarah Allen you get my years of experience, planning, services, and support for free. Travel agents are compensated through commissions that hospitality companies include in their packages whether you use a travel agent or not.

We will start the process by talking about what you want your vacation to be like and then I will curate a trip just for you based upon your family's unique budget, wants, and needs. My job is to wade through all of the options, availability, dates, and insider knowledge and present you with choices that work best for you and your family.

Once the trip is booked I help families with the details of the trip, such as transportation, dining plans, theme park information, things to bring, etc. I’ve spent years acquiring this information through travel and research so you don’t have to! Things don’t always go as planned and when you need help on a trip it’s nice to know you have a friend and expert available to help!

Time is money and using a travel agent will not only save you time it will save you from being overwhelmed and frustrated.

//

Tips from Leanne:

1. Check out the latest travel credit cards. Many companies offer incentives for opening a new credit card that could earn you free flights, money off your travels, cashback on gas, and more! Utilize credit wisely by not spending what you don’t have. Bonuses and freebies are great but what’s even better is not getting crushed by the weight of credit card debt.

2. Another great way to have your money work for you is by utilizing high-interest-earning checking accounts. Think Lake Michigan Credit Union, Consumers Credit Union, and others. Right now, you can find some credit unions and banks with checking accounts earning 3-4%. Use those earnings to bump up your vacation savings fund.

3. Speaking of your vacation savings fund, be intentional about it. Know you want to spend $5,000 on travel each year? Calculate what that equates to on a monthly basis and set it aside each month. This will encourage intentionality and lower the temptation to just “put it on the credit card” without actually having the cash to pay for it.

4. Have the cash but don’t know where you want to go yet or have longer than a 3-month timespan before you voyage off? Investing in a low-risk fixed-income vehicle might be an option for you. With the potential for rates being greater than your high-interest-earning checking account, this might be the perfect route to make your future vacation dollars work for you in your sleep (literally). Spark your interest? Leanne can chat with you to decide if this is a good move for you.

   //

Do you have your suitcase out yet? I tried to warn you your travel fever will be ignited by the end of this. Sarah Allen is your new go-to for all things travel. Keep these tips in your back pocket, right next to your passport.

Fiduciary Financial Advisors, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any securities. Investments involve risk and are not guaranteed. Be sure to consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein.

About Sarah…

Sarah Allen is a Travel Advisor with Fairytale Journeys specializing in Disney vacations, Universal Studios, cruises, and some all-inclusive resorts. Helping families plan a trip that fits their needs and budget is her passion. She loves helping others make lifelong memories with their families. She, of course, loves to travel herself, and sometimes planning trips is as much fun as going on the trip itself.

Married for 22 years, Sarah and her husband have 3 teenagers and 2 Goldendoodles. Her family has been traveling since her kids were very young and she has passed on the love of exploration to them all.

W: https://www.facebook.com/ftjbysarahallen

E: ftjbysarahallen@gmail.com

P: 269-929-0055

About Leanne…

Leanne Rahn is a Fiduciary Financial Advisor working with clients all over the US. If you don’t know what a Fiduciary is, Leanne encourages you to look it up (or even better - check out her website!). She swears you won’t regret it. Women entrepreneurs, newlyweds & engaged couples, and families who have special needs children are Leanne's specialties. 

She loves a good glass of merlot, spending time with her hubs and baby boy, and all things Lake Michigan. She could listen to the band Elevation Worship all day long and is a sucker for live music.

W: https://forfiduciary.com/meet-leanne

E: leanne@ffadvisor.com

Here, at Fiduciary Financial Advisors, we take our fiduciary oath seriously. We hold these five principles:

1. I will always put your best interests first

2. I will avoid conflicts of interest

3. I will act with prudence; that is, with the skill, care, diligence, and good judgment of a professional

4. I will not mislead you, and I will provide conspicuous, full, and fair disclosure of all important facts.

5. I will fully disclose, and fairly manage, in your favor, any unavoidable conflicts

Mega-Backdoor Roths Aren't Just For "Rich" People

When many people learn about mega-backdoor Roth 401k contributions, they think to themselves, “this sounds like a great strategy for “rich” people”. Sure, it can be a lot easier for someone with a very high income to afford a $60,000 or $70,000 contribution every year and high earners are definitely a group that can benefit hugely from the mega-backdoor. But, there are two things I’d like to point out:

1. A lot of income doesn’t necessarily translate into a lot of disposable income or savings. Without the right money habits, people tend to spend more as they earn more and can even end up feeling like they have less of a cushion than they did when they earned less.

2. Income is just one part of a larger financial picture. Too many people never think beyond income and their basic 401k contribution to consider ways their savings, assets, debt, and expenses interact with and can complement those basic building blocks.

You could write an entire book on point #1 but I want to focus on point #2 with five examples of relatively common situations where, when you look at the whole picture, mega-backdoor contributions are attainable and can make a lot of sense, at least in a given year or time period. If you don’t have a clear idea of what your “whole financial picture” looks like, please reach out, that’s exactly what I’m here for.

