401(k) Loans | You’ve recently made some money in the stock market and interest rates are still low, so you decide it is the perfect time to buy a home. But there is a dilemma – which assets should be used, and which accounts should be drawn from to fund the down payment? Should you liquidate investments held in your “regular” non-retirement account, or should you borrow from your 401(k)?
Many people don’t like the idea of funding a down payment by selling investments in a “regular” non-retirement account because of the possible income tax consequences. Instead, they sometimes choose to borrow from their 401(k), saying to themselves: I can save money NOW by borrowing from myself, AND I am paying myself interest on the loan! Sounds harmless, right? Not so fast!
Watch this video from our Sacramento Wealth Advisor and CPA, Matt Regan, to learn why treating your 401(k) like a piggy bank could have a material impact to your retirement plan and longer-term economic health.
Student Debt | You’ve graduated college, there is so much to look forward to and be excited about! Your first professional job, making money, traveling to new places, meeting new people, and no more studying! But for 44 million Americans, there is one part of college that unfortunately sticks with them for quite awhile: student loans.
Among the Class of 2019, 69% of college students took out student loans, graduating with an average debt of about $30,000. Most people believe that if they pay more than the minimum monthly amount, they won’t have extra cash for travel, nice things, and possibly even to invest. However, with the average student loan interest rate of 6%, it might sound crazy but it’s true: Even if you did invest that extra money, you might not break even!
Watch this video from our Sacramento Wealth Advisor and CPA, Matt Regan, to learn how making sacrifices and staying motivated can help you pay off your student debt sooner, save you money, and achieve greater peace of mind and full financial freedom.
A 2016 survey of 1,000 taxpayers, conducted by WalletHub, found that, if told they never had to pay income taxes again, 27% of respondents would brand themselves with a tattoo that says “IRS” and 11% would gladly drive to Chipotle every single day for three years to clean its toilets. You can’t make this stuff up!
And while there is credible evidence and research that suggests people actually like paying taxes (click HERE to read a Psychology Today article about this “phenomenon”), in our 23+ years helping clients properly build and protect their net worth and wealth, we have yet to encounter a single client, prospect, colleague, or friend who fits this category. While we may intellectually understand why we have to pay them, most of us seem to emotionally detest it.
At Towerpoint Wealth, we recognize (and embrace!) our bias in working with and helping our clients towards achieving the goal of growing and building their assets as intelligently and as efficiently as possible. Understanding there are a myriad of road blocks, speed bumps, and hazards to account for while on this journey, we also recognize and coach our clients to understand that there are two major, and unfortunate, “necessary evils” that stand in the way of accomplishing this goal:
Fees, costs, and expenses
Taxes
And while neither of these is completely avoidable, intelligently reducing the drag of either one directly helps your portfolio get better gas mileage. Below are two simple examples to illustrate that point:
To be clear, we have encountered those who let the “tax tail wag the dog” and seemingly focus more on tax avoidance than net-worth building; our preference will always be to help our clients maximize their after-tax wealth, which does pair with having a tax bill every year. However, it also pairs with being directly mindful about keeping your obligation to Uncle Sam to an absolute minimum whenever and wherever possible.
The 2020 tax season is right around the corner, and with it will come some inevitable surprises for those who didn’t properly plan, or who were ignorant of certain aspects of and/or changes to their global 2020 income tax situation. And understanding the interest, dividends, and capital gains that will soon be showing up on your 1099 forms, (all of which report taxable income to the IRS), we encourage you to use the resources found at the bottom of this newsletter to your advantage, and to contact us (click HERE) if you encounter any unwanted 2020 “tax surprises,” or feel you would benefit from a fresh perspective on how to leverage and maximize ideas and opportunities to make your portfolio, and your life, more tax efficient.
What’s Happening at TPW?
Our Wealth Advisor, Matt Regan, working hard as usual from home right now, along with little Mason and Stevie, his loyal friend!
