News
Saturday
Sep292018

Investing & Buying into the Driver-less Car Revolution

Clients and prospects talk to me all the time about their current car ownership picture and future purchase needs. Most seem wedded to the traditional model of one car per spouse, plus a car for each licensed child living at home. While the use of car sharing services such as Uber and Lyft are going full tilt, not many are thinking about the coming driver-less revolution. Most are not quite ready to give up their current car ownership habits.

But if you're in the market for a new or used car either now or in the near future, or just interested in investing in the future of autonomous auto-making, this might help change your thinking about being a multiple or even single-car family. I've borrowed much of a recent write-up from Jon D. Markman (used with permission).

From ownership to propulsion and operation, car making is at a point of inflection. Power brokers are scrambling to find new business models, and slow the process.

CNBC ran a story a few weeks ago about public frustration with Alphabet’s (Google) self-driving car program in Arizona. The robot vehicles are so cautious that human drivers can’t see their utility.

It’s disinformation passing for common sense. For investors, it’s dangerous.

Global sales of passenger vehicles reached 78.6 million units in 2017. Toyota Motor, the largest manufacturer, logged sales of $265 billion last year. This business is being disrupted right now. The same is true for auto parts, dealer networks, maintenance and repair infrastructure and the five-trillion dollar oil industry.

None of these deep-pocketed interests benefit from cars quickly becoming more safe, reliable or electric. They need to slow down the process, while they look for and find new business models. Stories that promote the myth that new technologies are less safe, and ultimately will do more harm than good, are a help to them.

An Associated Press report about an electric car catching fire became a global news story in June. It helped that the vehicle in question was parked, a Tesla, and owned by a celebrity. However, the story lacked perspective.

In 2015, the most recent year for which records have been kept, the National Fire Protection Association reported approximately 174,000 gasoline vehicle fires. It turns out that gas is flammable--go figure, and prone to spontaneous combustion.

In March, an SUV decked out with the latest sensors, cameras and self-driving software from Uber, struck and killed a pedestrian in Tempe, Arizona. The test vehicle did not slow or swerve. The ride-along human observer did not take the wheel. Video captured from the vehicle showed her looking down at her smartphone moments before impact.

Although, the tragedy became an indictment of autonomous vehicle technology, the National Highway Traffic Safety Administration reported that 5,376 pedestrians were killed in traffic crashes in the U.S. in 2015. Some 129,000 were treated for injury.

The numbers are not surprising. Humans are terrible drivers. We are far too easily distracted by children in the backseat, the radio, or our smartphones. And we are impatient to a fault.

In the above mentioned CNBC story, Arizona drivers complained Alphabet’s autonomous-vehicles (AV) were operating too safely. They didn’t speed. They proceeded cautiously at intersections. One man admitted to driving illegally to avoid getting stuck behind an AV.

Recent data from the California Department of Motor Vehicles reveals 38 accidents involving moving AVs since 2014. The AV was found at fault in only one case.

Driverless Car Revolution 2018-09-25

As a long time writer, I love a good-dog-bites-man story. Everyone does. But the idea that electric cars and AVs are the problem is dangerous, especially for investors. (the image above is a Renault concept car for an autonomous ride-hailing service.)

The automobile industry is headed toward autonomous, electric vehicles. Years from now, owning a car will make no more sense than owning music or movies today. Most legacy business models must change or ultimately fail. Car makers know this.

It’s why every leading car maker is moving production toward electric propulsion. Volkswagen, now the largest carmaker by volume, plans to offer 80 new electric vehicles by 2025. Even Dyson, best known for its snazzy vacuums and fans, is going to build electric cars.

It’s why Volvo and BMW are experimenting with vehicle subscriptions. For a single fee, subscribers get to change cars whenever they want, insurance and maintenance included.

It’s why iconic car brands are pairing with ride hailing startups all over the globe. In the future, selling fleets of vehicles and taking a piece of new Mobility-as-a-Service models, will be the business.