1. You have a self-employed spouse. While there are several retirement account types available to self-employed individuals (we set these up often for new clients), many people either aren’t aware of them or feel it will be too complicated to set them up. In this situation it makes sense to think about your combined income and turn the spouse who does have access to a 401k into the super-saver of the family. If one spouse has no account to save for retirement, it can be pretty feasible for the other to be able to max out their 401k contribution and then use the mega-backdoor to boost savings even further.

2. You have extra cash after selling a home. With the massive increase in home prices some people are finding they’ve accumulated enough equity to have cash left over, even after making their down payment on a new home. Often people are unsure what to do with this cash and will let it sit in the bank earning nothing. Some may at least take the step of investing it so it can grow. But, that growth will be taxed. In this situation, maxing out a 401k and then making a mega-backdoor roth contribution is an ideal way to essentially shift that money into a tax-free account where it can grow and never be taxed again!

3. You have more in the bank than you need for your emergency fund. This could be a sign that you’ve been under-saving for retirement. If so, maxing out your 401k for a year or two and making extra mega-backdoor contributions is a great way to catch up, get that money growing, and avoid tax on that growth. If you have been saving enough and are still in this boat, layering on mega-backdoor contributions could help get you to retirement or financial independence sooner than you thought possible.

4. You had a windfall or unusually high compensation this year. Most people don’t win the lottery so more often this could be an inheritance, a gift from a family member, an unusually large bonus at work, a stock grant, or an unusually “good year” for commission-compensated workers. Often in these situations the income is unexpected and therefore not already “spoken for”. If you want to avoid the temptation of spending it just because it’s there, a mega-backdoor contribution is a great way to essentially shift this money to an account where it can grow tax-free.

5. You moved or made a life change that has reduced your expenses dramatically. As remote work exploded during the pandemic, some people have been able to keep jobs with “big city” or “coastal” pay while moving to areas of the country with a much lower cost of living. Others may have moved in with aging parents to help care for them and have seen their living costs plummet as a result. Maybe kids moved out or finished college that you were paying for. While maxing out your 401k may have been unobtainable before, it may now be a very real option to consider along with going even further and making mega-backdoor contributions. 

There are many more examples of situations where mega-backdoor roth contributions can be unexpectedly relevant but there are some overarching themes:

• When the amount of money coming in during a year is significantly higher than usual.

• When your expenses are significantly lower than usual but your income hasn’t changed.

• When you’ve built up more savings than you need for your emergency fund and short-term goals.

• When one spouse has access to a 401k and the other working spouse does not.

If you need a primer on what a mega-backdoor roth contribution is and how to make one you can check out my summary blog post on this topic: Mega-Backdoor-Roth

2023 Contribution Limit and Tax Adjustments (mostly) Keep Up with Inflation

While the 2023 social security cost-of-living increase of 8.7% grabbed most of the headlines, the IRS also adjusted tax brackets and contribution limits for 2023 to keep pace with the 8.2% annual inflation rate reported in October. While many adjustments kept up (401k contribution limits increased 9.8%, IRA limits by 8.3%), the Feds were stingier with others (tax bracket thresholds increased only 7.1%, the standard family deduction by 6.9%, Roth income limit by 6.9%). I’ve summarized the major updates for 2023 below.

If you have any questions about how these changes may impact your saving or financial plan in the coming year feel free to reach out to me at ryan@ffadvisor.com or 616.594.6205.

Retirement Account Updates

• 401k contribution limit increased by $2,000 from $20,500 to $22,500

• IRA contribution limit increased from $6,000 to $6,500

• 401k catch-up contributions increased from $6,500 to $7,500

• IRA catch up contributions did not increase, they are still $1,000

• SIMPLE retirement account contribution limit increased from $14,000 to $15,500

• Roth IRA income limit phase-out increased:

  • Between $138,000 and $153,000 for singles and heads of household

  • Between $218,000 and $228,000 for married filing jointly

• SEP IRA contribution limit increased from $61,000 to $66,000

• HSA contribution limit increased from $3,650 to $3,850 for singles. Family coverage increased from $7,300 to $7,750.

Tax Updates

• Standard Deduction for 2023: Married filing jointly $27,700 up $1,800 from the prior year. For single taxpayers and married individuals filing separately, the standard deduction rises to $13,850 for 2023, up $900.

• Tax Bracket Adjustments for 2023:

  • 35% for incomes over $231,250 ($462,500 for married couples filing jointly);

  • 32% for incomes over $182,100 ($364,200 for married couples filing jointly);

  • 24% for incomes over $95,375 ($190,750 for married couples filing jointly);

  • 22% for incomes over $44,725 ($89,450 for married couples filing jointly);

  • 12% for incomes over $11,000 ($22,000 for married couples filing jointly).

• For tax year 2023, the foreign earned income exclusion is $120,000 up from $112,000 for tax year 2022.

• Estates of decedents who die during 2023 have a basic exclusion amount of $12,920,000, up from a total of $12,060,000 for estates of decedents who died in 2022.

• The annual exclusion for gifts increases to $17,000 for calendar year 2023, up from $16,000 for calendar year 2022.

Social Security Updates

• COLA Increase for 2023 will be 8.7%

• Earnings limit for social security benefit adjustment for workers younger than full retirement age: $21,240

Fiduciary Financial is not a tax advisor, these figures are provided for informational purposes only.

