For perspective, here is a sobering infographic (yes, that is a football field in front of the Statue of Liberty) depicting what $20 trillion looks like. Each pallet, or “brick,” represents $100 million:
Unless there is some new economic or societal model that none of us are aware of, our country’s debt will almost assuredly never be paid back. Politicians love promising us the world, and when the cash is not there to keep their promises, our government borrows money. Paying back this debt would require making extremely difficult decisions, and concurrently, losing votes. It is much easier to avoid this problem, kick the can down the road, and borrow from our children’s future than responsibly address it.
The politicians’ solution? Inflate our way out of the problem. The path of least resistance is to manufacture (read: print more) money to pay the debt back. By doing so, we are able to meet and satisfy our debt obligations (at least on paper). However, what this means is the holders of U.S. debt will receive back less than they loan in real dollars, as the purchasing power of a dollar declines as inflation occurs.
Most economists agree with and are untroubled by such massive amounts of borrowing, understanding our economy is currently in peril. The national debt was barely a concern when we passed the CARES Act, a cornerstone $2.2 trillion coronavirus economic stimulus bill, almost unanimously in March.
The two major concerns about carrying such a major debt load (higher interest rates and higher inflation) have not yet come to pass, as interest rates are extremely low and inflation remains quite muted. And because of that, our government is able to focus on providing the above-mentioned stimulus to combat the COVID-19 pandemic, and not have our national debt constrain our response. Seeing that we have been “forced” to borrow aggressively, at least we have been able to do so quite cheaply!
Make no mistake about it, questions remain about what the actual impact of this aggressive borrowing and economic stimulus will be. At Towerpoint Wealth, we believe the politics will eventually have to switch towards reining in the deficit. As this occurs, expect potentially massive implications for government spending, focused in areas like pension and medical spending, especially as our economy and our citizens age.
However, while we do feel there may be a transition to and an increased focus on debt reduction here in the United States at some point, the way we see it for the foreseeable future:
The U.S. economic engine will remain a powerful one
The urgency of the COVID-19 crisis will continue to underscore the demand for “safe haven” assets like U.S. Treasurys
A huge congratulations to both Jon and Katie, we can’t wait for your wedding!
TPW Service Highlight – Concentrated Stock Management
Have you amassed personal wealth through equity-based compensation, the inheritance of a large single-stock position, or from receiving stock as part of the sale of a closely-held business? Does this stock represent more than 10 or 15% of your overall portfolio? Do you recognize and are you concerned about the risk that this position may represent to your overall net worth? If the stock has appreciated, are you worried about the potential income and capital gains tax consequences of selling it?
We are experts in helping our clients manage and mitigate the risk and tax consequences of owning a concentrated stock position – click HERE or scroll to the bottom of this newsletter to download the white paper we recently published on this very important issue.
Graph of the Week
Researchers around the world are working around the clock to find a vaccine against COVID-19. In addition to a number of individual companies, the pandemic has created a number of unprecedented public/private partnerships in search of promising vaccine candidates:
BioNTech / Pfizer
Oxford / AstraZeneca
GSK / Sanofi
Novavax
Gamaleya Research Institute of Epidemiology and Microbiology
Moderna
Sinovac
Janssen
Valneva
CureVac
Below you will find a chart that outlines these current major partnerships and companies, as well as geographic distribution of the anticipated vaccine.
As always, we sincerely value our relationships and partnerships with each of you, as well as your trust and confidence in us here at Towerpoint Wealth. We encourage you to reach out to us at any time (916-405-9140, info@towerpointwealth.com) with any questions, concerns, or needs you may have. The world continues to be an extremely complicated place, and we are here to help you properly plan for and make sense of it.
For a myriad of reasons, 2020 has been both a surreal and unreal year, and the growth in the value of residential real estate is illustrative of that. According to USA Today and the National Association of Realtors (NAR), despite the hard economic times caused by the COVID-19 pandemic, home prices rose in the first quarter of 2020 in 96% of U.S. metro markets. A few of the local Sacramento-area agents we work with have commented that “this [real estate] market is even hotter and crazier than it was at its peak in 2006.“
The environment 14 years ago was very different – during the U.S. housing bubble, real estate prices were artificially inflated due to speculative fervor, lax lending standards, and arguably negligent regulations. But when we fast forward to 2020, we find four reasons for this red hot market:
Historically LOW interest rates. Money is extremely “cheap” right now, as interest rates on mortgages continue to hit record lows.
Cheap money is analogous to low interest rates, meaning it doesn’t “cost” much to borrow. Mortgage rate cuts have given house hunters ~ 25% more buying power in less than two years, and that does not appear to be ending soon. The less it costs to borrow, the more a buyer may be inclined to do so when buying a home. Alternatively, the less it costs to borrow, the lower the homebuyer’s monthly mortgage payment. Adding this all up provides major stimulus to and demand for buying real estate.
Urban exodus. Just a few years ago, demand for city living was high, and people were piling into major metropolitan areas throughout the United States; now, the opposite is happening, and they are filing out in favor of suburban life.
Rent decreases are accelerating, as seven of the top ten priciest rental markets saw apartment prices drop 5% over the same time last year. Cultural and social opportunities that often draw people to metropolitan areas have largely shut down due to coronavirus. The perceived health concerns associated with public transportation and dense city living, high city taxes, the safety concerns and stress caused by demonstrations devolving into riots and other increases in crime, the desire for more space, and the ability to work remotely have all created a huge outflux from the cities, and concurrently, an influx of cash that has pushed up real estate prices in the ‘burbs.
