More Changes Means More Financial Planning

Jan 2, 2021 | Economy, Financial Planning, Investing, Retirement

On the first podcast of 2021, Karl discusses the numerous changes in the economy, tax law, and politics that will drive planning and investment decisions. Plus, a fiscal stimulus deal is done. Was it needed?

Hey, good morning, everybody. Welcome to the show. This is Creating Richer Lives, the podcast. My name is Karl Eggerss. If this is your first time joining us, it’s not a bad time because it’s the first show of 2021, first show of the year. And let me be the first to wish you, or maybe the last to wish you a happy new year. It’s usually a holiday that frankly I don’t like. I don’t think flipping the calendar is some monumental thing, just another day but people celebrate it. But it is appropriate this year. I think everybody was happy for the calendar to change. Hopefully 2021 is not any worse than 2020. A lot of bad stuff going on, but a lot of good stuff too. I mean, frankly, where the stock market ended the year compared to where it was in March at the depths of the crisis, we’ll call it, was quite amazing.

But anyways, welcome to the show. (210) 526-0057 is our telephone number and our website is creatingricherlives.com. We made some big changes to that this year, organized differently. A little more user-friendly, you can check out a lot about Covenant and what we do and the services we provide. There’s even a place on there that has my calendar. So if you have a question you may need my help or Covenant’s help with your personal financial situation, all you got to do is click right on there, and usually what I like to do is have maybe a 15 to 30 minute conversation via phone.

Really, sometimes I talk to people, I answer their questions and that’s it. Sometimes it evolves into a formal meeting. But we like to have that process on there. We made it very simple for you to do that. And by the way, on the website, you can sign up for covenant U, which is our weekly distribution that goes out on Mondays and has a bunch of information in there. We also still have that free report, 10 ways to increase your investment income is still on the website, and you can still grab that. So make sure you go check that out and… Or you can simply tell a friend about it as well. And if you’re listening to this on the podcast, on your phone via podcast app, like Spotify, Google podcast, maybe Apple podcasts, which a lot of people use, give it a thumbs up, a share, leave a comment, a five star, whatever you want to do on there. We’d certainly appreciate that.

Again, thank you for really a great 2020 in terms of what we did at Covenant, what we’re able to do, really helping people navigate through what was a really scary year for a lot of people. Not only health wise, but scary year in terms of their finances. It was one of those years where you could make some really good decisions or make some really dumb decisions. For most people it was trying to stay in the middle and not overreact, which was a big part of it. But welcome to 2021.

All right. Let’s talk about this week and then we’ll get a little more into the show. Of course, that was another holiday shortened week. And we had really a three and a half day week during the Christmas week, and this past week we had a four day week, the markets were open. Even though the Dow was up 200 points on Monday, the breadth in kind of who participated, it was really a bad day Monday. It was also a pretty bad day Tuesday, and really this was dominated by fiscal stimulus. We know we have fiscal stimulus, was signed into law. It is law now.

But there was a caveat. Well, let’s try to get the $600 checks to $2000, which we’ll get into in just a minute. So there’s a lot of debate around that. These checks started going out very quickly. Steven Mnuchin announced that on Tuesday. We also saw by the way, the Japanese stock market on Tuesday hit a 30-year high, not a 30-month high, a 30-year high. So we’re getting in the big scheme of things, more broad based participation, which is what I’ve been pounding the table on the last several months is that that’s what we need. We need the small companies along with the large companies.

Well now, especially since the vaccines were announced, really right around November 1st, we’ve seen really a little change in character of the market, much more broadening out. We have small companies participating, foreign stocks participating, value stocks participating, and it hasn’t been an outright rotation, but you have seen definitely some of the high flyers pause a little bit. When you think about some of the FANG stocks, and you think about some of these stay-at-home stocks, they’ve taken a pause, but we haven’t seen outright rotation out of technology or some of the high flyers, but just more of a broadening out.

Wednesday, market bounce back pretty strong. Seven of the 11 sectors finished in the green. That was despite we’re continuing to hear this new strain of COVID that is now in the United States and maybe has been for a while and of course the drug makers are saying the vaccines will still cover that. And maybe this is a more contagious virus, but it is one that perhaps these drugs will still contain. It seems to be, the market is shrugging that off a bit and we saw some of those numbers really spike earlier last week. But part of that was due to some of these places not counting because they were closed for the holidays. So we saw a little catching up if you will.

