8 Key Discussion Topics for your Midyear Financial Check-In

By Andrew Harvey, AIF®, CPFA™

Summer. The season of sand, barbecues, vacations, and—careful examination of your financial situation? At Opus 111 Group, we think the early part of the summer is the perfect time for exactly that. Midyear is a great time to figure out where you are and, more importantly, where you’re going. Below, I’ve outlined several key questions to ask yourself (and your advisor) as you begin this discussion!

Taking the time to examine each of these 8 Key Items and the questions underneath. You can go through them by yourself or with your partner. Take time to think about (and as a best practice, take notes!) your response to each of these questions, and what sort of changes you may want to consider for the remainder of the year.

SPENDING AND INVESTING

  • Can we comfortably afford our current spending?
  • How much have we spent, year-to-date?
  • What areas are we spending more than we anticipated at the start of the year? Can we reduce that spending, if we need to?

GIFTING AND CHARITABLE GIVING

  • Do we plan on giving any gifts to friends or relatives this year? Will those gifts be under the annual gift tax exclusion amount ($18,000 per person per recipient in 2024)?
  • Do we plan to give any gifts to charity this year? Have we worked with our advisor or tax professional to consider the tax ramifications of giving?

ADMINISTRATIVE

  • Do all our accounts have the correct mailing address on file?
  • Are the listed beneficiaries of our accounts who they ought to be, and are those beneficiary designations in line with our wishes or formal estate plan?

DEBT PLANNING

  • What is the current status of any debt we may have, and do we have a plan to address that debt?
  • Depending on the interest rate for each debt and possible prepayment penalties, should we discuss making additional payments for any of our debts with our advisor?

INSURANCE NEEDS

  • Are we comfortable with our current level of insurance coverage?
  • If we have supplemental Disability Insurance coverage and have recently received a large raise or promotion, have we contacted our carrier or advisor about increasing our coverage level?

LONG-TERM GOAL PROGRESS

  • Do we still feel that our stated long-term goals are in alignment with our values and what we want from life?
  • Do we feel like we are on target to meet those goals?

RETIREMENT CONTRIBUTIONS

  • Based on our contributions so far this year, how much will we have saved for retirement by the end of the year?
  • Can we afford to increase our rate of contribution, if we have not already maxed them out?

TAX PLANNING

  • What is our next realized capital gain or loss so far this year?
  • Do we have any net capital losses from previous years left available to us?
  • How do any planned contributions to our retirement accounts or charitable donations affect our tax liability for this year and beyond?

This list is by no means exhaustive but can spark great conversations between you and your advisor to help make sure you’re on the way toward living the life you imagine!

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Cryptocurrencies, NFTs, Meme Stocks and the Dangers of the “Next Big Thing”

By Andrew Harvey, AIF®, CPFA™

FOMO (Fear of Missing Out) was a driving force in marketing and investing long before it was acronymized. The message is a simple one, especially in the investing world: “Look at how well this worked out for this other person who jumped in early! You don’t want to be the only one to miss out on that, do you?” Just like the wave of fraud and manipulation in the early 20th century that led to the regulation of the financial and banking industries, we now live in the age of digital fraud, investment scams, and weaponized FOMO designed to part hopeful investors from their money. A century after the Roaring Twenties, the old classic scams are still going strong in the digital age. As an investor, you should always be extremely wary of anything that bills itself as “the next big thing.”

Much hullabaloo is made about the decisions of the “rational investor,” and how they can perfectly assess the market and the fair value of any asset free from the influence of any emotion or irrational behavior. When you find them, please let me know. I am eager to become their client. At Opus, we think it is much more achievable (and better for everyone’s sanity) to strive to be reasonable investors – meaning “at the time we make any decision, does that decision seem reasonable based on all the available information and doing our best to account for cognitive and emotional biases?” There is a great deal of fence-sitting surrounding crypto and NFTs (and a great deal less surrounding meme stocks) in the world of financial punditry, I imagine out of a fear of later looking foolish if they fulfill all the wild promises that their respective communities make to their users. At Opus 111 Group, though, we adhere to a simple creed that our clients want us to tell them the truth, even when they don’t want to hear it.