Telecommuting / virtual working. Before COVID-19, only about 5% of workers did their jobs remotely. That figure has jumped to nearly half. Google, Twitter, and Facebook have led Silicon Valley in announcing plans to let, or even require, employees to work from home, at least for the next year, if not indefinitely. New York-based financial giants J.P. Morgan and Morgan Stanley have offered their employees a similar option. Telecommuting is no longer a trend, it is a full-blown movement. And that has allowed, or better put, freed people to live where they desire, and not feel geographically-tethered to their job location.
Inventory shortage. There is an imbalance. There are more buyers than sellers. Postponed purchases from March and April due to home-buying restrictions have created intense demand. Families are looking to upgrade, and, understanding we are all spending more time in our homes that before, people simply want more space. There was a nationwide industry shortage even before the pandemic hit, and the COVID-19 crisis has only exacerbated the problem.U.S. home values grew to $256,663 in August, an 0.7% increase from July, the largest increase since 2013, and inventory is 29.4% lower than a year ago! Builders are racing to catch up with demand, and rising prices should encourage more potential sellers to come off of the sidelines and list. But until those things occur, the shortage of inventory will continue to tilt the housing market in favor of sellers. Economics 101: When demand outstrips supply, prices go up.
How long this lasts remains to be seen. At Towerpoint Wealth, we believe that things will only begin to change in the real estate market when the uncertainty surrounding the job market, economy, and COVID-19 epidemic begin to subside.
What’s Happening at TPW?
The TPW crew enjoyed a “robust” teambuilding potluck earlier this week, highlighted by grass fed tri-tip marinated in “The Sauce for All Seasons,” Pearson’s Premium!
While 2020 will rightfully be remembered for the challenging and unprecedented COVID-19 battle we have all been impacted by, at Towerpoint Wealth, we have continued to proactively work with clients to identify economic opportunities presented by the coronavirus crisis. Specifically, we have identified a “silver economic lining” tax planning strategy this year, one that is designed to take advantage of today’s low income tax rates, which we feel are temporary, while at the same time leave our clients better positioned for tomorrow’s higher income tax rates, which we feel are inevitable.
Below you will find 2020: The Perfect Year for a Roth Conversion, our newly-published white paper that discusses what a “Roth conversion” is, who may benefit from a Roth conversion, why 2020 is a potentially great year to do a Roth conversion, and how to utilize important tax planning tools to evaluate this opportunity.
Graph of the Week
While we obviously need to continue to remain disciplined, and understanding there is still more work to be done, the United States COVID-19 hospitalization numbers below, from Bespoke Investment Group, are encouraging. Less than one person per 10,000 population (or less than 100 people per 1MM population) is currently hospitalized with coronavirus.
As always, we sincerely value our relationships and partnerships with each of you, as well as your trust and confidence in us here at Towerpoint Wealth. We encourage you to reach out to us at any time (916-405-9140, info@towerpointwealth.com) with any questions, concerns, or needs you may have. The world continues to be an extremely complicated place, and we are here to help you properly plan for and make sense of it.
It’s right around the corner, and it isn’t going to be pretty, so let’s discuss the election’s impact on the stock market now and get it out of the way.
For a good part of this calendar year, we have counseled you that it is prudent to give advance thought to the range of potential economic, regulatory, taxation, spending, budget deficit, societal, and financial market implications of the national election results, depending on whether Republicans or Democrats win one or more of the White House, the House of Representatives, and the Senate.
After Labor Day, the campaign is likely to reflect increased amounts of political vociferousness, perhaps some degree of vehemence, and even apportionments of vitriol (we hope and pray not too much), with the potential to cause meaningful shorter-term shifts in financial asset prices. That is precisely why we recommend forming beforehand, and sticking to, a well-reasoned and disciplined asset allocation plan and investment strategy tailored to your personal and financial circumstances, time horizon, objectives, and temperament.
November 2020: The 59th Quadrennial Presidential Election
September, October, and then, the Election: With the VIX volatility index (see the Graph of the Week below) having risen an average of four points ahead of each of the last seven presidential elections since this measure was created, important issues to consider in the upcoming weeks ahead include:
How clearly (and energetically) each political party’s convention message was received, perceived by, and responded to by their respective loyal voter bases;
The nation’s reactions to the anticipated three presidential debates and one vice presidential debate;
Assessments of the strength of party identification among various segments of the voting population, as well as in the composition of the overall electorate; at the same time, taking into account the ability of each ticket to generate serious backing from less-supportive voter populations;
Which candidate voters (considering demographic attributes, where they live, how they classify themselves on the political spectrum, and other characteristics) think can better confront America’s broad challenges, including the coronavirus pandemic, the economy, social issues, and pressing global concerns;
The effectiveness of voting procedures, trust in mail-in balloting, the degree of putative social media and foreign-based election interference, actual voter participation, and the perceived veracity and legitimacy of the results; and
The potential consequences of prolonged uncertainty associated with a contested election (should it occur) for social order and the financial markets.