Then Thursday, of course, last day of the year and last day of the week, markets hovered around the flat line. Initial jobless claims much lower than expected. That does go into what I wanted to talk about, which is number one, we heard a lot about stimulus and you heard us here and me talking about that we needed more fiscal stimulus. And it’s interesting because it was the right type of fiscal stimulus that we needed.

I’m not sure $600 checks are the real bridge, if you will. I don’t know if 2,000 is the right number and frankly I don’t think anybody in Congress does any real analysis. I don’t know where they come up with some of these numbers sometimes, because if it’s just printing more money and we don’t care about the debt in the future, then why not give everybody $10,000 if you really want to juice the economy. So I don’t know if 600 or 2,000 is the right number and I don’t think they do either, $600 doesn’t seem like a lot of money to bridge the gap. Yes, it helps. But when you think about sending money overseas to some of these programs and some of the waste and the pork in these programs, had we funneled that back here, it would have been more powerful. But there is some… In fact, our Chief Investment Officer, Justin Pawl and myself, were talking to somebody this week on

… a private conversation that studies the economy and does some pretty unique things in terms of looking at it. Their research actually showed that sometimes this type of stimulus doesn’t really move the needle, as far as the recovery in the economy, or not, which was interesting to see.

So I posed the question, well, let’s look at it the other way. What if we had not done it at all? What would that have looked like? We talked through that a little bit.

But his analysis was more about … These economies are basically a living, breathing organism. They’re not as manipulated and not as dialed in as people think, that if you turn this dial, you’re going to get this direct outcome. That’s not always the way it works.

In fact, they believe that, as the economies fall, the harder they fall, the more naturally they’re going to bottom, which is why you’ve seen this V, this backwards square root that I call it, but you’ve seen a big move up. That was going to happen regardless of stimulus, in his opinion. Interesting to see that kind of research. Maybe we’ll talk a little more about that in the future.

But these stimulus dollars, and you knew with this battle going on, again, most people either paid down debt or saved the stimulus. Of course, during the depths of this, you’re going to have some sloppiness in terms of how you get this done, and how you get it out to people. Government did it pretty quickly. But this time, they took four and a half months to talk about it. It still had a bunch of pork in it.

The good part about it was the PPP. Again, if you would open businesses and bridge loan some of these businesses, those are the ones paying the people. That’s how you get going. If you just pay people to stay home, and you encourage them to stay home, they’re going to stay home. We saw that with some of the unemployment checks that were actually larger than the checks people were getting to actually go to work. That’s not how you’re going to grow the economy.

There’s a lot of ways to do this, but we’re talking trillions of dollars now, with really no plan to really pay it back and what that looks like. Some of this chatter about what does this do for the longterm, and are we destined to fail because of all this debt, I don’t think we can say that either. Yes, the debt probably isn’t good, and probably it will be a drag for a while, but we don’t have any longterm studies on some of this stuff, because some of the stuff has never been done before.

Yes, we can go back and look at Japan. We can go back and look at times before the Great Depression and all that, but things are different now. They’re different because of technology. They’re different because of the way that some of the tools the fed uses and the treasury. There’s lots of things that are different now.

Again, not only do we have to look at the liability side of the balance sheet, just like in your house, you have to look at the asset side. What are we getting for that debt? Some us intentionally use debt to our advantage, if we can get a better return on our money. It’s no different with the government. Interest rates are low right now, which is what they’re paying out. So I would love to see them refinance debt and do a 50 year bond. Do a 100 year bond.

How many of you are doing 30 year mortgages because you just say, “I just can’t not do this. It’s such a good deal”? 30 year mortgages at 2.5%? Wow. Who would have thought? That’s the way the government needs to look at this. But we did get the fiscal stimulus package passed. There’s a lot of changes.

Really, I think 2021 is going to be more about planning than it is investing. I think there’s a lot of changes. You look back to the changes, not only prior to the CARES Act in March, no required minimum distribution this year, for example. Well, maybe it made sense in your life to actually take a distribution, even if you didn’t need it, because you’re in a low tax bracket. Maybe next year, you might be in a higher tax bracket. Those are the types of decisions that I think are going to be important as we move forward.