This is the truth: nothing about the current state of most digital assets, including cryptocurrencies, NFTs, or so-called “meme-stocks” pursuing a “short squeeze” makes them worth the risk of their inherent volatility or lack of investor protections. The likelihood of fraud, use for other criminal affairs, and lack of transparency means that our advice on these things can best be summed up by three words: “steer well clear.”

Cryptocurrencies

Our concerns around cryptocurrencies chiefly revolve around the lack of regulation, transparency, and investor protections. Jim and I discussed this on the firm’s weekly radio show “Money Management” in December of last year (you can find the archived show on this playlist) following the collapse of crypto exchange FTX and the indictment of its founder, Sam Bankman-Fried on a laundry list of charges including wire fraud, money laundering, securities fraud, and conspiracy. Another popular exchange, Coinbase, recently received a Wells Notice from the Securities and Exchange Commission (SEC) – signaling that the regulator will soon bring an enforcement action against the exchange. An article from the Wall Street Journal in 2013 found that, in a two-year period, 80% of recipients of a Wells Notice were later charged with violation of securities-related laws.

These examples were two of the most visible in the crypto industry. They went to great lengths to market themselves as legitimate business enterprises. Coinbase aired an ad during the Super Bowl in 2022. FTX had sponsorship deals with Major League Baseball, Formula 1, and the naming rights to the Miami Heat’s arena. If these are the “legitimate” actors in crypto, what about the rest of them? In a world where potentially up to 80% of all bitcoin trades are fraudulent wash trades, it is impossible to see cryptocurrencies as a viable investment opportunity.

A further issue with cryptocurrencies is that their proponents seem to want them to be considered securities or currency, whichever is more favorable at the time. The inherent volatility in cryptocurrencies makes them unsuitable for use as a currency (even so-called “stablecoins” are not exempt from these fluctuations, though they tend to be smaller in magnitude). Meanwhile, the lack of regulation and investor protections around them make them unsuitable as an investment. What’s more, there is still no convincing evidence that an investment in a cryptocurrency conveys meaningful ownership of anything at all, let alone anything of value. Does blockchain technology have interesting hypothetical uses in maintaining the security of user information without the need for a central repository? Yes, but currently there is also an issue with “wrong-address” incidents, where in the event of a mistaken transaction the sender of funds is wholly reliant on the goodwill of the recipient to return the errant money. In the financial world, regulators and central agencies play an important role in interceding on behalf of customers and investors when mistakes do occur. For these reasons, I do not envision a world where cryptocurrency will play a role in our client’s portfolios.

Non-Fungible Tokens (NFTs)

At its base level, a NFT is a digital identifier recorded on a blockchain that is used to certify ownership and authenticity. NFTs have been created for everything from digital art to tradeable NBA highlights. Currently, NFTs appear to be a solution in want of a problem. While the concept of a digital contract may be interesting for works of digital art and for creators, it still means that NFTs at best have little more meaning than as collectibles. Crazes around collectibles are nothing new. You may recall the swarm of activity surrounding Beanie Babies in the 1990s as a somewhat recent example. As speculators so often discover where collectibles are concerned, they are only as valuable as what someone is willing to pay for them. A bubble bursting can seriously erode the value of your initial purchase and—while I am certainly not at the forefront of the artistic community and the value of digital art—I do question whether an electronic image is worth $69 million. Collectibles are already considered an unsuitable investment for retirement plans. While I don’t mind the purchase of collectibles for sentimental reasons, I also would caution people against investing in any collectible with the aim of a large future capital return.

Wash trading is also a significant issue with NFTs. A wash trade is the simultaneous purchase and sale of the same financial instruments, creating the appearance of market activity without meaningfully exchanging money. For example, let’s say I minted an NFT of my headshot of the Opus website (and why not? It’s a pretty decent photo of me) and assigned its ownership to an account I own (Account A). Next, I “purchase” that NFT for $25,000 from a separate account I own (Account B). For the minor cost of whatever platform fees I incurred, I have now created an apparent demand for an image of my face for a tremendous amount of money. This can position me to sell the NFT from Account B to an unsuspecting outside party who is looking to speculate on the value of NFTs for a windfall profit, since my cost basis in setting up this scheme was essentially zero.