As we have counseled for some time, it is important to devote thought and attention to the taxation, regulatory, economic, asset allocation, and investment strategy implications of the three leading potential electoral outcomes outlined below (while noting that both political parties have expressed interest in promoting the development of generic drugs, lowering drug prices, and containing healthcare costs; and the two parties have also been focusing on antitrust, platform liability, and privacy issues relating to many of America’s biggest technology enterprises):
If President Trump is re-elected and wins the White House, Democrats keep control of the House of Representatives, and Republicans keep control of the Senate, such an outcome would likely favor securities in the following sectors: technology, defense, finance, healthcare, and energy, while potentially putting pressure on sectors and companies that could be harmed by further deterioration in U.S-China relations;
If Vice President Biden wins the White House, Democrats keep control of the House of Representatives, and Republicans keep control of the Senate, such an outcome would likely favor companies and sectors that would be deemed to have thereby avoided increased taxes and a heavier regulatory burden;
If Vice President Biden wins the White House, Democrats keep control of the House of Representatives, and Democrats take control of the Senate(sometimes referred to in the media as a “blue wave”), such results would substantially raise the odds of higher taxes. Offsets to the latter outcome could come in the form of substantial additional spending on infrastructure, education, and healthcare. Securities in the following sectors, among others, are perceived to be disadvantaged by a “blue wave” Democratic sweep: defense, healthcare, financials (via increased regulation) and energy (with expectations of restricting fracking and limiting drilling on federal lands in Texas/New Mexico’s Delaware Basin and Southeast Montana/Northeast Wyoming’s Powder River Basin), while giving a lift to sectors and companies that could be helped by improving U.S-China relations.
The Pre- and Post-Election Tax and Spending Outlook
As shown in the panel below, the current taxation and spending policy positions of Vice President Biden contain numerous base-broadening elements that increase taxes by approximately $4 trillion, while increasing spending to the tune of approximately $6 trillion in areas including healthcare, infrastructure, education, energy research, and other initiatives.
Released on Wednesday, July 9, the 110-page report of the Unity Task Forces (created and staffed by individuals designated by Vice President Joe Biden and Senator Bernie Sanders) contains a detailed set of policy recommendations in six domestic policy areas:
Health care (while not supporting Medicare for All, the report proposes a public option, a government-administered plan “like Medicare” that would be available to all Americans; on drug pricing, the report recommends appointing a government board to set prices that Medicare would pay for new drugs);
The economy (with $400 billion pledged for procurement of domestically made goods and $300 billion to support high-tech research);
Climate change (here, a total of $2.0 trillion over four years is earmarked to shift millions of jobs into clean energy, with the goal of cutting emissions from power generation to zero by 2030, having net zero emissions by 2050, and introducing new fuel-economy standards);
Criminal justice (proposing reforms to law enforcement and policing practices);
Education (including universal preschool for three- and four-year-olds, at a cost of $775 billion over a decade), and
Immigration (proposing to end travel restrictions against 13 countries, and to maintain protections from deportation for approximately 700,000 young immigrants known as “Dreamers”).
Should Vice President Biden win the White House, financial asset prices in general, as well as specific industries and companies, are likely to be affected by the speed and degree to which the new Administration and Congress (whose degree of support depends on which party controls the House of Representatives and which party controls the Senate) might be able to implement priorities in these and other areas.
For further granularity, the following panel sets forth eight elements of personal taxes and four elements of corporate taxes: (i) under the current U.S. tax regime, which would not currently be expected to change much under President Trump (although the President has endorsed the idea of payroll tax reductions; tweeted about a potential capital gains cut; and vowed to extend the Tax Cuts and Jobs Act of 2017, which capped the so-called SALT (State and Local Tax) deduction at $10,000); and (ii) as currently outlined as taxation policy under a Biden administration.
Given that the process of turning taxation proposals into law takes time, it is likely to be at least June 2021 for new tax legislation to be enacted. On several aspects of tax planning (including the timing and forms of income and expenditures; tax gain-loss harvesting; and retirement, estate, and gifting strategies), it may be sensible to postpone any major moves until a judicious assessment can be made of the makeup of the post-election government and its specifically-expressed legislative agenda.
Regardless of the fireworks, and ultimate outcome, of the election, we will always believe that good, well-run, profitable companies will remain good, well-run, profitable companies, independent of a Trump or Biden win.
What’s Happening at TPW?
Happy to have him aboard, contributing, and part of the Towerpoint Wealth family, the TPW team has been indoctrinating Matt Regan a.k.a. “the new guy,” over the past two weeks:
Our new Wealth Advisor, Matt Regan, connected with our President, Joseph Eschleman, and our Partner, Wealth Advisor, Jonathan LaTurner, for an enjoyable business lunch at the historic Sutter Club in downtown Sacramento earlier this week.
Our President, Joseph Eschleman, and his wife, Megan Eschleman, hosted Matt and his lovely wife Alyssa for an enjoyable evening of tri-tip, corn on the cob, chicken skewers, and Frank Familycabernet.
TPW Service Highlight – Social Security Optimization
Many investors are not prepared for retirement, and have not properly planned for how to structure their post-retirement income. With the popularity and availability of pension plans quickly waning, and rock bottom interest rates making it difficult to derive enough interest income from bonds, the importance of Social Security has never been greater.
Through careful planning and the development and utilization of a custom Social Security optimization analysis, our aim at Towerpoint Wealth is to help our clients structure a plan to ensure that they are not leaving any money on table when it comes to their Social Security benefits. According to the Annual Statistical Supplement to the Social Security Bulletin, 70% (!) of all retired workers started taking benefits before their normal retirement age. For some this may make sense, but for many, this will result in the forfeiture of tens, if not hundreds of thousands of dollars over their lifetime.
