Ironwood Recap – Week of October 7th, 2019

Ironwood Market Recap

This was the first positive week in the stock market in several weeks.   The S+P logged just over a half a percent gain and the Dow Jones gained almost 1%.  The bond market fell as the yield on the 10 year treasury rose by almost a quarter percent to 1.75%

Most of the economic news that came in this week was in line with expectations, doing little to move the market.  The big news was the lower than expected core inflation rate.  This paves the way for more Fed rate cuts if things slow.  The market has begun to price in another rate cut soon.  Additionally we got a positive surprise with consumer confidence being much higher than expected, and hopes of a China deal.

Next week we get some retail sales data as well as housing starts.  More importantly, earnings season kicks off in earnest with about 170 companies reporting earnings next week, giving us a better view of corporate profitability over the last three months and also giving guidance on future profits.

Ironwood Recap – Week of September 30th, 2019

Ironwood Market Recap

The markets this week were much  more volatile, with a bad start to the week being mostly erased by a good finish.  The S+P 500 dropped a little less than 0.5% this week and the Dow Jones was off about 1%.  The big mover was the bond market with the 10 year treasury dropping 1.68% to 1.52%.

The week started poorly with a bad reading on the manufacturing index.  The expectation was for neither growth nor decline, but the actual reading came in showing the worst reading in about ten years, signaling a shrinkage of new orders.  The mid-week unemployment data was slightly lower than expected, but not too dire.  The big news came on Friday when the unemployment rate unexpectedly dropped to 3.5%, the lowest rate since 1969.

Next week we are looking forward to job opening data, wholesale inventories, inflation data, and the consumer sentiment index.  Those data will let us keep an eye on the general state of the economy, and my big fear, that of inflation.  With such a low unemployment rate, inflation could show up, and that would mean the likelihood of further fed rate cuts would shrink significantly.

~ Alex Parrs

Get debt free as soon as possible? Bad advice!

Get debt free as soon as possible? Bad advice!

I spend a lot of time reading articles on the internet about economics and personal finances. The comments are particularly interesting since they give you an idea of what average people are thinking. Something that really astounds me is this absolute fear of debt. I just read an article about a young couple who was making 4 times their minimum monthly payment to their only debt, a student loan, and decided to take a vacation with the money they had saved for that purpose. The comments absolutely blasted them!

It seems, in the eyes of the readers, that people should put every effort into becoming debt free as soon as possible and delay expenses and savings until that happens. Most of the commenters stated that paying off all their debts should have been done before they take a vacation.

I don’t know where this advice is coming from, but it’s just plain evil.

The advice to avoid debt like the plague is short sighted and it will make your standard of living lower.

It will make you poorer.

It almost feels like a conspiracy to keep the masses poor, it’s such prevalent advice. How many billionaires didn’t take on debt? How many billion dollar companies don’t have debt? Debt can make you rich! In fact, it’s almost impossible to get rich without debt.

So you have a choice. The first option is to live as debt free as possible. Assuming you’re an average person with an average income, it will take you years to save up for a house. If you want to pay cash for a house? Good luck! By the time you have saved enough for a house, the price will have gone up so far you won’t be able to afford it. Meanwhile you will have paid people like me tens, if not hundreds of thousands of dollars in rent. Thank you, by the way! If you are willing to get a mortgage and then attack that debt as quickly as possible, you are still selling yourself short. With today’s interest rates, a mortgage is practically interest free after inflation and deductions. Every extra dollar you are putting towards your mortgage is you investing at just over 0%. Does that sound like a good idea?

The second choice, the choice used by most of the rich, is to use debt wisely. If you can borrow at low interest rates to buy an appreciable asset that will grow at a rate higher than the borrowed interest rate, then do it. The only thing you need to worry about is the cash flow. Make sure you can make the payment even in bad situations. The math works out like this. If you can borrow $100 at 4% and invest it at 6%, you are making $2 per year. If those are guaranteed rates, how much should you borrow? As much as possible! Of course, while the borrowed side can be a guaranteed rate, the invested side is rarely guaranteed. In the long run, however, you can find investments that average 6% or more and the math will work out and make you richer. Every dollar of debt you pay off makes your potential net worth lower because you can’t invest that money at the higher rate.