Meme Stocks

This last segment differs significantly from the previous two. Mercifully, it has nothing to do with blockchain, cold storage wallets, or photos of my face. Instead, meme stocks are equities that trade on regular indices like the NYSE or NASDAQ that, for one reason or another, develop a cult following with retail investors. Those investors often congregate on social media to discuss their investments and encourage others to invest in the product as well. The most recent high-profile example of this is with home goods retailer Bed Bath and Beyond (NASDAQ: BBBY), which recently filed for Chapter 11 bankruptcy protection as it continues to axe stores and jobs. Consequently, BBBY’s share price has dropped over 99% in the past 12 months. Certain online forums, however, were until very recently full of hopeful investors who thought that any number of particular scenarios (including an angel investor, a merger/acquisition, or a potential “short-squeeze” that would induce a massive buying demand from short-sellers looking to close their positions) might send the stock price skyrocketing. Now that that increase has failed to materialize and the stock is in the process of being delisted, those investors as common stockholders are the last in order of debt seniority in bankruptcy proceedings, meaning many of those investors will never recoup their initial investment.

People making bad stock picks is nothing new. The danger of meme stocks is much more than just making a bad investment selection, however. The real danger around meme stocks are the communities that can shut out dissenting voices, creating an echo chamber where the desired outcome seems certain. This can cause people to over-allocate their portfolio into an investment without fully considering its risks or fundamentals. Worse, they may even decide to leverage themselves to get even more money in play before “the big payout.” Concentrating too much of your portfolio, let alone your hopes for your financial future, on one single investment is seldom a good idea. It is always critical to consider the potential downsides and risks of any investment before you put your money in. It is even more important to try and continue to remain critical so that you know when to walk away from a bad investment.

The Next Big Thing

It’s impossible to say what the “Next Big Thing” in investing is going to be. People love hearing about longshots because they have the highest payoffs. People also tend to forget that that’s because they so rarely actually pay off. In any gold rush, there’s always a stampede of people looking to strike it rich. History remembers the handful who do because they are celebrated, but too often the many who leave empty-handed are consigned to the dustbin of history.

We firmly believe that the road to true wealth lies in building a habit of investing for the long-term in a well-diversified portfolio. Operating by that philosophy may dampen the potential to brag at a cocktail party, but it also means incurring significantly less risk to your portfolio. By working closely with your advisor and having realistic conversations about your risk tolerance and what strategies are appropriate for you, you can not only build a portfolio designed for success over the long term, but reduce the stress you experience on the road from point A to point B.

Andrew Harvey, AIF®, CPFA™ is a Financial Advisor at Seattle-based Opus 111 Group. He created Opus 111 Group’s SYFI (Secure Your Financial Independence) Program for young investors in 2022 and works in Opus’ Retirement Plan Consulting division. In his spare time, he plays the Irish sports of hurling and Gaelic football for USGAA side Tacoma Rangers. Andrew lives in Kent, Washington with his wife Lauren and their cat, Bella.

This material is intended for informational/educational purposes only and should not be construed as investment advice, a solicitation, or a recommendation to buy or sell any security or investment product. Please contact your financial professional for more information specific to your situation.

Diversification does not assure a profit or protect against loss in declining markets, and diversification cannot guarantee that any objective or goal will be achieved.

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DECEMBER 2022

Capital Gains Tax: How to Trim the Tax Bite

Anyone looking to sell appreciated stock is unfortunately going to trigger a tax on capital gains, whether long or short-term. The current legislative and political climate has produced rumblings of a potential doubling of the long-term capital gains tax. If such legislative action would come to pass, what potential solution exists to lessening that tax bite? The CFA Institute referenced a solution … donating to charity to avoid the capital gains tax.

A specific solution to lessen your tax bite: a donor advised fund, DAF.

Provided your shares have been held longer than a year, those shares can be directly deposited into a donor advised fund, with you enjoying a tax deduction based on the full market value of the stock. This transaction allows you to save what you would have paid in taxes and instead, use the value of the shares for charitable giving through your donor advised fund.