Let us help you scientifically analyze the myriad of Social Security claiming strategies available to you, and develop a customized plan to ensure you have properly maximized this hugely important retirement income benefit.
Graph of the Week
The market anticipates some pretty incredible fireworks (as we probably all do) leading up to November’s elections. With Joe Biden’s lead over President Trump drifting lower since the late summer, there is now even more expected volatility around Election Day, and things almost assuredly will only heat up further as we get closer to November.
The graph below reflects the historical activity and pricing of the VIX, a popular index that measures future stock market volatility, used by investors to hedge against it. Currently, November’s election is the most expensive event risk on record. With many more absentee and mail-in ballots expected to be cast in this election, the possibility certainly exists that we do not know who the winner is on Wednesday, November 4.
Quoting Cameron Crise, Bloomberg macro strategist, “In the history of VIX futures contracts, we’ve never had an event risk command this sort of premium… That obviously suggests that markets anticipate some pretty incredible fireworks.”
Don’t say you haven’t been warned, keep your seatbelt firmly buckled, and most importantly, don’t be surprised nor overreact to the upcoming craziness!
As always, we sincerely value our relationships and partnerships with each of you, as well as your trust and confidence in us here at Towerpoint Wealth. We encourage you to reach out to us at any time (916-405-9140, info@towerpointwealth.com) with any questions, concerns, or needs you may have. The world continues to be an extremely complicated place, and we are here to help you properly plan for and make sense of it.
With a heavy heart almost three years ago, we recognized the vicious wildfires tearing through both Napa and Santa Rosa. Today, with massive wildfires burning throughout Napa, Sonoma, Lake, Solano, and Yolo counties, we feel compelled to do so again.
As we mentioned in that newsletter, fortunately tough times do not last, but tough people do. And as dedicated and tireless relief and rescue crews work to contain and extinguish these devastating fires, we look to a rare bright spot during this time of destruction, symbolizing resilience, literally from the ground up as it rises from the ashes – the California fire poppy.
All of this begs the question – what can we do to help? The answer – stand with us and please give if you are able.
Towerpoint Wealth is committed to directly helping those in need during these fires, and we are pleased to offer a 100% match, up to a total of $15,000, of any charitable donations made by you to any of the following three fire-relief organizations:
California Wildfire Relief Fund
Solano Disaster Relief Fund
2020 Napa County Wildfires Fund
Please simply email us your donation receipt at info@towerpointwealth.com, and we will promptly email you our matching donation receipt within 48 hours.
* IMPORTANT NOTE: Please also remember that the recently-passed CARES Act created a one-year tax-deductible charitable deduction of $300 for the 90% of taxpayers who claim the standard deduction in 2020!
A New Addition to the Towerpoint Wealth Family
We are pleased and excited to welcome Matt Regan, CPA, MBT, to the Towerpoint Wealth family!
Matt specializes in working with attorneys, helping them manage the unique aspects of proper coordination all of their financial affairs. We look forward to having him utilize his tax consulting and wealth management skills and experience to help his own and other clients of Towerpoint Wealth save money on their income taxes, manage the downside risk of their portfolios, and properly plan for a comfortable retirement.
Please click HERE to read more about Matt, and please reach out (916-405-9164) to say hello, congratulate him, and help us with a warm “welcome aboard!”
TPW Service Highlight – Customized Responsible ESG Investing
Are you aware you are able to align your portfolio with your personal values, without compromising your ability to have a diversified portfolio positioned to earn competitive returns? Many investors are not. Responsible investing, also known as ESG investing (Environmental, Social, and Governance) has exploded in popularity and importance over the past ten years (see the GraphoftheWeek below), and has quickly become an area of specialization at Towerpoint Wealth.
Screening to either avoid or advance ownership of specific companies, based on a myriad of different sustainability issues and criteria, is a central objective of ESG investing:
Environmental issues range from climate change, clean water, animal welfare, and deforestation. Social issues can include racial justice, education, poverty, democracy, and women’s rights. Governance issues encompass worker treatment, corporate ethics, and corporate diversity and inclusion. Click the Ethic Sustainability Pillarsstory found below for a deeper understanding of the various ESG issues that Towerpoint Wealth can specifically screen for, to help you avoid or advance your investment in equities consistent with these issues.
Time to do an ESG “healthcheck” on your portfolio? We welcome an invitation to sit side-by-side with you to conduct a deep-dive sustainability analysis of your portfolio, where we will x-ray your investments to evaluate what is considered “clean,” what is considered “dirty,” and how to make intelligent and tax-efficient ESG improvements. Click HERE to find out more, or click on our What’s In a Name? A Guide to Responsible Investingeducational white paper found below.
Graph of the Week
As discussed above, responsible / ESG investing is no longer just a trend, but a full-blown movement. According to Pensions & Investments, the value of global assets applying environmental, social, and governance data to drive investment decisions has almost doubled over four years, and more than tripled over eight years, to $40.5 trillion (!) in 2020. Sustainable fund flows just in the U.S. have been extremely strong as well:
As always, we sincerely value our relationships and partnerships with each of you, as well as your trust and confidence in us here at Towerpoint Wealth. We encourage you to reach out to us at any time (916-405-9140, info@towerpointwealth.com) with any questions, concerns, or needs you may have. The world continues to be an extremely complicated place, and we are here to help you properly plan for and make sense of it.