In my personal situation, I got out of college, and one year later bought a house. I financed it. Then I bought a rental house, also financed. The next year, I bought three more. The next year I bought ten more all using debt. By the time I was three years out of college, I had accumulated about two million dollars in debt from mortgages. I owned 14 homes though. The rent from those homes paid the mortgages. A few years later, the financial crisis happened. It was painful, and I had to chip in from my personal income, but I covered the mortgages. Now it’s been almost twenty years, and it hasn’t been a particularly good real estate market over that time, but my renters have been making my mortgage payments for decades. The houses have doubled in price, and the mortgages have gone down. I have collected millions of dollars in rent from other people that has gone to buy me houses. Without debt, it could not have happened.

Yes, debt can be bad if used incorrectly, but don’t let anyone tell you that debt itself is bad. There are of course risks and it doesn’t work every time, but look at ten rich business people’s situations. I bet nine if not ten of them got there using debt.

Don’t let the mass media keep you poor with bad advice.

Like always, if you’re facing retirement and need a second opinion learn about what makes us different, we’ll audit your entire strategy to make sure you have the right tools to make your retirement as low risk as possible and still drive in a good income.

And if you want a further dive into some of the biggest risks with retirement planning then check out our webinar or download our ebook on taking income in retirement.

Three tips on saving money on taxes in retirement

It seems everyone knows how to save money on taxes while working using retirement accounts, but many people completely mess up their tax planning when they are actually retired! All that hard work and planning for years, just to mess it up once you’re retired. There is a ton of conflicting advice about what assets to spend first, which to save for last, how much income to take and so on. This makes deciding what to do very confusing and worse, it can cost you thousands of hard earned dollars.

Thankfully, there are a couple of easy tips you can follow to really make your retirement more tax efficient. Even better, they are commonsense and easy to follow once you learn them!

I can’t even count the conflicting articles I have read about which type of account do you take your money from first in retirement? In my opinion, it’s actually quite simple. Many people are told the best idea is to spend down the non-retirement account completely, and save the retirement accounts for later. This will minimize your current taxes and even potentially make it so you don’t pay hardly any taxes. Unfortunately, even in retirement, you still have to plan for the future! There are two main problems with this strategy. Firstly, you will allow your traditional IRA to grow without touching it, making your RMD’s (Required Minimum Distributions) grow. Those will be fully taxable and could bump you up a bracket. Secondly, if you spend all your non-retirement money first, you are left with few or no choices if you want to make a big purchase. Clients often call up wanting to help their children or grandchildren with a $100k down payment or something. Once they realize they only have IRA’s left and that it will cost them $170k to make that gift, they almost always decide against it. If they have non-retirement accounts left, the answer is usually that they are willing to help out their family.

For most people, their retirement needs are quite modest. They’ve paid off their home, the kids are out of the house and it’s just a couple enjoying their retirement. They can live quite reasonably on about five to ten thousand dollars per month. Let’s assume they have social security payments of three thousand per month and no pensions. Additionally, let’s assume they have a non-retirement account, a traditional IRA, and a Roth IRA.

So what do you do? Let’s look at a couple of examples. First we’ll look at the couple who needs ten thousand per month. After social security, they need an additional seven thousand per month. We don’t want to take all of this money from retirement accounts because that would bump them up a bracket. We also already discussed why not to take it all from non-retirement accounts. The answer of course, is to do a mix. Under the current tax laws, a couple who is not itemizing can have about $100k of taxable income and still be in the 12% bracket. In this situation, we want to take advantage of that fact. For simplicity, let’s assume the three thousand from social security is fully taxable. So that’s thirty six thousand of taxable income. What we want to do is take an additional $100k-$36k=$64k from their traditional IRA. This way we are maxing out the 12% bracket. This still leaves about $1,700 per month that we need to get to ten thousand per month. That money we take from the non-retirement account. The way I look at it, $120k of income and staying in the 12% bracket is extremely generous.