TPW Service Highlight – Tax-Managed Portfolio Management
In addition to investment expenses, income taxes are the second of the two necessary evils we face when helping you grow, and protect, your net worth and assets in the most effective and efficient way. Taxes can severely impact investment returns if not monitored, scrutinized, and controlled. And while we never let the “tax tail wag the dog,” at Towerpoint Wealth we do maintain a specific focus on helping our clients absolutely minimize the tax impact of their investments, portfolio, and overall financial decision-making.
Utilizing low-turnover mutual funds, ETFs, and separately-managed accounts, taxable versus tax-free bonds, strategic tax-loss harvesting, tax diversification, and the asset location strategies discussed in Steve Pitchford’s MoneySavage podcast featured below helps us help our clients significantly reduce the income taxes they pay on their investments.
Issuance of 2020 Charles Schwab 1099s
A brief but important reminder for our Towerpoint Wealth family of clients: Initial Form 1099 production is based on two different waves at Schwab, with the vast majority (85%+) produced in the second wave:
As always, we sincerely value our relationships and partnerships with 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 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.
By: Nathan Billigmeier, Director of Research and Analytics
From ancient civilizations to modern society, humans have always had a fascination with gold. The yellow metal has been used as currency, as jewelry, and incorporated within various other industrial applications. Gold also helped shape United States history when it was discovered in the Sacramento Valley in 1848 sparking the California Gold Rush. But does it belong in your investment portfolio? We will discuss some of the benefits and drawbacks below.
1) Store of Value
Famed financier J.P. Morgan once stated, “Gold is money, everything else is just credit.” This quote strikes at the core of the “gold as a store of value” argument. But what exactly is a store of value and what qualifies gold to be viewed as such?
By definition, a store of value is an asset that maintains its value without depreciating. Gold’s ability to maintain wealth by preserving purchasing power has been well documented. Civilizations throughout history have turned to gold as a means of exchange as well as a hedge against currency devaluation.
Gold’s finite supply also helps boost its appeal as a store of value. To date, all the gold mined throughout history would fit into two and a half Olympic-sized swimming pools. According to the US Geological Survey (USGS), approximately 187,000 metric tons of gold has been mined in total, with 57,000 metric tons remaining underground.
Critics of gold state that it is an antiquated means of exchange with little utility or industrial application, outside of jewelry, and should therefore not be considered a store of value. Specific to utility, their argument could be viewed as valid. But what gold lacks in utility, it makes up for in investor psychology. Humans have long placed value in gold. While this value may very well be due to its historical reputation, until this connection is broken, gold will remain one of the primary assets used to preserve wealth
2) Low Correlation to Other Investments
One key aspect of a properly diversified portfolio is owning investments that have a low correlation to each other. What does this mean, and why is it important? Correlation is a numeric value from -1 to +1. The closer that two different investments are to having a +1 correlation, the higher the likelihood their respective market values will move in tandem with each another. Vice versa is true for investments with a -1 correlation. Investments with a correlation of 0 are completely unrelated, meaning the price movement of one has no relation to the price movement of the other.For longer-term investors, it is important to have the correlation between the various asset classes (read: stocks, bonds, alternatives, cash, etc.) held in their portfolio be as close to zero as possible. This allows investors to better manage the risk of their portfolio and increases the likelihood that the share price of investments held in different asset classes will not move in the same direction in response to current economic and market trends.
Gold is a unique asset in that it has a low, or sometimes even negative correlation to the other primary asset classes typically included in a properly diversified portfolio. In fact, as you can see from the above graph, it tends to have a negative correlation to US equities, hence sometimes being described as a “flight to quality” asset.
3)Portfolio Insurance
Just as you purchase home or auto insurance to protect your assets against unforeseen events, you should consider doing the same with your investment portfolio. As recent events have shown us, market and economic crises can and do happen.
Given its negative correlation to US equities, gold can provide needed insulation to your portfolio, helping it to better absorb these inevitable pullbacks. While it will not completely offset equity losses, gold can help reduce volatility and provide “downside insulation” to a portfolio.