But it wasn’t just the CARES Act. Going back to the Trump tax cuts. But before that, standard deduction is now prevalent among people, instead of itemizing. So there’s a lot of things and a lot of changes we’ve seen, more on the financial planning side in the last couple of years, three years, we’ll call it, than maybe on the investing side.

The investing side, besides March and April and May and June, and that V-shape recovery, there’s some things going on, but primarily what we’re seeing is low interest rates, and now an economy that, in January, February was looking old in the tooth, is now looking like the beginning of a recovery, which is really interesting.

We were looking at full employment. We were looking at the fed talking about raising interest rates. Because of COVID and because of the economic shutdown, they went the complete opposite direction, and they drastically cut rates, gave people checks, bought bonds, bought everything in sight, supported the economy, threw money at it. And we got this recovery. So now it looks like an early stage economic recovery. Yes. It’s slowing down, as we’ve been talking about, and why we needed fiscal stimulus, in our opinion.

But if you think about 2021, and if we do have the vaccines and we have enough supply, which seems to be an issue, and we don’t have supplies getting ruined because they’re not getting kept cold enough, and these companies can produce enough, if we have that in a timely fashion and it works, and people are willing to take it, which is another other issue we’re hearing about, if you put all that together, could we have a roaring 20s 2.0? Could we have an economy that surges, as people travel, and people go out dining, and they just want to spend, because they’ve been hunkering down and saving for a year? It’s quite possible.

We could be more at the beginning of recovery than at the end. But these things ebb and flow. Economic cycles, they call them cycles for reason. They go up and they go down. They go up and they go down. We were peaking before, and then we drastically went down, and then here we are now recovering.

Everything was crammed into 2020, just like people learning to shop online for the first time, people working from home for the first time, using Zoom for the first time, doing video conferencing, using Microsoft Teams or Slack, or all these things people did, visiting with their doctors online for the first time. The doctors doing stuff online for the first time. All of those things were new and were going to happen, but they were accelerated due to COVID.

Let’s shift gears for a minute. I want to ask you … Of course, you won’t get your answers right away, but you can answer me over the next week or so. I am curious what some of you, what was your … I asked this on Twitter on Thursday. What was your best and worst financial decision of 2020?

I think it’s really important that we look back. This isn’t just investing decision. This is financial decision. It could have been a dumb expenditure. It could have been not saving enough. There’s a lot of things that could have been done from a financial planning perspective. But it can also include investing, if you wish. But what was the best thing you did and the worst thing you did? I think the only way we get better is by acknowledging that.

I had a couple people on Twitter. One of them said, “The best decision I made this year,” and

He put strangely, was buying Bitcoin at 3000. He said his worst was selling Peloton after it doubled from an IPO, and those were a couple of good ones, right? Those are a couple talking points. We know a lot of people, probably if they, probably in 2017, ’18 lost a bunch of money in cryptocurrencies and said, “Never again.” Then here comes Bitcoin storming back and so maybe they have regret for not buying it or maybe they did make some money. Then you had the stay at home stocks, right? We talked about all the software companies and the exercise companies and the streaming company, they all did very well. That was 2020. What are they going to do in 2021? But some people participated, some people, I think it concerns me that some people are still in those things and thinking that they can do no wrong.

I mean, they’re stocks that are down 40% since October. Some of these telecommunications video conferencing companies, we’ll call it. Be careful. Okay. But that was, it is good to reflect back. Another one wrote in and said he did a bunch of Roth conversions in March at the low, and then sold lots of positions too early and also probably refinanced his house too early. Let’s look at those. Doing a Roth conversion is a great idea. Now what’s a, a conversion isn’t just taking money from an IRA, paying taxes on it, preferably in a year you’re in a low bracket or any year you’re in a low bracket and maybe not paying any taxes on it, depending on your situation and putting it into a Roth IRA. It doesn’t have to be cash. It can be securities. In March, when those securities were down, whatever they were, Fund XYZ, or stock ABC, whatever it was, if it was temporarily down and you thought it was going to rebound, you could convert shares from your IRA to a Roth and the value at that time is what you pay taxes on.