Any concerns about the economic carnage seen in the rear view mirror were overshadowed again this morning by the hope and optimism of the economic recovery that is seen when looking out the front windshield.
Yesterday, we were not surprised to receive confirmation from the U.S. Department of Commerce that an economic contraction of historic proportions occurred in the second quarter of this year, as the coronavirus-induced shutdowns battered the United States economy:
Yes, the U.S. economy shrank by one third just in the second quarter alone. Here is a graphical depiction of this GDP plunge:
With a headline number this horrific, one might expect the financial markets to immediately tank, and panic to ensue, exacerbating the depth and darkness of the hole that our economy cratered into between April and June of this year. However, chaos, fear, and a huge selloff were anything but the case.
Three reasons why the economy tanked but the financial markets have recovered:
We are coming out of the crater, not driving into it (front windshield, not rear view mirror)
Demand for technology companies, and tech stocks, continues to explode
A large economic/GDP bounce back is expected in the third quarter:
Facebook, Amazon, Apple, and Google (Alphabet) all reported their quarterly earnings results yesterday afternoon, and all four companies beat already-high expectations. Facebook posted 11% revenue growth and issued stronger-than-expected sales guidance for the current quarter. Amazon’s sales soared, and operating income nearly doubled compared with the big drop that analysts had expected. Apple easily exceeded sales and profit estimates, and announced a 4-for-1 stock split. And Alphabet investors, while tolerating the company’s first year-over-year decline in advertising revenue, had sales from its cloud-computing segment come in well above expectations.
Through yesterday, Amazon is up 61% and Apple is up 31% for the year (and both stocks appear set for additional gains based on trading so far today), while Facebook and Alphabet have both gained 14% so far in 2020. Truly a historic run for these tech behemoths.
We believe this outperformance should not come as a huge surprise, given the work-from-home trend the pandemic has advanced, further accelerating technology’s leadership position; however, the pace, and scope, of this outperformance has certainly been noteworthy.
All is certainly not well for the U.S. economy – far from it. And while a full economic recovery is still a long way off (we do not expect an unemployment rate below 4% until at least 2023 or 2024), the economy is at least generally headed in a better direction. And, while assuming the recovery will be anything but a smooth ride, we are confident that we are driving away from the worst of it, and looking at a better road ahead.
What’s Happening at TPW?
For many people, spending time in Mother Nature has been a welcome respite during the COVID-19 lockdowns, and this has held true true for several of us here at Towerpoint Wealth.
Are you eligible for a 401(k), 403(b), 457, TSP, profit sharing plan, or an employer-funded defined benefit (pension) plan through your employer? Do you have a Roth option available within your defined contribution retirement plan? Have you qualified for a single or multiple grants of restricted stock units (RSUs) or non-qualified stock options? Do you have an employee stock purchase plan (ESPP) available to you, perhaps offering a discount on shares of your employer’s stock? Is employer-sponsored (group) life insurance and long-term care insurance part of your benefits offering?
We welcome working side-by-side with you to conduct a thorough deep-dive and audit of all of the various perks and benefits your employer offers. Analyzing, leveraging, and maximizing your employee benefits package could be one of the most impactful decisions you make in the service of your longer-term economic health, and we stand by ready to offer our counsel, expertise, and experience in this multi-faceted and oftentimes confusing area.
Graph of the Week
Investing in the stock market can be volatile. For this reason, we believe it is important to keep proper perspective when stocks rise or fall over shorter periods of time. History has shown that the odds of achieving a positive return are dramaticallyincreased the longer the investment time horizon.
We think First Trust’s illustration below does an excellent job of conveying this ideal.
As always, we sincerely value our relationships and partnerships with each of you, as well as your trust and confidence in us here at Towerpoint Wealth. We encourage you to reach out to us at any time (916-405-9140, info@towerpointwealth.com) with any questions, concerns, or needs you may have. The world continues to be an extremely complicated place, and we are here to help you properly plan for and make sense of it.
Investors are oftentimes their own worst enemy. Built-in psychological biases can lead to bad decision-making. At Towerpoint Wealth, we believe that being aware of these cognitive predispositions, and overcoming them, can be the single biggest driver to successfully building and protecting one’s longer-term wealth and net worth.
As human beings, we are hard-wired to avoid pain and to pursue pleasure. Additionally, avoiding immediate pain is much more motivating than gaining immediate pleasure (see Loss Aversion in the list below), all of which is good when hunting, gathering, and surviving in the wild, but not so good when it comes to investing. Fortunately, there are many ways to stop doing foolish things with your money, and being mindful of and avoiding these behavioral obstacles is at the top of the list. Emotional decision-making and poor investor behavior have always been major impediments to successful investing. If we are able to recognize, and to some extent, control our emotions and cognitive biases, the probability of achieving the economic results we desire increases significantly.
Author, artist, and financial advisor Carl Richards coined a phrase known as the Behavior Gapto describe the difference between the higher returns that investors might potentially earn and the lower returns that they actually do earn because of their own behavior. A classic empirical example of poor investor behavior and the Behavior Gap is that of the Fidelity Magellan fund.
