Wealth Management Blog

Turmoil Sells

By JJ Burns

March 23, 2018

Tariffs, trade wars, interest rate hikes, the Facebook data scandal, the omnibus spending bill…Today’s headlines are filled with market turmoil and it appears that everyone is tuning in. The question many investors are asking is “Should I be concerned and if so what should I do about it?”

The market is volatile, there’s no doubt about that. Volatility is normal, it is to be expected. The challenge that many investors face is that they are bombarded on all fronts by stories, opinions and so called expert recommendations. In today's on-demand era, “wait and see” can be a frustrating tactic. Yet consider it this way: Markets discount widely-known information. Expectations for $60 billion in tariffs and corresponding retaliation from China are probably baked into prices now. If Thursday’s volatility is any guide, investors are generally unhappy with this possibility. But as markets look forward, they move most on the gap between expectations and reality. Compared to what people evidently fear today, even watered-down tariffs would be a positive surprise. Heck, even simple math might be a positive surprise: $60 billion amounts to just 2% of total 2017 imports. That’s not a lot. If China retaliates in kind, they would apply further tariffs to just 2.6% of the US’s total 2017 exports which is also not a lot. Seems to us like there is a lot of room for negative sentiment to catch up to a more benign reality.

Most people are long term investors who are targeting a specific rate of return based on their individual goals. What people often forget is that when targeting an annualized rate of return you will have vast differences in year over year returns. In fact, there are few years when either stocks or bonds delivered returns that are even close to the market averages.

To illustrate this point, between 1926 to 2016 the annualized return for U.S. stocks was 10.16%. During that time returns fell within 2 percentage points of the annualized return of 10.16% in only 6 of the 91 years.

When considering the U.S. bond market, between 1926 to 2016 the annualized return for the U.S. bond market was 5.37%. During that time returns fell within 2 percentage points of the annualized return of 5.37% in 24 out of 91 years.

Financial markets, particularly stocks are inherently volatile over the short term, as we are once again experiencing.

When we understand, and come to peace with this data, we can begin to understand equity volatility as a positive phenomenon, and in fact the reason for the premium return from equities. The term “volatility” refers to the relatively large and unpredictable movements of the equity market, both above and below its permanent uptrend line. Equities can, and frequently are, up over 20% one year and down 20% the next, and vice versa. However, if we accept that the long run returns of equities will approximate the past return, we begin to understand that these periods of downside volatility must likewise at some point be corrected by a period of upside volatility, greater than the long-term average of roughly 10% per year.

The premium returns of equities are, therefore, the efficient market’s way of pricing in adequate compensation for tolerating such unpredictability. Volatility is the reason equity investors are rewarded over time with premium returns, as long as we have the emotional strength to live through it. Volatility is not to be survived, it is to be embraced and thrived upon.

You Have a Plan

The very best investors have a disciplined approach to making portfolio decisions, and always stick to their plan, no matter what the rest of the world is doing. They are able to live through the peaks of euphoria, as well as the depths of terror, with a healthy understanding that a well-designed written investment and financial plan will get them through both.

No predictions. No witch doctor investment sorcery or magic investing formulas. No “Black Boxes.” Just hard work, patience and discipline.

Turbulence in the Markets

By JJ Burns

February 10, 2018

“Ladies and gentlemen this is your Captain speaking. It appears we’ve hit a bit of turbulence.  For your safety and for those around you, please stay calm, seated and keep your seatbelts securely fastened”.

If you fly enough, you have undoubtedly heard an airline Captain say these words.  Many passengers would find it more comforting to hear the Captain say the following:  “This turbulence is normal and is to be expected. We never know when it will hit or how long it will last, yet it’s important for everyone to know that we built this into our flight plan before takeoff.  Please know that we are making the necessary adjustments to our flight plan which are based on the fundamental principles of flying.  I understand this can be a bit frightening, however it is important that everyone remain seated and calm. While I also know that it feels like this time it’s different, it’s not. This is normal and we will pass safely through it.  And as a friendly reminder, we’ve experienced this turbulence many times before during our flight and we’ve always made it through okay.”

The same advice can be given about the recent events in the financial markets.  Turbulence must be expected and investing is never a smooth ride.