As the chart below shows, with the exception of two instances, the 1997 Asian financial crisis and 2013’s “Taper Tantrum,” gold has achieved positive returns during times of equity unrest. It also has a tendency to outperform US Treasuries during these downturns, which many view as another safe haven asset.
4) But What About Income?
Gold is not without its faults. One of the main arguments against gold ownership is the lack of a dividend or interest payment and the fact it has little to no industrial production value.
One of the most famous investors in the world, Warren Buffet, is an outspoken critic of gold ownership for these very reasons. He has been quoted as saying,
“Gold gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.”
…and Mr. Buffett would be correct. Gold has little to no real economic utility, does not generate sustainable cash flow, and does not pay a dividend.
What it does offer is relative stability and the potential for price appreciation. During turbulent economic times when company cash flows decline and dividends are cut or reduced, gold tends to shine, as investors try to preserve capital and fear the inevitable stimulus measures taken by central banks and/or government could stoke inflation and decrease the purchasing power of their currency.
More recently, financial markets have also been grappling with historically low interest rates, with some countries even experimenting with negative interest rates (i.e. investors paying the government interest, instead of receiving it, when owning government-issued bonds). This has significantly lowered the opportunity cost of owning gold (which pays no interest) versus owning government-issued bonds (which pay interest) as investors look for safety during times of market unease. Gold has been a direct beneficiary as the declining interest rate trend has gained steam, particularly in countries issuing bonds with negative interest rates. Why would an investor choose to pay interest to own a government bond when they could own gold instead, achieving the similar end goal of capital preservation?
4) What happened to gold with the COVID-19
COVID-19 market pullback in March of 2020, gold suffered sizable declines along with equities. In fact, it suffered its largest weekly decline since 1983 while equities dipped into bear market territory in a record-shattering 20 days. Doesn’t this fly in the face of all the previous arguments for owning gold?
It depends on what you believe. Some have argued that the declines in the price of gold, at the exact same time equities were dropping precipitously, debunks the theory that gold should be viewed as a safe haven asset during times of market turmoil. Especially coupled with the fact that US Treasury bonds and the US dollar remained strong throughout the collapse in equity prices.
Proponents of gold have argued that the price decline the metal suffered in March, 2020 was due to the rapid shock the US economy experienced as virtually all of us entered lockdown. This forced many investors to raise cash as rapidly as possible, and gold, being a very liquid asset, provided easy access to needed cash. These proponents would challenge that the price of gold acted similarly during the 2008/2009 financial crisis before ultimately touching all-time highs, not too different to what has happened over the last three months.
By analyzing the above chart, we are able to see that initially gold did maintain its strength as equities began to move lower. As the equity losses accelerated, gold prices declined before beginning a steady march higher prior to the March 23 low in equity prices. This does lend credence to the claim by gold “bulls” that the metal was used as a source of cash by investors during the selloff, and in doing so, helped them limit their losses.
In Summary
While critics may remain unconvinced, it is hard to deny that gold has maintained its luster throughout history as a go-to asset during times of uncertainty. Its ability to provide ballast to a portfolio allows your longer-term financial goals to remain upright and on course. We are by no means advocating that investors transition 100% of their assets into gold. However, we feel that a modest allocation of 3-7% in gold does have a place in a properly diversified investment portfolio.
How Can We Help?
At Towerpoint Wealth, we are a legal fiduciary to you, and embrace the professional obligation we have to work in your best interests 100% of the time. If you would like to discuss your circumstances further, we encourage you to call (916-405-9170) or email (nbilligmeier@towerpointwealth.com) to open an objective dialogue.
Towerpoint Wealth, LLC is a Registered Investment Adviser. This material is solely for informational purposes. Advisory services are only offered to clients or prospective clients where Towerpoint Wealth, LLC and its representatives are properly licensed or exempt from licensure. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by Towerpoint Wealth, LLC unless a client service agreement is in place