From 1977-1990, the portfolio manager for the Magellan fund was Peter Lynch, considered by many to be the best mutual fund manager of all time. During the nine years the Magellan fund was open to the public (1981-1990), Magellan earned an annual return of 21.8%! However, Lynch himself pointed out a fly in the ointment – the average Magellan investor only earned an average annual return of 13.4% during the same time period. Money would flow out of the fund during setbacks (i.e. investors were selling low), and money would flow back into the fund during advances (i.e. investors were buying high).
The Fidelity Magellan example and Richards’ Behavior Gap concept provide additional evidence supporting the data found in J.P. Morgan’s chart below:
So what are the behaviors and biases that investors need to consider and be mindful of? Below is a “Top Ten” list (in no particular order) of the most prevalent, and important, ones to consider:
Loss aversion – the tendency to prefer avoiding losses to acquiring equivalent gains
Overconfidence – the tendency for investors to overestimate what they know or are capable of; “I know better than everyone else”
Mental accounting – taking undue risk in one area and avoiding rational risk in others; categorizing money and treating funds differently, depending on their origin
Regret avoidance – not performing a necessary action due to the regret of a previous failure; refusing to admit a poor investment decision was made
Herd behavior – copying behavior of others, even in the face of unfavorable outcomes, and whether or not those actions are rational
Optimism – the tendency to believe that you are less likely to experience a negative event than someone else
Anchoring – relying too heavily on familiar experiences, even when inappropriate; relying on the first piece of information to which we are exposed
Framing – how we alter our decisions depending on how information is presented to us; we react a different way when the same choice is presented in the context of a loss or gain
Hindsight bias – the misconception, after the fact, that one “always knew” they were right
Recency bias – favoring a recent event over a historic one; giving greater importance to a more recent event
At Towerpoint Wealth, we embrace our responsibility to help you, our client, to recognize and overcome these behavioral biases. However, we also understand that our clients are human, and recognize that it is impossible to be completely devoid of the emotional biases that can lead to poor decision-making. We balance that by remaining disciplined and objective as your financial coach and quarterback, and helping you identify, be mindful of, and avoid having these behaviors cause negative impact on your plan, strategy, and decision-making. All of this is in the service of affording you complete economic peace of mind.
What’s Happening at TPW?
The entire Towerpoint Wealth family enjoyed a fun night out together two weeks ago, connecting for cocktails at Zocalo’s downtown location, and then for an amazing Spanish dinner at Aioli Bodega Espanola!
TPW Service Highlight
Unbeknownst to some of our clients, Towerpoint Wealth provides integrated counsel, planning, and expertise in a myriad of real estate-specific areas. Advice on buy or sell transactions and negotiations, mortgage, HELOC, and liability analysis, investment property cap rate and return-on-investment (ROI) planning, 1031 like-kind exchanges, Delaware Statutory Trust (DST) sourcing and due diligence, and real estate tax and estate planning are all areas we regularly help our clients directly manage and care for.
Click HERE to read an excellent Forbes article discussing the importance of combining real estate expertise and financial planning.
Towerpoint Wealth Original Content
Inflation may be on the rebound, and real interest rates are moving deeper into negative territory. Both have provided a big tailwind for the price of gold over the past few months.
Should you own this precious metal in a properly balanced investment portfolio? What are the benefits and drawbacks to owning gold? Click below to read our recently-published white paper, GOLD – 24 Karat Shine or Pyrite for Your Portfolio, discussing these, and other important consideration
As always, we sincerely value our relationships and partnerships with each of you, as well as your trust and confidence in us here at Towerpoint Wealth. We encourage you to reach out to us at any time (916-405-9140, info@towerpointwealth.com) with any questions, concerns, or needs you may have. The world continues to be an extremely complicated place, and we are here to help you properly plan for and make sense of it.
The pain caused by the COVID-19 lockdowns persists on Main Street, as evictions, foreclosures, bankruptcies, and unemployment have all soared to unprecedented levels, creating an economic storm not seen since the Great Depression. However, over on Wall Street, the sun hasn’t stopped shining since early March, with the stock market staging an amazing rally based partly on hope about the future and partly on government stimulus.
What may be most bewildering is the huge disconnect between the rapid bounce-back and advance we have seen in the stock market over the past three months and the horrific 2Q, 2020 economic numbers that, in some cases, will be worse than what we endured during the Great Depression. As we have mentioned, investors are viewing this economic pain and weakness as temporary, and banking on the fledgling economic recovery growing into a more robust bounce back in 2021. The market certainly appears to be seeing the skies as mostly sunny, as investors continue to sing in the economic rain. As the market seemingly defies the pandemic and this immense economic weakness, many investors are asking “what gives?”
We see two main reasons: Hope about the future and health of our economy, and the Fed’s massive stimulus. Investors are currently attaching more weight to the prospects of the economy (and corporate earnings) recovering than to the possibility of a long-lasting pandemic and economic slowdown. The Fed has continued to provide massive amounts of stimulus, and just this week kickstarted a Main Street lending program designed to encourage banks to lend to small and medium-sized businesses hurt by the pandemic. It also announced that it will begin buying corporate bonds to support market liquidity and help make credit available to companies across the country. Additionally, the Trump administration is preparing a new proposal for $1 trillion in infrastructure spending to help revive the U.S. economy, including funding for roads and bridges, as well as 5G wireless infrastructure and broadband for rural areas.