The volatility we are experiencing this week is normal. In fact, since the beginning of this prolonged bull market which began in 2009, there have been 9 times that we have experienced this type of volatility.  The three most recent pull backs are highlighted below:

  • January 2016 – Over the course of three weeks the S&P Index was down 11 percent and by April of that year all the January losses were gone.
  • August 2015 – A 1,000-point drop in the DJIA on August 24th. The S&P lost 11 percent over the course of six sessions only to recover the losses in the next two months.
  • October 2014 – There was a 460-point rout in the Dow average on Oct. 15, widening a selloff that started a week earlier to 5 percent. The rout faded as quickly, and the Dow recouped all the losses in the next two weeks.

Even for the most disciplined of investors, this week’s market volatility is bound to strike up some negative emotions. This is completely normal. The key is to not act on those emotions or make irrational decisions.

What is causing these market moves?

  1. U.S. equities have had an unprecedented run and we were overdue for a correction.  Since the election in 2016, the S&P 500 gained 32% peaking on January 25th without any substantive pullback.  In the month of January alone, the S & P 500 ran up 7.4% to a new high before experiencing the current market turbulence.  These upward moves, while pleasant to investors, are unsustainable without consolidation.  Even though the economy looks promising going forward, corporate profits are rising, and tax cuts should spur additional growth, the financial markets simply got ahead of themselves.  The economic fundamentals are still intact and we see no signs of a slowdown on the horizon.
  2. Investors had become complacent.   As the equity markets reached new highs, many more investors piled in pushing the markets up further.  We saw risk parameters of investors change, eschewing the safety of bonds for big gains in equities.  These investors lost sight of the fact that stocks could be volatile and as quickly as they piled in, they are retreating.   Additionally, the Bitcoin phenomenon has taken on a life of its own.  We believe this is the epitome of speculation.  Speculators piled into Bitcoin driving it up to over $19,000 looking for quick gains.  Most people who invested in this cryptocurrency did not understand the fundamentals, they did it to make a quick buck.  As of this writing Bitcoin is valued at $8,300.  The risk of stock investing was not enough for these cryptocurrency speculators, they wanted more risk and got burned.  We do not invest in cryptocurrencies at JJBCO but we use investor sentiment in it as a gauge of fear and greed in the overall markets.
  3. Interest rates have been rising and this has a tendency to scare equity investors.  Since September of 2017, the yield on the 10 year US Treasury Bond has increased from 2.06% to 2.85%.  Why would this be a concern?  Markets get nervous when yields rise because of competition for investment dollars.   If an investor has an opportunity to lock in guaranteed income at higher rates they may be less likely to take the risk of investing in stocks.  We believe the orderly increase in bond yields is a good thing.  It shows that the economy is strengthening and it will allow our clients who need retirement income to meet their needs without subjecting themselves to undue equity risk.

At the end of the day this market turbulence we are experiencing is not unprecendeted….it is normal.  Yes, it is unpleasant to go through and it will shake some weaker hands out of the market.  The key is to have a target allocation and a plan.  Many investors just react with emotion because they do not know what they are investing in or the goal they are investing for.   We build portfolios on sound fundamental principles of investing which include:

  • Asset Allocation – The long term mix in your portfolio of stocks, bonds and cash.
  • Diversification – Within each asset class holding a globally diversified portfolio built upon the dimensions of returns.
  • Rebalancing – The simultaneous buying and selling of assets to maintain your target allocation and manage the risk inside your portfolio.

What happened in the markets over the last two weeks is normal.  There is no need to panic.  The fundamentals of the economy have not changed.  If you have any questions or wish to speak to us directly please feel free to contact us.

On behalf of your NY based flight crew, this is your Captain signing off.

As Goes January, So Goes the Year?

By JJ Burns

January 31, 2018

As the year begins, the pundits and talking heads are out in full swing with their predictions for 2018. But can anyone really predict the future consistently and predictably? Much of what investors see in the financial media is just noise. Some of that noise appears to be based on fundamentals but when one digs deeper, this is rarely the case.

For example some of the more popular headlines are about the “January Indicator” or “January Barometer.”

This theory suggests that the price movement of the S&P 500 during the month of January may signal whether that index will rise or fall during the remainder of the year. In other words, if the return of the S&P 500 in January is negative, this would supposedly foreshadow a fall for the stock market for the remainder of the year, and vice versa if returns in January are positive.

