The Billionaires Have Spoken

May 16, 2020

On this podcast, Karl explains the difference between what the biggest hedge fund managers are saying and what they might be doing.  Also, Karl welcomes Shawn Morris, CFP®, AAMS® to discuss financial planning techniques that you can use during the COVID-19 quarantine.

 

Karl Eggerss:

Hey, good morning, everybody. Welcome to Creating Richer Lives podcast. My name is Karl Eggerss as usual. I’m your host. Just a quick reminder. This show is brought to you by Covenant. Lifestyle legacy philanthropy, wealth management, financial planning. We have new tax services. So give us a call if you need help in that arena, (210) 526-0057. Or creatingricherlives.com. And on creatingricherlives.com I would steer you to a couple of things. We do have the Covenant economic review and outlook that we just posted on there a few days ago. It’s about a 15 minute video where you can see our screens. We’re showing you some charts, things that we see going on in the economy. And there’s some annotations on there. Myself and Justin Paul, our Chief Investment Officer created that earlier in the week. So that is on our website. And then also I was asked to do a television interview because I’ll was ask the question, “Is this a depression?”

Yeah, that’s a fun topic. You can go watch that. I will give you the short answer, which is no, but you can still watch the interview on there. So go to creatingricherlives.com to check that out. In just a few minutes, we’re going to bring in Shawn Morris, a certified financial planner, to the studio to talk about some things that you can do from a financial planning standpoint that really have to do with COVID-19. There’s some things going on that normally you wouldn’t think of because in normal times we wouldn’t even consider some of these strategies, but they are appropriate for what’s happening now. So stay tuned for that in just a few minutes. Before we do that, let’s have a quick recap of what was going on this week. A couple of things really that set the tone for the week early on was Los Angeles County with their stay at home orders extended for the next three months.

Really Monday, kind of a quiet day. Most of Tuesday was too. Until the last 15, 20 minutes of trading when the Dow fell over 450 points. I mean, look, markets were kind of rallying a little bit the last few weeks on the hopes of opening up and getting people back out working and consuming again. Right? Well, that kind of put a damper on that. And then we also saw some trade tension that day kind of spark up again. Wednesday Chairman Powell of the Federal Reserve came out, kind of a somber tone. And normally when the Federal Reserve has a somber tone, it means the economy’s slowing and they’re going to lower rates. Well, they’ve already done that. So the somber tone this time, caused people to really sell some stocks. But I don’t even think that was the biggest news of the day. Which by the way, he talked about negative interest rates because we’re seeing the market maybe suggesting that by the trading going on. He said, “Look, we’re not ruling it out entirely, but we aren’t considering that at this point.”

We’ll see if that changes. That’s going to be something to watch. But really the bigger news of the day to me was we saw some of the big, heavy hitter billionaire traders, the best of our lifetimes, come out and really had some bearish tone to their comments. Stanley Druckenmiller, who you may have heard of, said the risk reward for the stock market is not great at these levels. David Tepper, who pretty much called the bottom in 2018, as far as I can recall. And near March 23rd as well. He’s now saying, “Hey, the stock market is the most expensive market since 1999.” I would be careful though, because these guys are traders. They trade stocks, they go short, they go long. They may have very quick positions. They’re not investing like a Warren Buffet. So having said that, you don’t know their rationale or the reasoning for making these comments and coming on TV, when they do. Are they really wanting to buy these stocks lower, so they talk the market down?

I don’t know, I’m not accusing them of that. I’m just saying you don’t know why they come on and do what they do. And I don’t either. I’d also be careful because remember, Bill Ackman came on and was talking about hell on earth was his quote, I believe. And that was really close to, I think that was March 23rd. It was the low, when the Dow Jones fell over 3000 points that day. And then we went up straight from there. So just be careful about some of these guys and taking it with a grain of salt. They’re doing some sophisticated strategies sometimes, day trading, who knows what all they’re doing. But that certainly set the tone because the market was down 600 points at one time on Wednesday. And then Thursday, we opened down another 400, and here we go.