It’s why Toyota will invest $500 million with Uber to develop autonomous vehicles.

It’s why Bosch, the largest auto part supplier in the world, is working with Nvidia (NVDA) to build the trunk mounted supercomputers to power autonomous vehicle software.

And it's why chip and processor giant Intel (INTC) bought Mobileye, which makes software for autonomous driving, last year for about $15 billion. Back then, Intel also announced that it planned to build a fleet of 100 highly automated vehicles to test in the U.S., Europe and Israel. Two million vehicles from car makers BMW, Nissan and Volkswagen will use technology from Mobileye to build high-definition maps throughout 2018. Those maps would then be used by autonomous vehicles for navigation.

This is the state of the car business. The transition is happening. It’s not hype. It’s real.

Investors are doing themselves real harm buying into the idea the technology is faulty, or decades away from adoption. Even if you're not a potential investor in the driverless-car revolution, you might think twice about buying that next or second car to park in your garage. Heck, you might even add a monthly car "subscription" to your Apple Music and Netflix subscriptions one day.

If you would like to review your current investment portfolio or discuss any other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first. If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client is different, and so is your financial plan and investment objectives.

TheMoneyGeek thanks guest writer Jon D. Markman of Markman Capital Insights for his contribution to this post.

Sunday
Aug192018

Is Tax Simplification Just A Kiddie's Play?

You've probably heard by now that the IRS plans to issue a post-card sized 2018 tax form to allow taxpayers with the simplest of returns to file on. While "tax simplification" is an admirable goal, is it really possible when the objectives of the tax code are to meet and balance social, political and revenue goals/needs? Let's just say that, as a CPA who prepares tens of returns each year, I have no worries about job security in my lifetime.

Tax simplification is one of the biggest misnomers coming out of Washington, where Congress purportedly makes it easier for all of us to fill out our tax returns by adding several thousand pages of new rules, rates and lists of things we can and cannot deduct under new lists of circumstances. The most recent version, which includes a complicated deduction for individuals participating in S corporations, partnerships, LLCs and sole proprietorships (with regulations running no fewer than 184 pages); new rules governing the deduction of alimony payments; what new payments can be made, tax-free, out of 529 plans; and restrictions on state and local tax deductions for federal tax purposes, are excellent examples of more complexity, not less.

But one actual reduction in complexity came with reform to the so-called “Kiddie Tax.” Under the old law (warning: get ready for some real complexity), a dependent child under the age of 18, or under 19 who provides less than 50% of his/her support, or a full-time student under the age of 24 would divide his/her income into two buckets: earned and unearned (investment) income. If parents claimed the child as a dependent on their tax return, the child’s standard deduction would be the greater of $1,050 or the child’s earned income (W-2), plus $350 (limited to the standard deduction amount of the parents). If the unearned income was more than $2,100, the investment income—but not the earned income—would be taxed at the tax rate of the highest-income parent. Did you get all that?

Under the new 2017 tax act, each child’s tax is calculated using the tax rates that apply to trusts, rather than the parents’ tax rates. Unlike individuals, trusts have just four brackets for ordinary income: 10% (up to $2,550), 24% ($2,551-$9,150), 35% ($9,151-$12,500) and 37%, with the top rate applied to all income over $12,500. For long-term capital gains, different rates apply.

Of course, that means that children get to the highest tax rate with far less income than, for example, married individuals (where the top rate kicks in above $600,000 in taxable income) or heads of household ($500,000). But at least the calculation is simpler—certainly a rarity in our history of tax “simplification.”

For children with expected investment income greater than $2,550, and especially over $9,150, it's worth examining whether the "income shifting" planning that is currently in place, still makes sense.  Setting up and funding custodial accounts for minors, going forward, definitely won't be as simple as it once was.

If we can be of help with setting up custodial accounts or planning kiddie income, or if you would like to review your current investment portfolio or discuss any other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first. If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client is different, and so is your financial plan and investment objectives.