Mega-Backdoor Roth - The Hidden 401k Feature that can Supercharge Your Retirement Saving

Saying that the Mega-Backdoor Roth strategy can supercharge your retirement saving is not a hyperbole. In most situations, maximizing this feature MORE THAN DOUBLES the amount you can save to Roth accounts each year. Once those savings are invested in a Roth account, they can grow tax free for years or decades and be withdrawn tax free* in retirement.

The “mega-backdoor” can have mega tax impacts

A quick example illustrates just how powerful those tax savings can be:

Each year for 20 years, “normal 401k Charlie” maxes out his Roth 401k with $20,500 and invests an additional $40,500 in a taxable investment account. Both accounts grow at 6% per year. At the end of 20 years, Charlie has $1,497,169 in his taxable account and $757,826 in his 401k; $2,254,995 in total. While Charlie’s Roth 401k savings can be withdrawn tax free in retirement, he will owe capital gains tax on the $687,169 of his investment gains in the taxable account. At long term capital gains rate of 15% that would be $103,075 in taxes! This doesn’t even include taxes he would likely have paid on dividends in the taxable account over 20 years.

“Mega-backdoor Bettie” on the other hand maxes out her normal $20,500 Roth 401k contribution and is able to invest an additional $40,500 into her Roth 401k through the Mega-backdoor strategy. After 20 years, with the same investment return as Charlie, Bettie has the same total savings of $2,254,995. However, Bettie can withdraw that full amount tax free in retirement.

In this example the Mega-backdoor saved Bettie $103,075 on taxes! She also didn’t pay tax on any dividends along the way.

How to implement the Mega-Backdoor strategy

Hopefully this example helps illustrate that the Mega-Backdoor Roth can be a powerful tax-saving strategy, but how does it work? By making after-tax 401k contributions and in-plan Roth conversions. Let’s break those two steps down:

1) Allowing after tax 401k contributions increases the maximum amount employees can contribute from $20,500 in 2022 to $61,000* (or $67,500* if you’re over 50). After-tax contributions don’t reduce your taxable income or tax bill today, but this is where the in-plan Roth conversion is key.

2) Through an in-plan conversion you can easily take those huge after-tax contributions and convert them to Roth funds within your 401k (or through rollover conversions to a Roth IRA). Once converted, your savings grow tax-free and can be withdrawn tax free in retirement just like normal Roth 401k or Roth IRA contributions.

This is the power of the mega-backdoor, it allows you to quickly build a much bigger tax-free* retirement nest egg than you could with a typical 401k and Roth IRA alone. And, unlike a Roth IRA where households over the income limit aren’t allowed to contribute, anyone in the plan can contribute with no income cap. This means even high earning households can mega-backdoor. It’s actually this group that can benefit the most!

Some 401k plans don’t support the Mega Backdoor and some require an extra step

Unfortunately, many 401k plans don’t allow allow for employees to make after tax contributions. Sadly, there’s not even a good reason for this other than perhaps some added administrative difficulty. That said, it is becoming more and more common and will likely continue to grow in popularity. Some plans allow for after tax contributions but don’t have a program set up for in-plan conversions to Roth. This is where a second step is needed to see if the plan does allow for “in service distributions” so that employees can roll over their after tax contributions to an IRA and convert them to Roth. If you’re unsure what you’re plan allows or how to execute this step please reach out, I’m happy to help.

The Mega Backdoor isn’t right for everyone

Let’s be honest, making mega-backdoor Roth contributions isn’t realistic for a lot of people. Maxing out a $20,500 annual contribution is already a lot! In fact, it may already be more than enough for your situation and retirement goals. That said, there are a lot of unique situations where a mega backdoor strategy can become unexpectedly relevant, I’ve written about several of them here: Mega-Backdoor Roths Aren’t Just for Rich People.

Like any large money decision, mega-backdoor Roth contributions should be part of a bigger financial and tax strategy built around your needs, your timeline, and your goals. If you’d like help building a strategy tailored to your timeline and goals (or figuring out if your employer allows the mega-backdoor), feel free to reach out, I’d love to see if I can help or direct you to someone who can. You can reach me by email at ryan@ffadvisor.com or cel phone: 616.594.6205.

Footnotes:

*Roth savings grow tax-free. Contributions can be withdrawn without tax or penalty at any time and investment gains can be withdrawn tax and penalty-free after age 59-½ (or 55 if the “rule of 55” applies to you).

*$61,000 and $67,500 are the 2022 limits for employee contributions, employer matches, and profit sharing contributions combined. Your max contribution = $61,000 or $67,500 - employer match - profit sharing contribution.

A Few Logical Questions During a Time of Malaise

A few logical questions during a time of malaise

Bear markets are defined as a 20% decline from a high-water mark in a security or index. I believe that a bear market is better defined by feelings of pessimism and fear. I would sum these feelings up with one word: malaise. By the ladder definition we have been feeling malaise since roughly February in financial markets. This feeling begs a few natural questions that I will offer opinion around.

• When does the malaise end?