So have past Januarys’ S&P 500 returns been a reliable indicator for what the rest of the year has in store? If returns in January are negative, should investors sell stocks? The chart below shows the monthly returns of the S&P 500 Index for each January since 1926, compared to the subsequent 11-month return (i.e., the return from February through December). A negative return in January was followed by a positive 11-month return about 60% of the time, with an average return during those 11 months of around 7%.

This data suggests there may be an opportunity cost for abandoning equity markets after a disappointing January. Take 2016, for example: The return of the S&P 500 during the first two weeks was the worst on record for that period, at -7.93%. Even with positive returns toward the end of the month, the S&P 500 returned -4.96% in January 2016, the ninth-worst January return observed from 1926 to 2017. But a subsequent rebound of 18% from February to December resulted in a total calendar year return of almost 13%. An investor reacting to January’s performance by selling out of stocks would have missed out on the gains experienced by investors who stuck with equities for the whole year. This is a good example of the potential negative outcomes that can result from following investment recommendations based on an “indicator.”

Conclusion

Over the long term, the financial markets have rewarded investors. People expect a positive return on the capital they supply, and historically, the equity and bond markets have provided meaningful growth of wealth. As investors prepare for 2018 and what the year may bring, we should remember that frequent changes to an investment strategy can hurt performance. Rather than trying to beat the market based on hunches, headlines, or indicators, investors who remain disciplined can let markets work for them over time. At JJ Burns & Company, we adhere to a disciplined investment strategy focused on broad global diversification, asset allocation, rebalancing, dollar cost averaging and managing costs.

Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Past performance is not a guarantee of future results. Diversification does not eliminate the risk of market loss.
There is no guarantee investment strategies will be successful. Investing involves risks including possible loss of principal. Investors should talk to their financial advisor prior to making any investment decision. There is always the risk that an investor may lose money. A long-term investment approach cannot guarantee a profit.
All expressions of opinion are subject to change. This article is distributed for informational purposes, and it is not to be construed as an offer, solicitation, recommendation, or endorsement of any particular security, products, or services. Investors should talk to their financial advisor prior to making any investment decision.

Being Smart When Giving to Charity

By JJ Burns

November 14, 2017

There are many ways making donations can reduce your taxes, but how do you start a planned giving strategy? Which charities should you support? What type of assets should you donate? These are questions to consider. It’s also important to make sure your donation aligns with your values and fits in with your overall financial picture.

Giving to charity can often begin with something close to your heart. For instance, this year JJ Burns & Company participated in The Leukemia & Lymphoma Society’s (LLS) Light the Night Walk in honor and memory of my late father, James Burns.

He was a police officer and the day he sat down and showed me those blood test results it started a journey that changed my life. Through the darkness, LLS brought light and supported our family and especially my dad. Now we support this organization that touched our lives so personally.

Choosing Causes

Participating in an event like this is only one way to make a donation. There are many causes to support. Write down what matters to you. Think about things close to your heart you feel are important. Involve the whole family. Make a list, then select three or four ideas to start. Now think about what impact you would like to make for these causes.

Choosing Charities

Begin with more familiar groups. You can shift or expand your contributions as you become more comfortable with other organizations and as you define your financial goals. Start with charitable information services such as GuideStar.org, the BBB Wise Giving Alliance (Give.org), and CharityNavigator.org. Some allow you to review data, while others provide ratings for charities.

Tax Considerations

Time and money are not the only ways to make a donation. You can leverage your gift to support the charity and help you for the most tax benefit at the same time. Using our collaborative wealth management approach, we can work with your accountant to help analyze and explain your options.

Timing Donations

Spread your donations throughout the year. This gives more time to evaluate the charities—and more time for the organizations to process your paperwork. If you have special requests or require appraisal before transfer, processing will likely be easier and quicker before the end-of-year rush.

Giving Options

Donor Advised Fund (DAF)

Are you just donating cash, or are you also considering stocks and other financial instruments? One way to increase your donation options and help create more tax benefit for yourself is with a donor-advised fund (DAF). A DAF is established at a public charity. You make contributions as often as you like and receive an immediate tax benefit. The gifts can be invested and grow tax-free. Over time, you recommend grants from the DAF account.

Annuities (CLAT & CRAT)

A charitable lead annuity trust, or CLAT, pays a charity a set amount of money over a period of time. At the end of that period, any remaining money is paid to you or your family and are free from gift and estate taxes.