Source:

https://www.irs.gov/irb/2018-10_IRB#RR-2018-06

The MoneyGeek thanks guest writer Bob Veres for his contribution to this post

Sunday
Jul152018

Second Quarter 2018 YDFS Market Review

I often remind my clients and prospects that judging market performance for periods shorter than a few years, isn’t very helpful. Market returns are simply random over relatively brief periods. However, over longer periods, such as five years, stocks are almost always profitable and offer very good performance. The S&P 500 has finished higher in 91% of the rolling-five-year periods over the last 50 years.

Nonetheless, it's helpful to check back and see how well the markets performed over the past quarter  While the U.S. equity markets suffered a small setback in the first quarter of 2018, the second quarter brought us back into positive territory.

The Wilshire 5000 Total Market Index—the broadest measure of U.S. stocks—finished the quarter up 3.83%, and is now in positive territory for the first half of the year, at +3.04%. The comparable Russell 3000 index is up 3.22% so far this year.

Large cap stocks more than recovered their earlier losses. The Wilshire U.S. Large Cap index gained 3.41% over the past three months, to finish up 2.62% for the first half of the year, while the Russell 1000 large-cap index stands at a 2.85% gain at the year’s halfway point. The widely-quoted S&P 500 index of large company stocks gained 2.93% in value during the year’s second quarter, rallying to a 1.67% gain so far in 2018.

Meanwhile, the Russell Midcap Index is up 2.35% in the first six months of the year.

As measured by the Wilshire U.S. Small-Cap index, investors in smaller companies posted a 7.87% gain over the second three months of the year, and now stand up 7.08% at the half-year mark. The comparable Russell 2000 Small-Cap Index is up 7.66% for the year. The technology-heavy Nasdaq Composite Index finished the quarter with a gain of 6.31%, and is now up 8.79% at the halfway point of 2018. Much of the over-performance of the NASDAQ can be attributed to a handful of stocks such as Amazon, Facebook, Google and Neflix.

International stocks are not faring quite so well. The broad-based MSCI EAFE index of companies in developed foreign economies lost 2.34% in the recent quarter, and is now down 4.49% for the year. In aggregate, European stocks were down 2.74% over the last three months, posting an overall loss of 5.23% for the year, while MSCI’s EAFE’s Far East Index lost 3.24% in the second quarter, down 3.33% so far in 2018. Emerging market stocks of less developed countries, as represented by the MSCI EAFE EM index, went into negative territory for the quarter, down 8.66%, for a loss of 7.68% for the year.

Looking over the other investment categories, real estate, as measured by the Wilshire U.S. REIT index, gained 9.73% during the year’s second quarter, and is just eking out a 1.52% gain for the year. The S&P GSCI index, which measures commodities returns, gained 8.00% in the second quarter, up 10.36% for the year, mainly due to the rising price of oil.

In the bond markets, coupon rates on 10-year Treasury bonds have continued an incremental rise to 2.86%, while 30-year government bond yields have risen slightly to 2.99%. Five-year municipal bonds are yielding, on average, 2.00% a year, while 30-year munis are yielding 3.00% on average. Simply put, at present, investing in bonds with a term greater than 10 years is not rewarding you for the many years of interest rate risk you're taking. That may change.

So what’s going on? There appear to be several forces fighting for control over the investment markets. The current bull market started in March of 2009, and seemed to be running out of steam in the first quarter, before a sugar high—the stimulus provided by the recent tax bill—kicked in for companies that have traditionally experienced higher tax rates. This pushed a tired bull market forward for another quarter, and could do the same for the remainder of the year. A fiscal stimulus in the ninth year of an economic expansion is almost unheard of, but it is clearly having a positive effect: economic activity was up nearly 5% in the second quarter, unemployment has continued a downward trend that really started at the beginning of the bull market, and corporate earnings—with the lower corporate taxes factored in—are projected to increase roughly 25% over last year.