Many will guess and some will get lucky, appearing to be seers of future events (you can always test their accuracy by asking for past predictive accuracy). The point remains that no serious market participant knows for certain when this will end. We could be days, weeks, or months away from this point. I believe the key variable to break this market pessimism is the Fed (Federal Reserve). It won’t occur the day the Fed says or signals that they are done raising rates, the turn will occur before that in anticipation of said occurrence. Keep in mind, I believe the Fed is the key variable but not the only variable. There are a litany of additional variables that could change the market’s course thus making clean predictions around the course of a future market a risky endeavor. We will entirely avoid said endeavor.

• What will it look like when the market turns?

Again, no serious market participant knows. We could have a rapid move higher if the Fed is able to pivot from increasing rates to holding or cutting rates while peace pervades in Ukraine and the US/world avoids damaging recessions. Consequently, we had a dry run of what the market would look like if there was a swift recovery. From a low on June 16th, we watch the S&P 500 rally back north of 17% in roughly a two-month period. This could be called a “V” shaped recovery given the shape created on a graph of a quick drop and quick recovery. This is one probable outcome while another, readers of my early piece “Fear of Flatness” know this outcome, is a choppy, directionless market. This outcome could already be showing as the afore mentioned rally has largely dissipated (as of this 9/22/22 writing) to leave us sitting near the mid-June lows. We must prepare for different potential recoveries from the lows in the market.

• What should be done in these markets?

An absence of action can constitute a purposeful choice. Simply put, making huge changes in volatile times can often substitute short-term relief for slow, long-term pain. Not making moves is a decision in and of itself.

Having the confidence to believe we or anyone we follow can confidently call the bottom and subsequent invest accordingly is not the course we choose. Helping our clients maintain the best asset allocation for their given situation based on financial planning and the ability to absorb various market outcomes is the chosen path. There is a saying that “you are rewarded for time in the market not timing the market”.

We favor small, incremental changes based on high probability outcomes. For example, increasing portfolio exposure last year and the beginning of this year to dividend paying stocks can help ride through a down or choppy market because of the organic portfolio cash-flow created by these dividends. The investment saying here is “a bird in the hand is worth two in the bush”. In times of stress, you want to know what you are holding not what you are fantasying about holding.

• Fine, I understand all of this, but is there any silver lining?

Yes, yes, a thousand times yes. Money now has a cost and that is, very probably, good for long-term economic health. Simply, if you or a company borrows funds to fuel a purchase or capital project, the project must now produce larger or more certain returns than it would have a year prior. This leads the market to cull weak capital investment ideas in favor of strong, sustainable projects.

Furthermore, savers are now rewarded exponentially more on a nominal basis than they were just twelve months ago. For example, if you had bought a 1-year treasury bond last September it would have yielded under 0.10%. Today a new 1-year treasury yields over 4.00% (as of 9/22/22). Over a 40x increase in yield. While this punishes borrowers and slows economic activity in the short-run, we are of the opinion that a more balanced cost of borrowing/reward for savings can act as a catalyst for the next, multi-year economic and equity market expansion.

To enjoy the wealth creating benefits of our free-market, capitalist system we must have periods of reset where weak, over leveraged borrowers are punished in the short-run and the strong, prudent capital allocators are rewarded in the long-run.

Final thoughts

Risk assets are on sale. If you accept the thesis about the in-ability to peg the bottom of the market, you can still rest assured that mathematically the average stock is anywhere from 10-30% lower than it started the year. If you look at the index level like the S&P 500, you are buying at a roughly 20% lower price than the start of the year. This doesn’t guarantee huge returns; however, historic precedence would indicate you have a higher probability of better future returns than had you purchased at the beginning of the year.

This year has not been fun nor rewarding in almost any asset market. Keep in mind that the decisions of today determine the returns of tomorrow. We keep today’s decisions, with high conviction, focused on the long-run, resisting short-term needs for catharsis, and take advantage of small, tactical moves for long-run success. This malaise too shall pass.

As always, I am available for questions, feedback, commentary, or just to chat by cell 248.982.8190 or email rob@ffadvisor.com. Be well and focus on the long-term!

Are Your Financial Passwords Leaked On The Dark Web?

Advice From A Cyber Security Expert

Andrew Rathbun is a cyber security professional with seven years of experience between local/federal Law Enforcement and the Private Sector. Andrew has spent the last 2.5 years responding to ransomware incidents for businesses at every scale. Andrew is heavily involved in the Digital Forensics and Incident Response (DFIR) community. He enjoys writing blog posts, sharing research, contributing to open source projects, publishing books, and learning from and collaborating with other professionals in the field. Below are Andrew’s answers to a few questions I had for him regarding online financial accounts.

---

1. What are the biggest threats to keeping online financial accounts secure?

The biggest threat is when people use the same passwords that have long since been compromised in numerous hacks. You should make sure your current passwords aren’t in the infamous “RockYou” password leak, which can be found here. This is a commonly used password list by hackers when they want to attempt brute forcing (trying many passwords to see if one will work) accounts to gain access and carry out their goal of stealing all your money!

Additionally, some financial institutions do not have multi-factor authentication (MFA). My credit union doesn’t currently, which is crazy to me! Email/Password combinations used for some of the most important accounts people own are floating about on the dark web. You should use multi-factor authentication for every financial account if possible.