Then we had the biggest reversal that we have seen since December of ’18, it was down 400 and yet the Dow finished up at almost 400. So an 800 point swing. Kind of surprising to me with all the volatility we’ve had the last few months, that that was the biggest reversal we’ve had since December of ’18. So that was pretty interesting. But you continue to see, as this market’s falling earlier in the week, you continue to see … what I noticed, here’s what’s in common with the stocks that are falling the hardest and the ones that are holding up the best. The ones that are falling the furthest are the smallest, cheapest companies. That’s where the value is. The largest, most expensive companies are the ones that are holding up the best. So people are still paying a premium for name brands and the largest companies.

And that, again, that may not always be that way, but that’s what’s happening right now. Now a couple of things I did think where it was interesting this week. We did see home buying demand is now back to and has passed pre-Coronavirus levels according to Redfin. That’s fantastic. The housing market is hot. I mean, where I am, it is hot right now. Lots of reasons for that. But I think that’s a good sign. So we’re seeing that. But the other thing that I noticed was I’ve been, people have been asking me what kind of recovery it’s going to be economically. Is it a W? Is it going to be a U, a V, an L, where it just doesn’t come back? What’s it going to be? I’ve been saying, I think it’s going to be a backwards square root. I’ve been saying that for a long time.

Funny thing, China came out with their leading indicators and guess what it’s shaped like? A backwards square root. Now, if you don’t know what that is or what that looks like, draw a square root, or Google it if you don’t know how to draw one. Print it out, hold it up to the mirror. It’ll come out backwards. That’s what I think the recovery will look like. And China is already experiencing that. And that may maybe why the market is holding up pretty well here is because it does look like somewhat of a V. It doesn’t get back up to where it was, but it bounces a pretty hard amount. Maybe that’s what investors are anticipating. But boy, it surprised me Friday when we had the retail sales were down 16.4% in April alone. That is the worst report ever for retail sales in a month.

And it was really off the charts in terms of the comparison to normal times. If you look at what normal times, you don’t see … it barely looks like … barely looks like a blip on the map compared to what we saw. And really that’s the key. We know people are, are they permanently unemployed, temporarily unemployed? We don’t know. We won’t know that until we see companies reopening and people being allowed to go out, and do they get their jobs back? But what we

Karl Eggerss:

You know what’s happening with the retail sales, but these bad economic reports tend to be ignored right now. Have you noticed that? Whenever a bad unemployment number comes out, you tend to see the market rally. It’s happened time and time again the last few weeks. There is this disconnect building and there’s this tension, and you hear it all the time. There’s a disconnect between maybe the economic reality out there and what the stock market is doing. Again, I will point back to the fact that the stock market and the economy are two different animals on two different timeframes. You may not know why the market is moving like it is, and it’s a good lesson that just because you’re reading bad news about something or good news about something doesn’t mean you invest your portfolio accordingly to that news of that day. You have to have an approach based on your specific situation and then tweak it over time. That’s the best way to do this because if you lean one direction too far, you could get caught.

All right. Let’s shift our gears from the stock market and let’s shift it to financial planning. All right. Joining us today is one of my colleagues, Shawn Morris, certified financial planner. Welcome back to the podcast. It’s been a while.

Shawn Morris:

Thanks, Karl. Thanks for having me.

Karl Eggerss:

Sure. I asked you to come in because during this time of quarantine, some of us have been, are out of jail. Some people are still in jail. Some people are half in, half out. The jail cell is open, but they’re not going out. Regardless, this is a time that people listening should really look at their own financial situation, and there’s some things going on that are directly related to COVID-19 that may affect your planning, your taxes, all that. I asked Shawn to come in. He’s got a few ideas and some things that you at home listening can be doing, or at least reviewing. Shawn, let’s just jump right in. Tell me one of those things that people should be looking at right now in terms of their financial planning.

Shawn Morris:

I think one of the top of the list items is Roth conversions. That may or may not be part of your long-term planning. This market pullback though presents a great opportunity to convert assets while those values are lower with anticipation of a recovery and have that recovery take place in a tax-free account as opposed to a tax-deferred account, which will lead to higher taxes down the road.