In the second example, let’s say the couple only need about five thousand per month. That’s two thousand over social security. We would still recommend they take that money from their traditional IRA since it’s still cheap money. However, this puts their taxable income at only $60k. That’s leaving money on the table. There’s still $40k left in the 12% bracket that they could be using to maximize their lifetime tax savings. In this case, the answer is a Roth conversion. Why not pay 12% on the money today and never have to pay taxes on it again? In my opinion, 12% is so generous we need to take advantage of it now, before the law changes again! So this couple should take $40k and convert it from their traditional IRA into a Roth. This will lower their RMD in the future, and if they don’t spend the money, make their estate pass more tax efficiently to their heirs.

I keep talking about RMD’s, and in many cases they mess up a person’s tax situation. Particularly if they are frugal. Many people haven’t been spending this much money and then when the turn 70.5 the IRS says they have to take it out and trigger taxes on it. This can make you pay way more in taxes and even bump you up a bracket, something the frugal certainly don’t want. There is a good solution under the new tax law. The standard deduction has increased to the point that far fewer retirees will be able to itemize their taxes. This makes contributing to charities effectively non-deductible, since you don’t get additional deductions by contributing to charities if you aren’t itemizing. Thankfully, we can still make direct contributions to charities using your RMD up to certain limits. This means you can optimize your tax situation by donating straight from your IRA instead of from your pocket. For example, if you give $5,000 to a charity from your pocket, your total deduction is just the standard deduction. If instead you give it directly from the IRA, your total deduction is the standard deduction, but your income is reduced by the $5,000 you gave straight to charity. This effectively makes the charitable contribution deductible again. You do have to remember to check the correct box on your taxes or tell your accountant that you made a direct contribution. It won’t necessarily show up on your 1099.

Hopefully one of these tips will help you save some taxes and make your life a bit more tax free! Of course, this advice is generalized and not suited to every situation, but it can make some of these big questions a bit easier to answer.

Like always, if you’re facing retirement and need a second opinion learn about what makes us different, we’ll audit your entire strategy to make sure you have the right tools to make your retirement as low risk as possible and still drive in a good income.

And if you want a further dive into some of the biggest risks with retirement planning then check out our webinar or download our ebook on taking income in retirement.

Ironwood Market Update – August 19 2019

Dear clients and friends,

The yield curve for corporate bonds has become almost completely flat. What this means is that a 5 year bond is yielding (paying) almost exactly what a 1 year bond is yielding. Normally, you would earn more interest for longer bonds than for shorter ones. Right now, this is not the case, at least on the bonds that we are using. This has happened because the longer bonds have gone up in price, driving the yield lower which is of course a good thing.

We will be selling these longer bonds and moving to shorter bonds. Ideally the yield curve will regain its normal shape or interest rates will go up, at which point we will buy those longer bonds back at a lower price and a higher yield. Since they are currently all earning the same amount, we won’t be giving up potential interest while we wait for this to happen. If interest rates fall farther, then we could miss out on some potential interest, but in our opinion that risk is low.

In the high yield portion of our portfolios, we will be likewise shortening our bond ladders both for this reason, as well as because of potential price risk if recession fears increase.

Overall this is NOT a big move, but we believe it will be a bit safer, as well as hopefully earn a bit more on the fixed income portion of our portfolio once this weird pricing corrects.

As always, please don’t hesitate to contact us with any specific questions or concerns you may have.