2. What is the best way to create a secure online password?

Using a random password generator is the best thing you can do. This can make it difficult to remember all of the random passwords though. So once the random password is generated, you then have to decide the best way to store/remember it. For examples of strong passwords, use a site like this one to create a password that is difficult to crack.

3. What is the safest way to save/store these secure passwords?

It is vital to use a password manager. I use 1Password as my password manager. I like it because I can use my email and an easy-to-remember password to access my password vault, which contains ALL of my passwords for every login I have. What makes it secure is that not only do you need the typical email/password combination to log in, but you also need a secret key that is unique to your account. If you use a password that has long since been leaked as associated with your email, a hacker will need to know your secret key, which is a random string of numbers and letters, before they can log in to your password vault.

Within my 1Password vault, I don’t know any of my passwords by heart. They are often 20+ characters and include lowercase characters, uppercase characters, symbols, numbers, and other special characters. There’s no way I could remember one let alone hundreds of different passwords. On some of my most valuable accounts, I have 50+ character passwords! I use 1Password on my phone and computer to log in to my accounts, so I don’t have to remember those passwords because they are simply too secure to remember. If ever they get leaked and therefore associated with my email account, I’ll just regenerate a new 20+ character password and replace it in my vault with the one that was compromised.

4. Any password managers that you would recommend that are free?

I’ve personally not used any free password managers, but one free password manager I would not recommend is your web browser. Obtaining your saved passwords from a browser like Firefox or Chrome is trivial for a motivated bad actor, and frankly, I could download a free tool right now and obtain the passwords stored in my web browser without much effort. 

If I had to choose a free password manager, the first I would consider looking into would be BitWarden on account of the program being open-source. What does this mean? That means the source code that makes it work is completely transparent to the public. If there are vulnerabilities, those who have the knowledge can identify them and suggest changes to the program to make it more secure so everyone benefits. For those not in the cyber security industry, this is a very common occurrence where a tool is free and open-source where improvements, bug fixes, and any other feature requests are encouraged. 

5. What is a VPN, how does it work, and should the everyday person use one?

A virtual private network (VPN) is something that people can use to make their internet traffic secure from people who are trying to steal their data. VPNs are secure but they can be very slow. Without a VPN, if you go to a website, data travels from your computer directly to the website’s servers. With a VPN, the data travels from your computer, to Israel, to Switzerland, to Brazil, and then to the website you’re trying to go to. Therefore, the website will load much slower than without a VPN.

The everyday person should strongly consider using a VPN when connecting to public Wi-Fi, such as the airport or a local diner. Unsecured Wi-Fi networks allow bad actors to easily sniff for packets of your data going to and from your computer, including but not limited to your email/password combinations when you’re logging into your bank account on said public Wi-Fi network.

6. Any good VPN services that you would recommend?

If you care about privacy, then you want to use a VPN that’s based out of a country with favorable privacy laws. Switzerland is widely considered to have the most robust laws on privacy when it comes to consumer data. ProtonMail, a privacy-focused email provider based out of Switzerland, has a VPN service called ProtonVPN. I use it and I very much recommend it. The philosophy of Proton is admirable and the fact it’s based out of Switzerland is a huge plus for privacy. Proton also embraces the open-source mindset that I admire about BitWarden and many other projects within my field of work.

7. Any other best practice recommendations?

Use a password manager, enable multi-factor authentication (MFA) on every account that provides that as an option, and change any passwords that you’ve been using since high school! 

Remember if something is free and you are not paying for it, then you are the product. Your data, your interests, your everything is being sold by advertisers like Google for profit. It’s not that any of us have anything to hide, but there’s a reason why we all don’t have 24/7 freely accessible streaming cameras in our bedrooms for all the world to see. 

Also, if you try to sell something on Facebook like I did tonight for the first time in a few years, and multiple accounts message you asking if the item is available within a minute of the posting, they are very likely bots. Sure enough, the first 4 accounts that asked me if the item was available ALL asked if they could call me with their second message. In the next message after I said “no, I don’t give out my phone number” they asked if I could post my phone number so they could call me. I immediately blocked them at that point. You have to take a moment, slow down, and not be in such a hurry to make the sale and ensure your data’s privacy is maintained as much as possible. Why would this person want my phone so badly? I thought they were interested in the mattress I’m trying to sell. Truthfully, my phone number is more valuable to them than the mattress, and they know I want to sell the item badly enough because otherwise why would I be posting about it on Facebook where there are tens of thousands of people on each of these 10+ groups I posted the item in? Much like the term innocent until proven guilty, nowadays I see things as scams until proven otherwise.

---

Fiduciary Financial Advisors, LLC is a registered investment adviser and does not give legal or tax advice. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any securities. The information contained herein has been obtained from a third party source which is believed to be reliable but is subject to correction for error. Investments involve risk and are not guaranteed. Past performance is not a guarantee or representation of future results.

Is This Jar Full? Is Your Life Full?

After watching this video, take a minute to reflect on what your current “golf balls” are in your life. If they aren’t what you want them to be then make a plan to change your priorities and start allocating your time differently!

