As the 2018 New Year got underway, I spent most of the month of January writing about the unhealthy parabolic price increases that were occurring across many asset classes, and simultaneously examining where the current sources of value and sound investment opportunities resided. If you did not have a chance to read these missives, I encourage you to let me know and I will add you to the Weekly Observations email I write each Friday.
The broad U.S. stock market parabola I discussed at length in my January 20th letter came to a conclusion in February, as the stock market abruptly fell 10% and initiated a new season of volatility that continues as I write this letter.
However, of even greater interest to me was the continued rise in interest rates, which accelerated during February. This caused two important moves. First, it meant that the price of bonds declined at the same time that stocks were declining, making it difficult for investors to find a safe-haven outside of cash and commodities or gold. Second, it meant (and means) that investors are finally receiving at least a nominal rate of interest on their cash equivalents and short-term bond holdings going forward — a welcome change for patient value investors.
As the first quarter closed, the year-to-date returns across all asset classes ranged from -6.0% in real estate to +2.1 in gold, with the majority of assets posting modestly negative returns.
The three asset classes with the highest returns — gold, commodities, and emerging markets — will come as no surprise to those of you familiar with my writing and our approach to investing based on a value driven selection of asset classes. These were among the worst performing assets in the years leading up to 2016, and became widely shunned by investors — an ideal investment setup if you prefer to buy low and sell high.
On the other end of the spectrum, real estate has declined nearly 30% since last July, including the 6% loss during this past quarter. While we own very little in this asset class currently, it is one I am watching for signs of price stability and value. Given the recent sell-off and an attractive dividend yield, it is possibly approaching the criteria for a sound investment opportunity.
Given the recent uptick in volatility across all stock markets and bond markets, and a significant increase in the pace of the political and economic news cycles, I will continue to frequently address these asset classes and our specific holdings within them via my Weekly Observations email. There are seasons where a quarterly letter can cover all the important information, and seasons where it is simply necessary to evaluate investments more in real-time — this season is the latter.
Now that tax season is behind us, we are coming up on my annual request for copies of tax returns from our planning clients. As we receive your tax returns, here are steps that we will take to complete a thorough review.
- We review each line item from your tax return and evaluate your gross income, adjusted income, marginal tax rates, effective tax rates, deductions, carryforwards, and other factors. We are looking for tax savings opportunities for the coming year based on where these numbers land in relation to dozens of thresholds embedded in the tax code, and also for last year’s credits and deductions that may have been missed based on our knowledge of your situation.
- Once the review is done, we will summarize our findings in a letter describing the tax strategies available to you in 2018 that are consistent with your planning goals. These could include taking advantage of the 0% tax rate on dividends and capital gains, charitable giving strategies, maximizing your use of the standard deduction, maximizing retirement plan contributions, and others. We also invite you to schedule a meeting by phone or in-person to discuss each of these.
- Finally, so that you don’t need to worry about remembering all of this in the coming year, we create pending tasks in your file for each next step needed to take advantage of these strategies. We’ll be in touch throughout the year with reminders, guidance, and handling any needed paperwork.
As we conduct annual financial planning reviews for each client, we are now adding a recommendation to work together to complete a plan to address advance directives, caretaking, and other financial and medical concerns that will come into play as a client either ages or otherwise enters a period of declining physical and mental independence.
This is something that happens to almost all of us at some point, and we need a plan in place to ensure you and your loved ones are well-served during these seasons. These are also matters that can only be effectively addressed before a life-altering event occurs and it is no longer possible to make decisions for yourself. I am looking forward to having these conversations with you.
During the first quarter of 2018, I modestly expanded our service area into Ohio and now have an office for client meetings in Cincinnati in order to better serve our existing clients and to help serve an increasing number of new clients in the Midwest.
As always, I want to thank you for your confidence and for allowing our work to impact your life. I am continuously grateful for the opportunity to serve you.
Kenneth Klabunde, MSFP, CFP®
Founding Principal and Chief Investment Officer
Precedent Asset Management
Indianapolis | Cincinnati