Karl Eggerss:

Yeah, especially in maybe a year that your income is down is another reason to do it, but there’s also when to do because a lot of people don’t know that number one, you don’t have to convert your entire IRA. Somebody asked me that the other day, and I said, “No, you do not have to do that.” Number two, you can do it with securities, is what you’re talking about. You don’t have to take cash and then go buy something. You’re talking about depressed securities that are temporarily depressed, you think, and you convert them at a lower level, pay less taxes, and then get them into the new Roth IRA, that then when the recovery happens, it hopefully happens at a tax-free clip.

Shawn Morris:

Yes, that’s correct. I saw a new term that I hadn’t seen before. It’s called Roth conversion cost averaging. If you think that the market may go lower and you’re like, “I don’t want to do a lump sum right now,” it’s just like dollar cost averaging, but it’s a conversion cost averaging.

Karl Eggerss:

Yeah, and I will say it’s not in a vacuum. You have to do some planning because even though the market’s down, maybe this isn’t the year for you to do it because you’re about to retire and maybe next year your income in 2021 is going to be even lower and that’s the time to do it. It’s not just, hey, the market is down, go do it. There’s other financial planning from a comprehensive standpoint that needs to take place before you make that decision.

Shawn Morris:

Correct, yeah. It’s just maybe, like I said, if it’s already part of your long-term financial plan, instead of waiting till the end of the year, it might be a good time to do it right now. It’s not for everybody, but it’s something to definitely look at and see if it makes sense.

Karl Eggerss:

Yeah, or if you had designated, let’s say you were going to convert $25,000, that was your 2020 plan, you may still do the $25,000, but you can get more shares.

Shawn Morris:

Correct.

Karl Eggerss:

In the conversion. Again, you’re actually being able to convert maybe more than you would have at the beginning of year from a share perspective.

Shawn Morris:

Exactly.

Karl Eggerss:

What’s number two on your list?

Shawn Morris:

For those who are paying college tuition out of a 529 account, you may be due a refund. If you paid for that college out of a 529 account, it’s best to get that put back into the 529 account.

Karl Eggerss:

When you say refund, you’re not talking IRS refund. You’re saying, if you get a refund from the school because maybe they’re going to do online classes, maybe they just did a tuition decrease because it’s going to be a hybrid model, whatever that looks like, you may be getting money back or somebody, the spring semester. I know some kids that were overseas and got called home. They had already prepaid that and were given a credit, so you’re talking about once you’ve taken the 529 money out, you’ve paid for the tuition or whatever and it comes back to you, you need to put that back in the 529.

Shawn Morris:

Yes, because if you do not, it becomes income and also could potentially subject to penalties.

Karl Eggerss:

Is this a contribution or is it a basically you’re crediting it back?

Shawn Morris:

It’s considered a rollover. You have a 60 day window to get that put back into the 529, so it doesn’t have to do with the contributions. It is considered a rollover and it can be pretty complex and trying to figure the taxes if you don’t get it rolled back in. I think I saw where UTSA was refunding something like $10 million in dorms, in parking and all kinds of expenses that they’re not necessarily refunding for the class. There’s, as you are going to be painfully aware, coming in the fall, there’s a lot more expenses besides just the class for college.

Karl Eggerss:

For those listening outside of our area, whether you’re in another state, whether you’re in another country because we have people all over the world listen UTSA is the University of Texas at San Antonio.

Shawn Morris:

Correct.

Karl Eggerss:

Yeah. I do know specifically, I think my niece was one of them who got a refund on college dorm costs because let’s face it, they were not there for the whole second half of this past semester. The college isn’t having to have all those operating expenses, so they did offer a refund for that prorated amount and a 529, generally, for those that don’t know, it’s a great savings vehicle. It kind of works like a Roth where you put money in, you don’t get a deduction, but it grows tax-free as long as it’s pulled out for college use. It’s pretty liberal, what it can be used on not just tuition, but yeah, you take money out, pay it in advance, and now you’ve got that money back, and you may end up paying taxes on it unless you put it back within that 60 day window. Now if they did that at the beginning of the semester, the window may have already passed.