Sincerely,

Alex Parrs
Investment Advisor
alex.parrs@ironwoodfinancial.com

Ironwood Market Update – August 15 2019

Dear clients and friends,

The stock market was shaken by an indicator called a yield curve inversion. What this means is that 2 year government bonds were paying a higher interest rate than 10 year bonds. This is unusual and fundamentally shouldn’t be. The theory is that there is more demand for long term bonds because of perceived short term weakness in the economy. This makes the price of the long term bonds go up, and therefore the yield go down.

The reason the market is concerned by this is that there is a high correlation between this indicator and a coming recession. This indicator does not have a 100% track record, however, and the coming recession that it has predicted in the past has taken as long as 2 years or more to come to pass. Historically, after one of these signals, the market drops about 5% and on average rallies about 17% after that, before falling due to recession. To me, that reads as if this is a bullish indicator at least in the medium term.

Another point to take into consideration is that the Fed is playing a huge role in artificially controlling interest rates. This makes any indicator based on these rates suspect.

Our plan at the moment is to wait and see how the market reacts until there’s a larger overall move. There have been some big days, but the overall move from the peak isn’t that big in terms of percentage points. If the drop continues, we intend to purchase more stocks, and keep a close eye on profits to see if a recession actually is looming. On the bond side, our bonds have gone up in value, so we will start leaning more towards the short end of our bond ladder and when interest rates climb once again, we will once again go longer.

As always, please don’t hesitate to contact us with any specific concerns or questions.

Sincerely,

Alex Parrs
Investment Advisor
alex.parrs@ironwoodfinancial.com

Ironwood Market Update – August 2019

Dear clients and friends,

The last week or so in the financial markets have been a bit concerning. The stock market has taken a downward direction once again due to the China trade thing. Recently, the US imposed further tariffs on Chinese imports as a bargaining tool in upcoming talks. These tariffs effectively would make goods from China more expensive. In retaliation, China devalued their currency, thereby making goods from China cheaper to US consumers. From an economic theory perspective, both of these moves are negative. The change in exchange rate is particularly concerning because it raises a great deal of uncertainty as to future moves by China.

From a stock market perspective, we have two concerns. The first one is of course the uncertainty of more politically motivated moves that can affect earnings, and secondly the effect of the already made moves to the profitability of companies.

In my opinion, at least with companies that are US based and derive most of their profits in this country, the first concern is by far the bigger one. After all, as far as the US is concerned, Chinese imports were made both more expensive and cheaper by these two moves. Those moves are opposite and will to some extent lessen or even cancel the overall effect. The uncertainty factor, is as usual the thing that will make the market jump or tumble in the near term. Remember back to the 4th quarter of last year. There was a pretty big drop for no real reason, based on uncertainty over interest rates and the economy. That of course was short lived, as people came to their senses once they had reviewed the real economic data and not just acted based on speculation.

As of right now, we are in “wait and see” mode. It is very likely that all this is just political posturing as it has been the last half dozen times or so over the last couple of years and will just blow over. I do not believe that either the US or China will willingly scuttle its economy over this. It is very likely in the short term that there will be more of a downturn as speculators take advantage of investors’ panic. However, in the long term the market should realize the economy is doing quite well right now.

Finally, and most importantly, “Don’t fight the Fed.” The Fed just lowered interest rates, signaling it has its eye on the economy and is ready to continue its ridiculous level of stimulus if we show signs of economic weakness. Right now, 10 year treasuries are trading below 1.75% per year. Interest rates that low create a huge amount of upward pressure on the economy and the stock market. It is too soon in my opinion to do any large buys, but if this latest political fight pulls the market down significantly, we will be ready to buy.

As always, if you have any questions or concerns, please don’t hesitate to contact us about your particular situation.

What Financial Advisors to Avoid? – Choosing a Financial Advisor in Tucson, AZ – Part 5

Financial Advisors To Avoid In Tucson, AZ

In our final post on the subject it’s time to understand which financial advisors you should avoid, and how to find them.