A charitable remainder annuity trust, or CRAT, is the opposite. It pays you and your family a set amount over a period of time. The charitable organization receives the remaining money at the end of the period.

Activating Your Plan

Take all your notes to your financial team. At JJ Burns, we will review your ideas and see how to help you meet your wealth management goals, while also supporting the causes you feel passionate about. By collaborating with all members of your financial circle, we can help you maximize your impact and work toward your greater good.

What to Know When You Own Multiple Homes

By Anthony LaGiglia

October 11, 2017

Whether it’s going away for the weekends, for a month, or for an entire season, having a second or third home can be a blessing for families that creates lasting memories. It can also come with some significant financial considerations.

Moreover, if you’ve purchased multiple properties for investment purposes, once you get into your retirement years, you’ll want to figure out how to make the most of your portfolio of property investments to generate a steady stream of income.

Here are some key issues to think about:

Plan and Manage

In this case we mean planning about your properties—not your stock investment portfolio. Who is going to be your partner in managing the properties? If your family is not interested in management, is it worth it to hire a property manager? Secondly, do you want to eventually gift your properties to members of your family? Who can walk you through the process and give you solid tax and financial advice?

We hear about many people who spend hundreds of thousands of dollars a month renting luxurious estates and apartments. That’s certainly wonderful if you are the landlord. However, you may not have the experience or time to manage all the business aspects of such a transaction. Consider hiring a knowledgeable financial advisor who can give you the full perspective of owning and managing multiple homes, and refer you to other qualified professionals to make the most of your real estate investments.

Understand Tax Planning

When you own multiple properties, you can deduct the interest on your mortgage just as you can with your primary home mortgage. According to tax law, you can write off 100% of the interest you pay up to $1 million of total debt, which includes the mortgages on homes, as well as money spent on any improvements.

Deduct Your Property Taxes

In addition to mortgage interest, you can also deduct your homes’ property taxes. The good news is that unlike the mortgage interest tax deduction, there’s no dollar limit on the amount of real estate taxes that can be deducted on the homes that you own.

Rent Out Your Homes

For many people who own multiple properties, it makes sense to rent out your empty home when you’re not there. If you rent out your home for 14 days or less during the year, that rental income is tax-free.

However, if you intend on using Airbnb, other rental sites or a real estate broker for more than 14 days after your private rental, it’s important to know that this income is taxable. You'll want to calculate the number of days you rented your home and divide that by the total number of days you or a renter used your home. This is where an advisor like JJ Burns & Company, who’s coordinating with your accountant, can help you make the most of mortgage interest, depreciation, business expenses and other home ownership issues to stay right with the IRS.

Simplify Your Investments

Rather than own residential real estate that may be inconvenient to manage, many people look to invest in commercial buildings. These properties still generate income and may have similar tax advantages, but if professionally managed, do not require the hands-on responsibilities of home or estate ownership.

Sell It

Depending on your circumstances and the number of properties you have, you may want to consider selling some properties due to taxes, maintenance or the location. You should evaluate which ones generate the most income—especially if you’re retired—and how the sale may impact your taxes.

Something else to think about when selling is how a sale can impact the balance of your portfolio and income-generating investments. At JJ Burns, we can review the full picture of your investment portfolio, pensions, IRA and 401(k)s, rental income, and annuities to give you informed advice about the steps you can take to maximize your current—and future—wealth.

Seek Legal Advice

Retirement planning, real estate, and family law are complex areas that require legal counsel. Unlike working on your homes on the weekends, this is not do-it-yourself territory.

If you decide to keep your properties to generate retirement income—or want to protect your real estate investment portfolio and pass it on to your heirs without going through probate–you can create a Limited Liability Corporation (LLC) or a Family Limited Partnership. Because the laws vary throughout states, counties and cities, it is best to leave the decision to the legal professionals.

We’ve also known about families that have spent fortunes in court, only to be torn apart battling over estates. An LLC gives each family member an equal interest, which avoids future disputes over any properties. There’s also flexibility to transfer shares, consolidate individual properties into a master LLC or into a revocable trust.

Owning a number of homes can definitely enhance your life. And investing in properties is a smart way to bring in income during retirement, as well as diversify your financial portfolio. Whether you intend to manage your properties, sell it, or pass it on to your heirs, JJ Burns can help you collaborate with all aligned professionals to create a tax-efficient plan that works best for you and your family.