The other contestants for control of the economy seem destined to lose this year and possibly start winning in 2019. The Federal Reserve Board has raised short-term interest rates once again, and has announced plans to continue in September, December, next March and next June. Bonds' share of investors' dollars at some point will overtake stocks as government 10 year bond yields reach 4% or more, making it difficult for stocks to levitate at current levels.

Meanwhile, the labor markets are so tight that there are more jobs available than workers to fill them. Won’t this eventually force companies to share their profits in the form of higher salaries? And there are potential problems with the escalating trade war that America has picked with its trading partners that will almost certainly not have a positive impact in the long term.

Bigger picture, the flattening yield curve—where longer-term bonds are closer to yielding what shorter-term instruments are paying—is never regarded as a good sign for an economy’s near-term future. It’s worth noting that the financial sector—that is, lending institutions—was one of the economic sectors to experience a loss. Banks borrow short and lend long, and there isn’t much profit in that activity when the rates are about equal.

Beyond that, in a good year, corporate earnings would grow around 5%, so one could argue that the economy is now experiencing five years of earnings growth. Add these factors to the doddering age of the current bull market, and you have to wonder how long the party can continue. Nobody knows what tomorrow will bring, but everybody knows that bull (up-trending) markets don’t last forever. This may be a good time to mentally and financially prepare for an end to the long bull run, and to hope it ends gracefully. For our clients, we remain cautious bulls and are keeping our hedges in place. The higher volatility we've experienced so far this year shows no sign of waning, and the low-volume summer trading season is the ideal time for market shenanigans to show up.

If you would like to review your current investment portfolio or discuss any other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first. If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client is different, and so is your financial plan and investment objectives.

Sources:

Wilshire index data: http://www.wilshire.com/Indexes/calculator/

Russell index data: http://www.ftse.com/products/indices/russell-us

S&P index data: http://www.standardandpoors.com/indices/sp-500/en/us/?indexId=spusa-500-usduf--p-us-l--

Nasdaq index data: http://quotes.morningstar.com/indexquote/quote.html?t=COMP

http://www.nasdaq.com/markets/indices/nasdaq-total-returns.aspx

International indices: https://www.msci.com/end-of-day-data-search

Commodities index data: http://us.spindices.com/index-family/commodities/sp-gsci

Treasury market rates: http://www.bloomberg.com/markets/rates-bonds/government-bonds/us/

Bond rates: http://www.bloomberg.com/markets/rates-bonds/corporate-bonds/

General: https://www.marketwatch.com/story/stocks-see-broad-gains-in-the-second-quarter-but-not-without-turbulence-2018-06-29
https://www.cnbc.com/2018/06/08/gdp-for-second-quarter-on-track-to-double-2018-full-year-pace-of-2017.html

https://finance.yahoo.com/news/jobs-report-4th-july-need-know-week-ahead-191630507.html

The MoneyGeek thanks guest writer Bob Veres for his contribution to this post

Monday
Jun252018

Social Insecurity & Medicare Insolvency?

With about 10,000 baby boomers on average retiring every day, it's not unusual for me to talk to clients and prospects who are anxious about the future of social security and medicare. Some clients, despite evidence and advice to the contrary, have gone ahead and filed for social security benefits even if it meant they would potentially reap hundreds of thousands of dollars less over their lifetimes, because they are worried that the systems are going "bankrupt".

Given the stories and rumors that seem to float around endlessly about the imminent demise of social security and medicare, it is understandable that many were alarmed when, on June 5, the good people who run Medicare and Social Security released a report that said that the Medicare program will become insolvent in 2026 and Social Security will face a similar fate in 2034. The Medicare projection is three years earlier than the previous report, while the Social Security projection is unchanged from previous estimates.