“When you create a difference in someone’s life, you not only impact their life, you impact everyone influenced by them throughout their entire lifetime. No act is ever too small. One by one, this is how to make an ocean rise.”

— Danielle Doby

---

---

Fiduciary Financial Advisors, LLC is a registered investment adviser and does not give legal or tax advice. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any securities. The information contained herein has been obtained from a third party source which is believed to be reliable but is subject to correction for error. Investments involve risk and are not guaranteed. Past performance is not a guarantee or representation of future results.

5 Ways to Fight Inflation as a Business Owner

Fiduciary Financial Advisors, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any securities. Investments involve risk and are not guaranteed. Be sure to consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein.

---

Surviving Your First Market Crash

Picture this: you’re young, living life, killing it at your first “adulting” job, putting those dollars away for retirement, finally making some good money, and then boom - the market crashes. Social media blows up, politics get even more heated, your invested savings drop lower and lower, and you can’t seem to escape the dark shadow of worry. Sound familiar? Well, hang in there, because you're about to get all the deets on how to survive your first market crash. 

First, let’s start with the technical definition of a market crash. A market crash is when the market falls 20% or more from the very top. Crashes can take longer to recover from and may last years. They also are often accompanied by a recession and usually are a result of some systematic failure or other reasoning. Okay, so now you know how to identify a market crash. Now, let’s talk about how you can gear up and weather a storm when it comes.

Don’t Stop Investing

Wait, you’re telling me to continue putting my money into the thing that feels like it’s going to collapse at any second? Yep. If you’re a client of mine, you know we are all about the long-term mindset. Markets go up and down throughout your lifetime and you are feeling the pain of your first major market downturn. Pain isn’t easy. It stings. It can be lingering. But the amazing thing is pain can be healed and can go away with time. And guess what! You have the time. Retirement is more than likely 3 to 4 decades away for you. Market downturns are a part of investing and will happen again in your lifetime. Author, Carl Richards, puts it best in his sketch below. Days can feel painful, all over the place, and scary. But zoom out and take a look at the big picture. 

By continuing to invest, you can take advantage of the market downturns and investments being less expensive. Not only that but get in on the downside and you are fully prepared to ride the wave back up when the time comes (aka you are making money). If you wait until the market is “looking good” again, you might miss the opportunity for growth. Now, I’m not saying to time the market. But what I am saying is investing at regular intervals regardless of the market performance is a healthy habit to have (dollar cost averaging, my friends). 

Tune Out the Noise

Remember that pain I was talking about? You’re not the only one feeling it. So is your boss, your parents, your neighbor down the road, and your local grocery store. It’s everywhere when there is a market crash. So naturally, that is what’s going to be flooding your social media timelines. I’m here to tell you to shut it off. Tune out the noise of your Twitter’s worry and your Facebook’s advice. If you find yourself constantly logging into your IRA and 401k accounts to check the balance - don’t. Trust me, it will help you feel less of that temporary pain. From our previous conversation above, you know you have time. Focus on the decades, not the days. Temporarily unfollowing some select individuals and deleting your investment apps might just help you forget the pain is there. 

Make Sure Your Financial Advisor is Doing Their Job

When you go through your first market crash, I want you to pay close attention to your advisor. I’m not talking about performance (because let’s be real, if the market crashed, more than likely your accounts will have dropped no matter who your advisor is). I want you to pay close attention to their communication and education. Are you hearing from them? Are they checking in and educating during a market crash? A good advisor communicates with their clients especially when the market is a little wobbly. If you are a client of mine, you know I send quarterly newsletters to educate you with what’s going on in the market. Not only that, but you can expect communication from me when turmoil in the market comes. How does your financial advisor communicate with you? Will they listen to your concerns? Will they educate and help set your focus on what matters? Remember - you hired them. 

Crashes will be inevitable in your lifetime. Knowing what to do when they come will play a huge role in your long-term financial success. So keep making strides in your career and keep building up those savings. Pain is temporary and if you focus on the right things, the pain might just start to feel like opportunity. Gear up and don’t just survive in a market crash - thrive in it. 

Fiduciary Financial Advisors, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any securities. Investments involve risk and are not guaranteed. Be sure to consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein.

Here, at Fiduciary Financial Advisors, we take our fiduciary oath seriously. We hold these five principles:

1. I will always put your best interests first

2. I will avoid conflicts of interest

3. I will act with prudence; that is, with the skill, care, diligence, and good judgment of a professional

4. I will not mislead you, and I will provide conspicuous, full, and fair disclosure of all important facts.

5. I will fully disclose, and fairly manage, in your favor, any unavoidable conflicts

5 Ways to Prepare Your Business For a Recession

Recessions, hard times, and slow growth are all things no small business owner wants to hear. But the reality is you will have times like these in your business. How do you prepare as a business owner? What can you do right now to go confidently through a natural phase of your business life? Let’s jump into five ways you can prepare your business for a recession: 

1. Build That Emergency Fund

We often talk about emergency funds on the personal side but we can’t forget about the business side. Set a goal to build a business emergency fund that would cover 3-6 months’ worth of business expenses (things like office supplies, payroll, rent, software subscriptions, etc.). There is always going to be something else you’d rather spend your business dollars on, but trust me when a recession hits you will feel so much better knowing your business essentials are taken care of. 