One of the benefits of employing the use of a donor advised fund (DAF) in a charitable giving strategy is that, in certain scenarios, it can be utilized to separate your tax strategy from your charitable giving strategy. Because you always receive the tax benefits of contributing to a DAF in the year that the gift is made, this makes a DAF a viable recipient for directing charitable donations as part of an annual tax strategy.

At the same time, the distributions from the DAF to other charitable organizations can be made over time, in some cases years after the initial gift is made to the donor advised fund. It’  s this space between the original gift and the final distribution that allows for the separation of tax and charitable planning.

For those individuals who normally do not give much thought to charitable donations, the tax bite they may be facing due to capital gains can provide the motivation they need. Faced with paying a capital gains tax to the government (and having no say in how the government chooses to spend that tax money) vs. placing your appreciated shares into a DAF, negating your capital gains tax liability, and also having the value of those appreciated shares fund causes you want to support can provide you a good enough reason to open a DAF.

Reducing capital gains tax is not the only way for a donor advised fund to lessen your taxes.

DAFs can provide other tax savings including: 1.) Income Tax: You receive an immediate income tax deduction in the year you contribute to your DAF. Contributions immediately qualify for maximum income tax benefits. The IRS does mandate some limitations, depending upon your adjusted gross income (AGI): Deduction for cash – up to 60 % of AGI. Deduction for securities and other appreciated assets – up to 30 % of AGI. There is a five-year carry-forward for unused deductions.

2.) Estate Tax: A DAF is not included in the account holder’s estate.

3.) Tax-Free Growth: Investments in a DAF can continue to appreciate tax-free.

4.) Alternative Minimum Tax (AMT): If you’re subject to alternative minimum tax (AMT), your contribution may reduce your AMT impact. While contributions are deductible for AMT purposes, whether it reduces an individuals’ AMT depends upon your circumstances.

Another fine way to support charitable intent is through planned gifts.

According to the Association of Fundraising Professionals (AFP), a planned gift is structured and integrates personal, financial, and estate-planning goals with your giving, regardless of if the giving is done while you’re alive or at the time of your death. Many planned giving vehicles are available, including bequests, donor advised funds, private foundations and charitable trusts.

Often the best results can be attained by combining a vehicle like a donor advised fund with another vehicle such as a charitable lead trust (CLT.)

For those familiar with a charitable remainder trust (CRT), the CLT is its inverse. Like a CRT, a CLT is also an example of a split interest trust. Such trusts are considered “split” because their value is broken into two components: a “lead” interest and a “remainder” interest.  Charitable lead trusts work in the following way:

  • The trust receives cash or property from you.
  • At the time the CLT is implemented, you specify:
  1. the timespan for the trust, such as your lifetime or a specified term of years.
  2. the trust’s income beneficiary (typically a charity) who will receive income from the trust (this is income generated by the “lead” interest component);
  3. the beneficiary (typically your heirs) who will receive the value of the trust at the time specified in item above (the “remainder” interest component).

CLTs can be of most benefit in an environment of low interest rates. The ideal candidate for a CLT includes:

  • Someone who doesn’t need current income from the trust.
  • Has charitable intent.
  • Is looking for a tax-efficient means to make a future transfer to heirs.
  • Is concerned about income tax or estate tax exposure.

A charitable lead trust can work well in conjunction with a donor advised fund. You can name your donor advised fund as the income beneficiary of the CLT. This provides you and your family the flexibility as to whom and how they direct their charitable giving.

Your financial advisor can continue to oversee the investment management of the remainder assets.

In short, the DAF enhances the CLT and provides you considerable flexibility to engage in planned giving during your lifetime, as well as providing a nest egg for your heirs when the term of the CLT concludes.

Opus 111 Group does not provide legal or tax advice. You should consult a legal or tax professional regarding your individual situation.