Is this optimism fragile, neurotic, and excessive? Or is it justified, warranted, and a signal of continued (albeit gradual) improvement and economic recovery? At Towerpoint Wealth, we agree with Liz Ann Sonders’ outlook about the market (see below), and feel that while the nascent economic recovery will continue on a long, slow, yet positive path, the market’s growth will be much more frenetic and unpredictable. However, things are beginning to point in the right direction, and it is important to drive not by looking at the rear-view mirror, but instead by looking through the front windshield. Put differently (and as Warren Buffett said), “always better to buy an umbrella when it is sunny outside rather than when it is raining.”
What’s Happening at TPW
Towerpoint Wealth continues to flourish and strategically grow as a firm during these uncertain times, due in part to the strength and depth of our client partnerships, as well as the intra-firm family-first culture we cultivate on a regular basis. As the lockdown slowly unlocks, we feel fortunate to be able to enjoy more and more opportunities to spend time with each other outside of the office as well as in.
Jonathan and Joseph (pre-haircut) (and John Sutter in the middle) at The Sutter Club last week.
TPW Office Update
Pursuant to the story found below, and as mandated by Governor Newsom and the CA Department of Public Health yesterday, please wear a mask when visiting us at our office. We will be!
The pandemic will be a part of our lives for the foreseeable future, but fortunately, so will getting out, spending time together (albeit with masks on and standing 6′ apart), and fostering and nurturing the relationships we have with each other. And as always, whether in person or via a Zoom teleconference, we sincerely value our relationships and partnerships with each of you, as well as your trust and confidence in us here at Towerpoint Wealth. We encourage you to reach out to us at any time (916-405-9140, info@towerpointwealth.com) with any questions, concerns, or needs you may have. The world continues to be an extremely complicated place, and we are here to help you properly plan for and make sense of it.
After losing 20.7 million jobs in April (by far the worst monthly decline on record), the Bureau of Labor Statistics yesterday morning reported that the United States unexpectedly gained 2.5 million jobs in May, the biggest jobs increase ever:
While one month certainly does not make a trend, yesterday’s employment report provides further evidence about how nascent this economic recovery is, and how unpredictable it is, as economists expected a loss of 8 million jobs in May. Nobody said accurately predicting the future is easy! Regardless, this is truly a blowout number, providing hope for a “V” shaped recovery, and clearly the catalyst for the Dow’s 800+ point advance yesterday.
Not convinced? Perhaps noting these additional pieces of information – evidence of economic “green shoots” – will help:
While some investors believe the market is on a “sugar high” due to the vast amounts of government stimulus ($9 trillion globally, so far) that has been doled out, we remain optimistic that the underpinnings of a more substantive – and sustainable – economic recovery are in place. And while virtually all measures of economic activity remain substantially lower than where they were last year at this time, a recovery does have to start somewhere. Additionally, investors have hoarded cash in 2020, providing an ample amount of dry powder to potentially be redeployed elsewhere (and more productively) as investor confidence increases and the recovery takes hold:
While the pace of the growth of these green shoots of economic (and employment) recovery will remain a question for some time yet, at Towerpoint Wealth it seems clear to us that this recession, while unprecedented in its depth, will prove to be short-lived and temporary. And around the corner? Hopefully the foundation for a brighter future again for all of us.
What’s Happening at TPW?
A couple of familiar faces, back together!
From the left in the photo below, our Partner, Wealth Manager, Jonathan LaTurner, our Director of Research and Analytics, Nathan Billigmeier, our Director of Tax and Financial Planning, Steve Pitchford, and our President, Joseph Eschleman, all enjoyed going out to eat together for a business lunch earlier this week at Sauced BBQ and Spirits in downtown Sacramento.
While the crew was missing both our Director of Operations, Lori Heppner, and our Client Service Specialist, Raquel Jackson, who were working from home, the boys enjoyed BBQ and southern-style side dishes as the lockdown in California continues to ease.
In addition to green shoots and collard greens, a number of trending and notable events occurred over the past few weeks:
The lockdown is ending. Life will be different for the foreseeable future, but opportunities to be back together in person with those we have been missing are growing. And as always, whether in person or via a Zoom teleconference, we sincerely value our relationships and partnerships with each of you, as well as your trust and confidence in us here at Towerpoint Wealth. We encourage you to reach out to us at any time (916-405-9140, info@towerpointwealth.com) with any questions, concerns, or needs you may have – the world continues to be an extremely complicated place, and we are here for you to help you make sense of it.
The COVID-19 crisis has challenged and changed us all in different ways, including what we think of as essential. The conversation over what qualifies as an “essential” versus “non-essential” business has impacted many companies that produce and sell items and services considered essential for everyday use. What do you think of as essential (?) – we encourage you to reply to this email and let us know.
Traditionally defined, consumer staple stocks are broken down into five main industries: beverages, food, household goods, personal and hygiene products, and tobacco – services and items that individuals are either unwilling or unable to eliminate from their budgets even in times of financial trouble. Recently, a more contemporary definition of a consumer staple has emerged from our pandemic-altered lifestyles, and consequently, the definition of a consumer staple stock has arguably changed. Introducing, the FAANG stocks:
Facebook (social media). Amazon (e-commerce). Apple (smartphones and tech hardware). Netflix (video streaming). Google (online search and services). All five companies are known for their dominance in their respective industries and sizable customer bases. Combined, they have a market capitalization of more than $4 trillion! Additionally, as a group (below, in purple), the stocks have collectively outperformed the overall stock market (as measured by the S&P 500, below, in yellow) by a healthy margin so far in 2020:
While many other companies have experienced major interruptions to business operations during the COVID-19 pandemic, revenue and earnings for the FAANG stocks have been excellent. Facebook doubled its first quarter profit from 2019; Amazon’s first quarter revenue in 2020 increased 26.4% from the same period a year ago; Apple increased its dividend by another 6% on April 30; Netflix now has 182.9 million subscribers, more than doubling its own projections for new paying customers in Q1 of 2020; and Google’s parent company, Alphabet, experienced year-over-year revenue growth of 13% (to $41.2 billion) in the first quarter of 2020. Clearly impressive numbers for these “essential” businesses.