2. Pay Down Debt

Do you have a business credit card or a business loan that has reoccurring balances? Now’s the time to try and minimize that debt - especially debts with a high-interest rate. Being tied to a lender is never a good feeling and it’s even more challenging when business is hurting due to the economic surroundings. Once you have an established business emergency fund, chip away at that debt. Your future self will thank you. 

3. Look Ahead

All businesses have some seasons that are slower than others. Look ahead at your expected business activity in the months to come. Are they usually slower or perhaps you're coming up on your busiest time of the year? Taking a glance forward will help you know what to prepare in the now. If you know the slow months are quickly approaching, it might be time to build that extra cash reserve (maybe even slightly larger than normal) to tackle the slow months and weather a recession. 

4. Revisit Your Marketing Plan

It’s always a good idea to review your current marketing plan every so often to know what’s working and what’s not. Both your time and your potential leads are valuable - we want those two things to complement each other. Carve out an hour or two out of your time to do a deep dive into your marketing streams. Where are you getting most of your business? How much are you spending and are the dollars coming back to you in the form of new business? What type of marketing takes the most of your time and is it worth it? Are there new streams you could be taking advantage of? If and when a recession comes, you can confidently know your marketing strategy is at its best. 

5. Review Your Current Expenses

With subscriptions being at the click of a button nowadays, it can be easy to forget what services you are paying for and how much you are actually paying. There are some expenses that definitely are worth paying for and help your business tremendously but it’s a good habit to often review your current expenses to decipher that. Clean up your business budget and make the most of your business dollars by staying on top of your monthly costs. On the other hand, is there a service or product that, if purchased, will increase your productivity/your time/your leads/your quality/etc.? Then click that “checkout” button! This tip isn’t just to cut back on all your expenses but to help your business and your revenue be the most efficient possible.

As I mentioned at the beginning of this conversation, talk of recession is never something a small business owner wants to hear. But coming to terms with this natural economic wave and knowing how you can prepare will allow you to ride the wave with ease. So get to work on building your emergency fund, minimizing business debt, looking ahead at your business activity, revisiting your marketing plan, and reviewing your current expenses. The storm is a lot less fearful when you have shelter and an umbrella in hand. 

Fiduciary Financial Advisors, LLC is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any securities. Investments involve risk and are not guaranteed. Be sure to consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein.

---

How to Beat Inflation

What is Inflation?

Recently inflation has been a hot topic, but what exactly is inflation and why does it matter so much? Inflation is the rate of increase in prices over a given period of time caused by an increase in the money supply. Since this causes more money to chase after the same amount of goods and services in our economy, prices increase. Our money then has less purchasing power because we end up paying more for things than before. Inflation is not a new phenomenon but hasn’t been a big issue since the early 1980s.

If we look at the M2 money supply data below, which is how the Federal Reserve broadly measures the money supply, you will notice the large increase that happened during the COVID pandemic to try and help stimulate the economy. People can debate back and forth if that was the right or wrong thing for politicians and the Federal Reserve to do. I would like to instead focus on some practical tips to help weather the “inflation storm” and potentially come out on the other side unscathed or even better than before!

Have an Emergency Fund!

Having money sitting in an emergency fund is not the most exciting tip, and inflation will indeed decrease that purchasing power. However, the purpose of an emergency fund is not to make a high return. It is to have a liquid supply of money available in an emergency. Going without one could lead to more serious financial issues if something unexpected happens and you don’t have enough cash to cover it. Since the Federal Reserve has started to increase interest rates, we should see that translate into higher yields on savings accounts soon!  

Typically, I’d recommend 3-6 months of living expenses in your emergency fund, but you may want more or less depending on your situation.

• Are you single? 

• Do you have children? 

• Are you a one-income or two-income household? 

• Is your job in a high-demand sector?

• Could you easily find another job quickly if needed?

These are some questions you should consider when deciding how much money you should keep in your emergency fund. 

Own Assets!

Owning assets that produce income could help during high inflation and protect your purchasing power. As inflation increases, these income-producing assets should be able to increase their rates to help soften the blow felt by inflation. Real estate properties can command higher rents as inflation increases. If you can’t afford to purchase an entire property then REITs (Real Estate Investment Trusts) are the other potential option to gain access to that asset class with smaller capital amounts. 

Owning businesses is similar. The money the business receives as income may become less valuable due to inflation. If the business can increase the prices charged for goods and services, then the greater amount of income could offset the money being worth less. If you can’t afford to purchase an entire business, then consider owning parts of businesses through stocks, mutual funds, or index funds.

Own Debt?

I wouldn’t encourage anyone to go out and accumulate more debt. If you already have a fixed low-interest debt such as a mortgage, it may make sense to delay paying it off early. If inflation remains high, the money you use to pay back that debt will be worth a lot less in the future than the money you originally received. Using that money to invest in other assets could be a much better option.