Shawn Morris:

The 60 day window is once you receive the refund, you have 60 days to get it back into the 529.

Karl Eggerss:

It’s not 60 days from the withdrawal amount.

Shawn Morris:

Correct.

Karl Eggerss:

Once you receive, you have 60 days from the time that you receive that refund.

Shawn Morris:

It’s kind of interesting because that’s one of those scenarios that we’ve never really seen before.

Karl Eggerss:

No.

Shawn Morris:

That’s not something that’s going to be top of mind for the average person.

Karl Eggerss:

Yeah. I don’t think anybody’s ever dealt with that before when they were dealing with the 529. You usually take money out, go pay for college, move on and everybody lives happily ever after, but it’ll be interesting to see coming up in the fall what happens. That is mainly the reason why I think these colleges are doing everything they can do to go full blast with opening classes back up, dorm rooms, everything, because that is a lot

Karl Eggerss:

… Of lost revenue and many kids go to colleges because of the location. Imagine going to Pepperdine and they say, “Hey, we’re going to do online classes.” Yeah. That’s not going to work.

Shawn Morris:

If you’re going to a private college and you’re paying 50 grand or, I mean some of those are 80 grand, I mean a year to send your kid to school and they’re not getting the college experience, I’m thinking there’s going to be a long line for the local community college because that’s a lot less expensive.

Karl Eggerss:

These colleges have gotten pretty smart the last few years because they now mix in some of your major early on. Where back in my day, you used to take your basics your first couple years, which you could do anywhere, and then transfer into the university for your major.

Now they mix in your major early on, which is hard on an 18 year old to declare a major, but they sprinkle those in, I think for that very reason. And it amazes me that we haven’t seen online education take off more than it has, but I think this will change that.

And not only because people are going to have to do that from a cost standpoint during a severe recession that we are in, but they’re also going to have to do it because maybe they can’t go to another college right now. So we will see. Yeah, that’s an interesting one. Something that you bring up that’s never probably been needed to do before.

Shawn Morris:

Yeah. The next one is a Qualified HSA Funding Distribution or a QHFD.

Karl Eggerss:

Oh, my gosh. Acronym.

Shawn Morris:

This can only be done once in a lifetime, but you can actually move money directly from an IRA to an HSA.

Karl Eggerss:

My wife said I was once in a lifetime.

Shawn Morris:

Yeah.

Karl Eggerss:

But she has other acronyms for me. Anyway.

Shawn Morris:

We won’t go there.

Karl Eggerss:

We won’t go there. Once in a lifetime, so tell us how this works, walk us through what this looks like and why would you do it?

Shawn Morris:

Well, I mean if you have money in an IRA, you have to take that money out at some point and pay taxes on it. This basically, kind of get out of jail free card from the tax man. And you can take those funds directly, once in a lifetime, take those funds from an IRA. It’s kind of like the qualified charitable distribution.

Karl Eggerss:

Charitable distribution.

Shawn Morris:

Yeah. But instead you’re the charity, your medical conditions are your charity, and it goes into the HSA and it is subject to the limitations of your contributions. So if you’re already contributing out of your paycheck, that’s going to compete for that. You might turn that off or something along those lines.

But it is 35/50 per individual is the annual limit this year and $7100 is the limit on families. And then there’s also the catch up of $1000 for those of us that are-

Karl Eggerss:

Over 50.

Shawn Morris:

Yeah, over 50.

Karl Eggerss:

Grandpa. You actually are a grandpa.

Shawn Morris:

I am a grandpa and I am-

Karl Eggerss:

Congratulations, by the way,

Shawn Morris:

I am over 50. And it’s kind of hard to… I still need to go get my AARP card, which doesn’t make sense. What’s awesome about that is that you end up and you take that money instead of paying taxes on it, it goes into the HSA, which can be used for current medical expenses, or it can grow inside that HSA and grow tax free and be matched against medical expenses at a later date.