Will companies like the FAANG stocks continue to dominate in the hazy and nebulous “new normal” we are all continuing to get used to, or will things revert and this outperformance be temporary? One thing is for certain – we should get used to life, as well as the financial markets, remaining unsettled and uncertain for the foreseeable future.
Pandemic Notes
Did you know that COVID-19 is an acronym for coronavirus disease of 2019? The name was selected by the WHO, the World Organization for Animal Health, and the Food and Agriculture Organization of the United Nations, working in cooperation. Their joint guidelines required that the name and its abbreviation be easy to pronounce, related to the disease, and not refer to a specific geographic location, a specific animal, or a specific group of people.
Good news heading into the weekend: While one additional coronavirus diagnosis is too many, the curve is flattening, as new COVID-19 cases in the United States have been stable for over two weeks now, according to Deutsche Bank, the World Health Organization, the CDC, and Worldometer:
More than 90 Sacramento restaurants are re-opening for dine-in service this weekend. To see the full list within the Sacramento Bee article, create a free account with the SacBee, or click HERE, and then cut and paste the URL into a web browser opened in “incognito mode” (a nifty little trick):
In addition to our dependence on the aforementioned technology behemoths and our desire to dine out again, a number of trending and notable events occurred over the past few weeks:
Fred Willard, comic actor best known for his scene-stealing roles in “Best of Show” and “Anchorman,” and on sitcoms “Laverne and Shirley” and “Everybody Loves Raymond,” dead at age 86
We are seeing early signs that these times of separation are beginning to pass, and opportunities to be back together in person with those we have been missing, are beginning to grow. And as always, whether in person or via a Zoom teleconference, we sincerely value our relationships and partnerships with each of you, as well as your trust and confidence in us here at Towerpoint Wealth. We encourage you to reach out to us at any time (916-405-9140, info@towerpointwealth.com) with any questions, concerns, or needs you may have – the world continues to be an extremely complicated place, and we are here for you.
As we trend towards gaining back the freedoms we surrendered in the name of saving lives and flattening the curve, the slow unwind of sheltering-in-place is beginning:
We are continuing to witness the COVID-19 pandemic re-order virtually every industry in the world, and concurrently, many aspects of our formerly “normal” lifestyles. And as we have adapted to today’s slower lifestyle and “new normal,” we have been reminded of just how important our homes have become – as a safe haven, a de facto schoolhouse, an impromptu remote office, and a warm family nest. However, as much as we have learned (a bit forcibly) to love being at home, and as integral as home has been in this new normal, most of us would agree that being at home this much has gotten a little long-in-the-tooth.
There are many more chapters yet to be written about the COVID-19 crisis, and as much as we love our “warm family nests,” this next chapter in the story is one that we all have been anxiously awaiting – the safe and sturdy return to shared communal life, outside of our homes.
As the dawn of the decline of the shutdown approaches, we are all eager to regain the ability to step outside our homes and see friends and family again, to shop at our favorite stores, to eat at our favorite restaurants, and yes, to trade in our trusty sweat pants for our favorite work attire as we begin to head back to work. But make no mistake about it, what our lives will look like as summer approaches will be markedly different that the way we lived our life in February. A “new normal” is upon us, and being adaptable, and socially, economically, and physically aware, is paramount.
A summary of our views:
We are all working more hours now than before the COVID-19 outbreak – expect it to continue
Companies will begin bringing employees back to work over the next two to six weeks, with strategies for doing so being differentiated and customized based on geography and industry
People are starving for connection, and content, and while we yearn for and need physical connection with each other, the transformation of digital communications and social media has been monumental
Debt, both personal and governmental, will finally become a central economic and political theme
Public confidence levels are quite low, but the condition will be temporary as we continue to learn about the virus and make irregular progress in defeating it
Serious concerns surrounding public transportation will lead to a longer timeline for people getting back to work in larger cities
We are not planning to see even the possibility for a COVID-19 vaccineuntil mid-2021, at the absolute earliest
If there is a significant resurgence in COVID-19 cases this fall, the fatigue of the situation will be extremely painful and we could retest market lows
On a much lighter note, and for anyone who is a fan of Billy Joel (who isn’t?), click HERE (or below) to spend four minutes listening to/watching a VERY entertaining “social distance-sing project” where the Phoenix Chamber Choir performs The Longest Time – the adapted lyrics and instruments are great!
Tragically, some have lost loved ones during this time, and we acknowledge that will change life for them even on the upside of this pandemic. But for most of us, these times of separation will pass and we will be back together, in person, with those we have been missing. And as always, we sincerely value our relationships and partnerships with each of you, as well as your trust and confidence in us here at Towerpoint Wealth. We encourage you to reach out to us at any time (916-405-9140, info@towerpointwealth.com) with any questions, concerns, or needs you may have – the world continues to be an extremely complicated place, and we are here for you.