It seems like everyone these days is calling themselves a financial advisor.

There’s everything from bloggers talking about retiring early or radio pundits, to insurance agents calling themselves full financial planners or “money coaches.”

It’s no wonder it’s confusing.

Probably the most common thing we run into is someone who recommends almost nothing but annuities (AKA an insurance agent), but calls himself a financial planner when in reality they’re anything but.

Which would you rather have?

An insurance agent who only sells insurance or annuities…

…or a financial advisor who’s legal obligation is to put your interests first?

When we tell people the difference, they usually request the latter.

That’s why it’s imperative that you learn to tell them apart, so you can know which ones to seek out and which ones to avoid.

The issue is simple: commission.

Some products pay far more commissions to an “advisor” than others.

Naturally, an advisor who bases their income on how much commission they generate will lean towards those products.

We met a lady whose late husband had been sold over a dozen different annuities.

Here’s why: Each of these annuities has a 10% free withdrawal privilege each year. This allowed her husband to take out 10% per year and do whatever he wanted with it.

What did the advisor recommend?

He recommended taking that 10% from each annuity, every year and using it to buy a new annuity…

It didn’t matter that the new annuity carried a brand-new, decade long surrender charge or that the client would now lose access to their money.

Do you think that was really in the best interest of the client?

To help you out to make sure you can tell different types of advisors apart, here are a few things to look for.

Earlier in our series, we have talked repeatedly about the word, “fiduciary.”

This is a great place to start.

Someone who is acting as a true fiduciary is going to have a really tough time justifying a high built-in commission.

In addition, insurance companies can hide their commissions so it’s hard to know they are there, let alone who actually ends up paying them.

It’s quite simple.

You do.

The insurance company isn’t going to take money out of its pocket to pay the advisor. That would hurt their bottom line.

So, whose bottom line do they want to impact?

Just because a salesperson isn’t a fiduciary, doesn’t by itself mean you can’t trust them.

For example, car salesmen aren’t fiduciaries.

Not all of them are out to harm the consumer. Likewise, there are good, ethical insurance agents.

People need life insurance…in some cases.

The problem is when you the only tool you have is a hammer…everything looks like a nail.

So you need to be able to determine who is actually a broad based financial advisor and who is just a guy with a hammer looking to solve every problem one way.

The first way to determine this is to look at their licenses.

If all a “financial advisor” has is an insurance license, then that’s all he can sell you. I would avoid people who call themselves advisors who can only sell one type of product.

If you look deeper into the licenses a person holds, you get more insight into their structure and what they can sell.

For example, someone who holds a series 6 or 7 license is going to be a commission based broker, whereas someone who holds a series 66 is going to be fee based.

Again, those advisors who are commission based are held to a different standard of what they can sell you as opposed to those who are fee based. They also have different incentives.

The company an advisor works for also tells you something about him.

For example, someone who works for Northwestern Mutual is likely going to recommend Northwestern Mutual products over anyone else’s.

This is also the case in many big names such as Merrill Lynch.

I had an account with them when I was in college. All they recommended were Merrill Lynch branded mutual funds.

Banks are often the same way.

There is no one company that has the best products in all the different sectors of investing. If there were, no other companies would exist!

So why would you lock yourself into one brand of products by choosing an advisor who works for a company that has its own products?

That’s a clear conflict of interest on the part of that advisor.

In the end, remember the tips we went over in the entire series:

  1. Do your research.
  2. Understand the Designations
  3. Ask the right questions.
  4. Decide if you really need an advisor in the first place!
  5. And make sure to avoid anyone with a conflict of interest to your future.

Hopefully these tips will help you feel more confident in choosing the right financial advisor for you.

And if you want to see how we think a financial advisor interview should, then interview us and then go meet a few others.

If they pressure you and don’t allow you to go home and think about it, before making a decision?

Then maybe it’s time to work with someone who will.

Sincerely,

Alex Parrs