You and I know someone here that loves the HSA as a longterm savings vehicle. Pays for his medical expenses out of his pocket now, keeps the receipts and then he’ll match them up down the road and be able to let that money grow basically tax-free over his lifetime.

Karl Eggerss:

Yeah. We’ve done other podcasts. That’s probably the best savings vehicle there is out there. So this is getting money out of your IRA, which normally is going to be taxable. It’s not taxable. It will go straight into your HSA. So you get this deductible going in, essentially never paying taxes on that IRA money. Grows tax free, and then you can withdraw it tax free. So you’ve got the triple tax free.

Shawn Morris:

Well, and on the heels of the stretch IRA being eliminated, getting money out of an IRA is potentially a really big deal for your heirs. Because if you have a big IRA and it gets left to a non spouse, you have a limited amount of time to get that money out of there, and that puts that tax burden on who inherits the money. Well, if you get it into a tax free vehicle, that’s a bonus.

Now HSAs have their own limitations as far as inheritance. If they go to a child, that’s going to be a distribution then. You still want to probably use it in your lifetime. It would be the best thing.

But, I guess while we’re on the subject of qualified accounts, probably a good thing to add as another to do item is go through your beneficiaries and make sure that they are up to date and that you are leaving money to the person you want to leave your money to.

Karl Eggerss:

You must have listened to last week’s podcast when we had David Akright, one of our cohorts here, talk about trusts as beneficiaries. If you want to listen to that, we’ll put a link right here in the transcript. We do transcribe these podcasts.

But yeah, one of the to dos was go through. I mean there are… I’ve already updated several client’s beneficiaries that just didn’t make sense. They may have had a single person whose parents were on there. Parents are now either passed away or elderly, just doesn’t make sense.

Shawn Morris:

Right.

Karl Eggerss:

Or somebody is a surviving spouse and they had their husband. So yeah, go check that. Another to do. We’ll just keep stressing that one because it’s so important.

Shawn Morris:

I want to make sure you don’t leave your divorced spouse on there.

Karl Eggerss:

Not unless you want to.

Shawn Morris:

Yeah. Well, that’s probably the worst scenario I’ve seen is when someone still has their first wife on the account and doesn’t have their current wife on the account as a beneficiary.

Karl Eggerss:

Could cause some conflict in the new marriage.

Shawn Morris:

Yeah. I mean if you’ve had a change of life status, let’s go make sure and get those beneficiaries updated.

Karl Eggerss:

Yeah. While we’re on the to dos, you’ve got another to do on your list I see.

Shawn Morris:

Yeah. And I think probably this one is just really, once again, just going through and making sure number one, that you have a will. I think that’s… we had a colleague that has a friend that’s a doctor and this COVID-19 really prompted the doctor to say, “Hey, I need to make sure, I’m on the front lines, I need to make sure that my will is in order, that my estate plan is in order.”

With this just heightened risk of even though it’s probably not as fatal as maybe we’ve been led to believe, it is still a risk. And so it’s just a good time. Most people don’t like talking about death, and so they avoid their estate plan. Sometimes attorneys are the worst.

Karl Eggerss:

Well, attorneys, should be a lot of attorneys aren’t as busy right now.

Shawn Morris:

Right.

Karl Eggerss:

And it may be easy to get in, and if they’re offering virtual-

Shawn Morris:

Yeah.

Karl Eggerss:

You can get this done.

Shawn Morris:

And a lot of attorneys are, they’re offering virtual, they can do it over the phone. It’s just a really good time to go in and look at your will, at your estate plan. Obviously, there’s been some changes over the last few years regarding that.

I mean just if you haven’t reviewed your will in a while, it’s a good time to do that. But I think in addition to the will itself, your

Karl Eggerss:

… medical directives and your advanced directives, you want to understand with an advanced directive that… you want to make sure that, Hey, I get COVID-19, I have to go on a ventilator, that your advanced directive doesn’t say do not put on a ventilator.