These problems are not new, of course. People are living far longer than anticipated when Social Security was created in 1935; in fact, the average life expectancy for a person who managed to reach age 30 at that time was age 68 for men and 70 for women. Today it’s 79 for men and 82 for women. Meanwhile, Medicare has been hit with higher-than-inflation increased medical expenses—along with, of course, those longer lifespans.

Alarmists point out that the Social Security and Medicare Trust Fund reserves are “invested” in government securities, which is essentially the government writing itself an IOU—currently to the tune of $2.8 trillion, which is the total “asset reserves” in our largest social programs. Individuals are advised not to run their own finances this way, accumulating deficits but meticulously keeping slips of paper around which represent a promise to pay back every single nickel and dime eventually. But in fact, today nearly all of the money paid out to Social Security recipients, and on behalf of Medicare enrollees, are simply transfers of money paid into the program by current workers. The money comes in as FICA payments and taxes on Social Security benefits, and goes right back out the door to beneficiaries. We've all heard the expression that "our government is running the world's largest Ponzi scheme".

So where’s this alleged deficit? That can be found on page 9 of the report, in a section labeled “Assumptions About the Future.” There, the report makes economic projections about the next 75 years, including the future fertility rate (children per woman), mortality, the annual percentage change in worker productivity, average annual wage increases, inflation, unemployment and the interest rate earned by those IOUs the government is writing to itself. Page 18 shows a graph that illustrates the projected outcomes of three different sets of assumptions for all these (basically unknowable) variables, and one can see that two of them are, shall we say, not optimal, while the third projects not just solvency, but actual prosperity for the combined trust funds going forward well past the year 2090.

Social Security Solvency 2

Even if the worst case comes to pass, and the programs goes “bust,” they won’t actually stop paying benefits. There will still be workers who pay in FICA taxes, and even if there is no trust fund, these collected payroll taxes can be transferred, as they are now, to Social Security and Medicare recipients. The Social Security trustees report, on page 58, how much of the projected payments would be covered by workers going out to 2090 under the three future scenarios. The worst case scenario says that there will be roughly an 18% shortfall in 2040, rising to roughly 22% by 2090. Basically, that means that Social Security recipients, worst case scenario, would have to get by on 82% of the benefits they were expecting in 2040, and 78% if they manage to live all the way out to 2090.

And, of course, that’s if nothing is done to shore up the program between now and then. One of the simplest options on the table is to raise the age people can collect full retirement benefits as the average lifespan goes up, basically “indexing” retirement benefits to changes in longevity. Congress could also marginally raise FICA taxes (e.g., the taxable wage limit) or impose more taxes on Social Security income. Minor tweaks to the system can add decades to the solvency of social security and medicare.

The best advice here is not to panic about the fate of our country’s social programs. There is no question we need to address their solvency, and with gridlock in Washington, that seems like a bit of a long shot. But even if Congress can’t agree on tweaks and fixes, the world won’t come to an end. Social Security and Medicare recipients will have to tighten their belts a bit—and maybe start voting for candidates who offer real solutions to the budget issues in Washington. But as I've told my clients for years, no one is going to vote for anyone who favors allowing the system to go bankrupt, or not pay the promised benefits. Members of congress really like keeping their jobs, and eventually they'll find the right solutions.

If you would like to review your current investment portfolio or discuss any other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first. If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client is different, and so is your financial plan and investment objectives.

Sources:

https://www.ssa.gov/oact/TR/2018/index.html

https://www.infoplease.com/us/mortality/life-expectancy-age-1850-2011

https://www.nola.com/national_politics/2018/06/medicare_finances_worsening_tr.html

The MoneyGeek thanks guest writer Bob Veres for his contribution to this post

Sunday
Jun102018

Adding inSALT to Tax Injury

Ever since I became a tax preparer in 1980, a federal deduction for state and local income, property or sales taxes have been available to taxpayers as an itemized deduction, generally without limitation. The idea behind the deduction, at least as it relates to state income taxes, is to grant taxpayers some degree of relief from double or triple taxation of the same income.