Then the recovery takes place in the Roth IRA. So, that growth coming back up is tax free. It’s a great technique. Sometimes we do that for clients in December, depending on their situation and we talk through it. But in this year, there were some done in March. Pat on the back to him for doing that Roth conversion at that time, but also he mentioned sold some positions too early. Well, there’s probably a lot of people who did some of that, especially if there were some, if you have a little more of a trading mentality or let’s just say that perhaps there was things you wanted to get out of and they bounced up and he said, “Okay, I can finally get out.” Then they kept going, right?

That can happen. We’re going to make some mistakes in years like this, but we need to minimize them. The last one, he refinanced his house too early. That is one that, I mean, if you’ve done it in the last three months, six months, nine months, a year, I don’t know if it’s too early. I mean, yeah, none of us are going to call the bottom in interest rates, but you have a really good rate, I would imagine. Yes. Is it shocking to see rates at 2.5 for a 30-year mortgage. It is. Could it go lower? Hey, yes. Right. The answer is yes. We know that not only can it go lower, but zero’s not even the floor. Maybe it’s time for you to look at a 30 instead of a 15. Maybe it’s time for you to look at a 15 instead of a 30.

The cost of refinancing continues to come down. It doesn’t, you don’t have to have a big rate change as big as you did in the past to refinance, because costs are coming down, because there’s a lot of competition. Good job on refinancing. I mean, when all this started, that was the first thing I looked to do was when you look around and say, “What can I do, right? Number one, can I take cash and invest? Can I, if I see opportunities, do I have access to capital at very low rates?” It became very clear that rates were going down and they did. They kept going down and what’s amazing is as the economy recovered, and on top of that, as the housing market continued to strengthen, mortgage rates continued to fall. They didn’t really follow what was going on, even in the bond market.

I mean, remember the 10-year treasury got down to know 0.4% and it’s sitting at 0.92% today, which is still low, but it has gone up since March, April, May, and yet mortgage rates have continued to fall. But, those were a couple of good ones, but what did you do in 2020? If you could narrow it down, and again, hopefully you made some good decisions, made some bad decisions. Maybe some of you didn’t make a lot of decisions at all, which may have been the best thing you did, right? Not overreacting one way or the other, but what was the best thing, if you had to think about the whole year, what was the best thing you did and the worst thing? Then again, and maybe even write it down, maybe even … I’ve talked to people about writing down kind of a trade journal if they’re emotionally inclined.

Write down either what you want to do from an investing standpoint, and fortunately you didn’t do it or vice versa, but writing down that journal and keeping a journal can help you look back at that and then go back and put notes in on why that worked or didn’t work. I’ve learned a lot by doing that where I looked at a chart pattern and just thought this thing’s definitely going up. Then I looked back and it just didn’t. It set up perfectly. It just didn’t happen. Okay. It’s important to take notes and look at that, but I would do that on your finance level, on your higher finance level. Again, when we think back, there were people I talked to in March and said, “Do you want to do a Roth conversion?”

The answer was, “No.” You look back now and it would have been a great thing to do. There’s people that maybe didn’t want to buy stocks at that point. Even though they weren’t overexposed, they could have bought some funds or some stocks, what have you, in the markets and didn’t. Again, nobody’s perfect. This was not, we didn’t have a template for this, right? We had a template for bad markets and our emotions, but we didn’t have a template for the economy literally shutting down as fast as it had, due to the virus. We didn’t have that. We didn’t know what to do with that. Fortunately, and I do, again, I said it last week, I want to give credit to the Federal Reserve, Treasury Secretary Steve Mnuchin for how fast they acted and in concert, and even Congress, after a little bit of wrangling, they did get a deal done.

It was a little sloppy, but it worked. I do think it worked. This round, this $950 billion has yet to be seen if it was that type of aid needed or not. We’ll have to see in the future, but, and I also want to compliment, obviously, not necessarily just medical workers, that we all think just like our military and our police and our teachers and those important industries, but the drug manufacturers who always get slapped around and every four years get talked about. We need to reduce drug prices. I’ve defended them for years because the way those companies work is they spend a lot of money on research and development, a lot of times their own money that they’re not getting help from some people. Then, when it comes time to pay themselves back through selling these drugs, they get ridiculed.