Shawn Morris:

We know the medical stats that we’ve heard is 80% of people that go on ventilators that have COVID-19 don’t come back off, and have you changed your mind? You had your will set up 20 years ago, and now you have a different perspective on all types of things. And so that’s a really important one, especially with COVID-19.

Karl Eggerss:

Those are some just things that you just may not be thinking about, things you may have never heard of. One that’s maybe common sense, but you haven’t really thought about it is just going back and looking at, am I still on track? There’s a provision in one of our financial planning softwares, and it stress tests your plan with a 20% market decline. Hey, guess what? We had a 20% market decline. Are you still on track? That’s just a pretty quick easy one and maybe that means-

It’s an easy one if you have a plan set up-

Shawn Morris:

That’s true.

Karl Eggerss:

There are some tweaks people may have to do, even adjusting spending for a while. And let’s face it. I mean, most people I’m talking to, they’re going through deflation right now. They’re spending less because they can’t go spend that’s from a planning standpoint, that’s a good thing. That’s now not what people are retiring for so they can spend less and hunker down, but it does help a financial plan. And the good news out of this, anytime there is a recession, is that inflation is probably going to be lower for longer now. And so there’s a lot of costs that just aren’t going up. We know there’s plenty of other costs that are, depending on what your lifestyle is, but a lot of things aren’t going up that fast right now in terms of cost. And so that’s a good thing, especially for retiree, there’s inflation and there’s taxes. And if you can minimize both of those, that really, really helps out a situation.

Shawn Morris:

Well and I think that addresses another something that’s important as looking at your cash reserves. Do you have that three to six months stored up of cash reserves? And if you are one of the ones that’s fortunate enough to have money left over at the end of the month, because you’re not spending as much. Don’t just let it sit there and get spent like a found 20 in your pocket. Next month, when you get out released back to the wild, put it, invest it, stick it somewhere. So that once again, you’re taking advantage of markets that are down. If you’ve got cash, that’s above your cash reserves, what a great time to go and buy in into the market?

Karl Eggerss:

Yeah, this is probably the best lesson that I’ve taught my kids through all this is that, this is where rainy day funds come into play. Most people don’t touch the rainy day funds, but guess what? If you have a temporary stoppage and pay for a month or two, which nobody would have fathom this would have happened this way. It did happen. That’s where the rainy day has come in, because plenty of places are saying, look, I have to lay you off temporarily, and we’re going to hire you back when we can. And so that money that’s sitting there is being used and we know, I don’t have the stat in front of me, but I want to say half Americans don’t even have a thousand dollars in a rainy day fund. And so most Americans are living paycheck to paycheck, right? Most of our audience is not in that situation, but it’s an excellent lesson, especially if you’re somebody that’s older, talk to your grandkids about it right now. If you’re a parent, talk to your kids about it, because it is a huge lesson.

It’s something they can understand. They can see it. My son had a DJ business and has a DJ business. He hasn’t been able to do any weddings, parties, anything like that. So he’s seen that, Hey, guess what? Even for you, 18 years old, you’re your income stopped what you used to do. So now he’s doing a bunch of odd jobs, what he can do to earn a little extra money. And so I think those practical lessons are really good right now. There’s a lot of lessons that came out of this. To me, that’s the most important one is have the rainy day fund, except that you’re not going to make a reasonable return on it and just stick it in there, leave it alone and move on.

Shawn Morris:

And replenish the rainy day fund, if you’ve had to tap it. Make plans for rebuilding that back up. And then if you have extra leftover, let’s talk about putting it to work. And some assets that are undervalued.

Karl Eggerss:

Well yeah, people’s expenses have fallen and they haven’t lost their job. They may be having a surplus and they may be having extra money, and of course we know behaviorally people are going to hunker down and build up too much of a rainy day fund. But to your point, get that invested if you’ve already reached that cap and take advantage of this market, there’s a lot of good practical things you can be doing right now. Shawn Morris certified financial planner, thanks for joining us here for bad.

Shawn Morris:

You bet. Thanks Karl.

Speaker 3:

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