Of course, each year, thousands of professionals use their creativity and ingenuity to try to figure out the best ways to lower your federal taxes, including optimization of your state and local tax deduction. You know you’re living in interesting times when state lawmakers join that crowd.

The reason they’re working so hard is something popularly known as the SALT (State And Local Taxes) provisions of the new Tax Cuts + Jobs Act, which set a firm $10,000 limit on the deductibility of state and local taxes. That limit isn’t such a big deal for residents of Texas or Florida, and other states that don’t collect income taxes. But people living in New York, New Jersey, Connecticut and California generally pay far more than $10,000 of income taxes to the state alone, on top of the property and municipal taxes they’re assessed.

Those higher-tax states are now using that aforementioned creativity and ingenuity to help their citizens get back those deductions—and some of the proposed solutions are indeed quite creative. For instance, New York has already begun allowing taxpayers to, instead of paying their local property taxes, simply make a comparable charitable contribution to a charity set up by their local school district. Presto chango! What used to be a tax is now a charitable contribution that would be deductible for taxpayers who itemize (limited to a maximum of 50% of adjusted gross income). The state would also allow New York City and other municipalities to set up their own charitable trusts, converting local taxes into deductible charitable contributions as well.

Not to be outdone, New Jersey and Connecticut are attempting to reclassify state taxes as charitable contributions, while New York plans to allow taxpayers to convert their state income tax into a payroll tax, which their employers would pay on their behalf—and then deduct from their federal tax bill.

Even more creative: California’s Senate Bill 227 would create something called the “California Excellence Fund,” which would provide a credit against state income tax liability for any contributions to the fund—effectively recharacterizing as much of the state tax liability as the resident wants into deductible charitable donations. Similar legislation has been introduced in Illinois, Nebraska and Virginia. In Washington state, which doesn’t levy an income tax, a copycat bill would let taxpayers make charitable contributions to the state and receive a sales tax exemption certificate in return.

The most complicated solution is being proposed in Connecticut, whose legislature is finalizing a bill that would impose an “entity-level” tax on pass-through companies like Subchapter S corporations and LLCs—entities which normally are only taxed at the shareholder level. (Hence the name “pass-through.”) Those entity-level taxes would be deductible by the S corp. or LLC, and the state would issue an offsetting individual income tax credit to shareholders of the entity. Presto! The state income tax becomes deductible at the company level, and the individual’s state income tax obligation goes away. Connecticut’s Department of Revenue Services estimates that this provision would recover $600 million in otherwise-lost SALT deductions for state residents in the first year alone.

Is any of this legal? We don’t know yet. The IRS has recently issued a broad warning against states’ creative use of charitable contributions, and it never helps a future tax court case when lawmakers openly tout their intentions to evade the federal SALT provisions when they introduce state legislation. But tax experts note that the IRS has provided favorable rulings in more narrow cases regarding the federal deductibility of state tax credits in 33 states.

For instance, Alabama has, for years, provided a 100% state tax credit for taxpayers who donate money to organizations that give children vouchers to attend private school. New York’s new SALT-related provision would give an 85% state tax credit to residents who donate to a local charitable fund that supports education. Is one legit but the other not?

There's little doubt that some of these provisions would be challenged in court, so get ready for some of your tax dollars to be spent to help the government keep and collect more of your tax dollars.

If you would like to review your current investment portfolio or discuss any other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first. If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client is different, and so is your financial plan and investment objectives.

 

Sources:

https://www.nytimes.com/2018/05/23/us/politics/irs-state-and-local-tax-deductions.html

https://taxfoundation.org/more-dubious-salt-workarounds/

https://www.bondbuyer.com/news/eight-states-may-follow-new-yorks-workaround-for-salt-deduction-limits

http://www.taxanalysts.org/content/connecticut-finds-salt-workaround-would-actually-work

The MoneyGeek thanks guest writer Bob Veres for his contribution to this post