Review Your Expenses

With inflation running high it’s the perfect time to look at your expenses. Review what you are spending your money on to figure out if it aligns with your long-term goals. Do you need five different streaming services? Is it time to stop eating out as often and start cooking more at home? Is it time to start carpooling to save on gas prices? Incorporating some of these ideas to help reduce your expenses is another potential way to decrease the effect felt by high inflation.

Invest in Yourself

I saved the best for last! Investing in yourself is one of the best ways to deal with inflation. Learn a new skill, read a new book, take a new class/certification program, and grow your knowledge base. By making yourself more marketable to your current/future employer and providing more value for them, you should be able to command a higher salary. That can help make inflation not sting quite as much. Even though things will cost you more, earning more money to help offset those costs can be a difference-maker. 

James Clear, the author of Atomic Habits, shared a powerful principle: a 1% improvement every day leads to you being 37x better at the end of the year. And I’m confident you can get 1% better at something every day! Inflation does not prevent you from improving yourself.

---

---

“Whatever abilities you have can’t be taken away from you. They can’t actually be inflated away from you. The best investment by far is anything that develops yourself, and it’s not taxed at all.”

— Warren Buffett

Fiduciary Financial Advisors, LLC is a registered investment adviser and does not give legal or tax advice. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any securities. The information contained herein has been obtained from a third party source which is believed to be reliable but is subject to correction for error. Investments involve risk and are not guaranteed. Past performance is not a guarantee or representation of future results.

Following Your Financial Plan in 2022

Video Transcript:

0:06 Hi, everybody wanted to get a video out, to give an overview of the market and to help give some reassurance about current investment strategies and plans.

0:16 I'm sending this out to all of my clients, as well as people I've interacted with during my financial advising career and people that I have meetings coming up with.

0:26 So I hope you find it helpful and feel free to share it with anybody else that you think might also find this helpful.

0:32 So wanting to jump right in the current stock market this year for 2022 is down over 20%. And so if you've watch any of the news read any financial articles, lots of people are talking about bear market recession and the media thrives on negativity and fear gives 'em a lot more views.

0:54 And so I wanted to give, uh, a few different data points to help give a longer-term picture and a different point of view.

1:01 I, so this first one it shows the history of the bear and bull markets in us since 1942. Visually I like it.

1:12 You can see, but I'll just explain it. The bull market on average has lasted around 4.4 years since 1942, when we've had a bull market, it compared to only 11.3 months of a bear market.

1:26 And the returns of those bull markets have averaged around 154% compared to the loss of only 32% during a bear market.

1:37 And so looking at a bigger, longer-term picture like this helps reassure me that even when we do go into years like we have had in 2022, I'm not investing year to year.

1:49 I'm looking at the long term, 10, 15, 30 years out, from when I'm gonna need that money. And whenever I talk to people, I always tell them that if you need money in the next three, four years, you should’t be investing it in the stock market, or at least not super aggressively.

2:05 If you do you wanna make sure you don't need that money for at least five years or more because that'll give markets time to recover when we come across situations like we are today, this one shows data a little bit differently.

2:19 I like this one because the gold shows how much the stock market has been down at some point throughout this, that year where the blue shows the overall returns of the stock market, S&P 500 for that year.

2:34 And so you'll see that there's lots of times where the gold is down quite a bit at some point during that year, but at the end of the year, the blue ends up still being in the positive.

2:45 And so I don't know if that's gonna be one of those years that we're in for 2022, but I do know that looking at this, it helps reassure me that I'm investing for the long term.

2:58 And then this last one, if you focus on the blue line, the stocks, you can see that they dipped quite a bit in 2008 with the great financial crisis, the housing market crash, and then following all the way through, you can see how stocks have performed.

3:12 They did dip for the COVID crisis when that started. But again, looking long term, looking back since 2007, I would much rather be invested in stocks than invested in some of these other, you know, gold, cash, oil, because in the long term stocks have outperformed quite a bit more than these other categories.

3:36 Again, I can't predict the future, but this data helps reassure me that I'm gonna stick to my own financial plan.

3:44 And I'd advise you guys to stick to your yours as well and not let emotions or fear control what your investing decisions are.

3:53 So I will leave you with a quote by Warren Buffet, which I know lots of people use it, but they use it because it's really good.

4:02 And so he says that people should try to be greedy when others are fearful and fearful when others are greedy.

4:10 And right now there seems to be like, there's quite a few people that are fearful, and that might lead to a really great buying opportunity, uh, with stocks being, uh, quite a bit cheaper now than the, what they were at the beginning of the year.

4:24 And so if you don't have a financial plan, I'm happy to, uh, help build one out for you. And if you're a current client and you wanna review yours or get more in-depth with it, I'm happy to meet and I'll leave you with my contact information.

4:39 Feel free to call email. If you wanna schedule a meeting directly on my calendar, there's a Calendly link there where you can sign up for that.

4:47 So hopefully this helped and feel free to reach out if you have any other questions. Thanks.

---

---

Fiduciary Financial Advisors, LLC is a registered investment adviser and does not give legal or tax advice. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any securities. The information contained herein has been obtained from a third party source which is believed to be reliable but is subject to correction for error. Investments involve risk and are not guaranteed. Past performance is not a guarantee or representation of future results.