[inaudible 00:00:00]. Well, in this case, multiple companies, dozens of companies, creating vaccines in a six to nine month timeframe and getting it actually in people’s body is quite amazing. Little scary for us as cosumers putting something like that in our body, yes. But amazing. And these companies, the administration for doing warp speed, all of that should be congratulated because it was amazing. And that’s the ingenuity that we have, and that will continue. We’re going to continue to see amazing things come out of this country. So this isn’t a, “2020 was awful, and 2021 is going to be so great.” Again, it’s just another day, it says January 1st, January 2nd, January 3rd, January 4th on the calendar. Right? It’s just another day, but it’s naturally a time to look back and say, “Yeah, I need to lose 10 or 15 pounds.” That’s every January. And that’s why I don’t really like financial resolutions.

It’s kind of like Valentine’s Day. I think about Valentine’s Day and people going, “I’m going to be nice to my spouse today and I’m going to tell them, I love them and get them some candy and a card,” one day a year? It’s not good. So some of these holidays, whatever. But again, it’s a natural time for us to reflect back and say, “How can we improve?” And again, I think I mentioned this a few weeks ago, for most of you that have W2 income, whether you’re a one person household working, two, whatever it might be, or you’re retired for that matter, you pretty much know what the income’s going to look like for 2021, for the most part.

This is the time to sit down and start allocating those dollars now for not only expenses, not only discretionary. I did a TV interview this past week on the local CBS affiliate where I was discussing having maybe an extra account, a slush account, where it’s your fun money. And if it retains too much money in there at the end of the year, great, you can do something else with it. But the idea is that you spend it and you reward yourself for the discipline of having other money go into savings and those types of things. By the way, if you want to watch that interview, it’s on our website, creatingricherlives.com. So if you need to do stuff like that to actually stick to a system by opening separate accounts for different purposes, go for it. We’re all for that. And we have clients of all different net worth that do that.

So this isn’t something for just 22 year olds starting their first job. This is just a way of functioning in a logistical way of doing this. But this is the time to look at that. And then again, what tax advantages are available to you? What can you do if you’re philanthropically inclined? Do you spread it out over the year? Do you take a few years and bunch them into 2021? Hey, a lot of that’s going to depend on what happens with tax changes coming up. And that’s why it’s important you can continue to listen to the podcast through 2021, because I’m going to continue to have people on that know about recent tax changes, strategies for you, things to think about. And when we talk about these things, we’re not recommending them to you. We don’t know you. We do know some of you, but we don’t know who’s listening.

And so these aren’t recommendations, these are ideas and things to think about and be aware of, of what’s going on around you so that you can talk to your financial advisor, or if it’s us talk to us. But a lot of times we have CPAs around us that our clients may use and they aren’t recommending some tax strategies and we’re the ones recommending them. We had a client that sold a business in late 2020, had a big liquidity event, a large dollar figure, and there’s some tax strategies in there that they have available that could save them substantial tax dollars that we brought to their attention that their CPA did not, and that’s going to make a big difference in their life.

So when we talk about creating richer lives, obviously it is about the financial part, but we also talked about philanthropic things with this couple and tax strategies around that and just their heart for giving. And so we’re going to bring you all kinds of things in 2021. Again, bringing you more video we would like to do. And again, if there’s things that you would like to hear on the podcasts, if it’s less of me and more guests, let me know. I won’t be offended. But we’re going to have some guests from time to time as we did this year. We had a lot more guests this year than we’ve ever had. And we’ll try to vary it up for you, and again, hopefully you find this educational and again, feel free to share it. This is a free resource. We want as many people listening as possible, because we put a lot of effort into it each and every week.

As you saw, I didn’t miss a week in 2020. I did not miss a week, and I don’t plan on missing one in 2021. And I don’t record five at a time or anything like that. I record them each and every week, right on schedule. So, all right guys, well Happy New Year to you too. 210-526-0057. Creatingricherlives.com. Happy New Year, and we will see you back here next week. Take care.

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product, including the investments and or investment strategies recommended or undertaken by Covenant Multifamily Offices, LLC, Covenant, or any non-investment related content will be profitable, equal any corresponding indicated historical performance levels, be suitable for your portfolio or individual situation, or prove successful. Moreover, you should not assume that any discussion or information serves as the receipt of, or as a substitute for personalized investment advice from Covenant. To the extent that a listener has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with a professional advisor of his/her choosing. Covenant is neither a law firm nor a certified public accounting firm and no portion of the newsletter content should be construed as legal or accounting advice. A copy of our current written disclosure brochure discussing our advisory services and fees is available upon request or at Creatingricherlives.com.

 

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