Michael J. Maehl
Senior Vice President
Opus 111 Group

The Investment Advisor Representatives (IARs) use the trade name/DBA, Opus 111 Group. All securities & advisory services are offered through Commonwealth Financial Network©, Member FINRA/SIPC, a Registered Investment Adviser. For a current list of our IARs please visit our website. Fixed insurance products and services are separate from and not offered through Commonwealth Financial Network Opus 111 Group 14 East Mission Avenue Suite 4 Spokane, WA 99202 Phone: (509) 944-1790

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NOVEMBER 2022

Wealth Management and Retiring

Whether you’re already retired or it’s moving closer to reality for you, there are some things you should consider when managing your investments.
Up until retirement, you simply accumulate assets. You get paid and a portion goes to your retirement plan. When employment income stops and retirement is a reality, you need to be prepared as best you can.
And yet, according to the American Association of Actuaries, about 80% of folks not yet retired have expressed anxiety that their assets may not provide the income they need to last through their retirement. Further, on a relative basis, Social Security isn’t providing as much income replacement as in the past. And, of course, there’s inflation to consider. Even if you use the 3% US average annual inflation rate going back to 1926, this means your overall costs will double in 24 years.
As that eminent sage, Mr. Yogi Berra, put it, “If you don’t know where you’re going, you might not get there.” In other words, you need to know where you are and what you have now so that you can allocate your assets to your best benefit.
These include knowing how many assets you have available for retirement. How will you generate enough income from those assets to help support your living expenses? Have you considered that your assets need to cover a long life, or lives, as in a 20 to 30 year average after you retire? Most people wildly underestimate both their own longevity as well as the spiraling cost of their care in the last decade of life.
Knowing which assets are reliable, as in, will continue to provide income over your life is a key. These include your Social Security, any pensions and some annuities. We know that the cost of living has gone up in just about every year of our lives. Indeed, the Consumer Price Index has been compounding at around three percent for the last century. Were it to continue to do that during our three decades of retirement, we could expect to see our living costs go up very nearly two and a half times. Due to inflation, a purely fixed-income investment strategy—focusing as it does on preventing your principal from fluctuating—may leave you seriously exposed to the long-term erosion of your purchasing power. Put simply, a fixed-income strategy may not sustain us through a long retired life of rising living costs.
Equally important, is determining those average annual living expenses. Determine the must haves – mortgage and real estate taxes; medical/Medicare; Utilities; Food; Car payments, insurance and gas – plus some amount for discretionary expenses. Divide that total by 12 and you’ve got a good idea what you need to keep everything flowing.
Now, add up your investable assets, retirement assets and personal, plus any pension, rental or royalty income. Don’t include your residence value as its non-liquid and generally not included in these calculations. Do include your Social Security payments (actual or anticipated). Now you can start focusing on what to do to help you manage your way to the life you want in retirement.
Further, using annuities can help mitigate some market risk over time, as well as providing steady, predictable income sources over your life and, if applicable, to that of your spouse as well.
There is a math formula to help you see how you’re tracking. It’s called the Income-to-Asset Ratio, or IAR. Add your total expenses. Next, subtract your Social Security income. What’s left is the income needed from your assets to cover those expenses, i.e., the withdrawal rate. Now, divide the amount of income you need by the current value of your portfolio.
For folks between 55 and 64, an IAR of 3.5% to 4.5% is a good range. For those 65 to 74, the ratio goes to 4.0% to 5.5%. And for those even closer to maturity, as in 75+, that number is 5.0% to 6.5%.
Two things need to be considered once you’ve got your answer. First, with your asset base as is, how long can it support you? What amount of average annual growth do you need to, at least, maintain your coverage? Next, if the numbers aren’t favorable, what can you do? Cut expenses? Take less income from your assets? Part-time employment? Win the lottery? You still must deal with the future potential for rising interest and inflation rates, as well as markets which may not perform as you’d like for a while. Having a solid asset allocation strategy that you stay with can go a long way to helping you deal with these challenges. What you might consider doing in case your retirement reality undershoots historical probability can include: • Postponing retirement for a year (or two, or three) because you think you may be cutting it too close. • Scaling back planned spending for the first couple of years of retirement, until you get some real-world experience of it. • Starting with a couple of years’ living expenses in a money market fund, to be used in case of market setbacks early in retirement.
Managing your investments is only part of “retirement”. For example, in addition to determining what’s most important to you, where you live and who you spend time with are essential considerations. What are the laws in your new location about estate tax and taxes on retirement earnings? Is it a community property state? Is there a state income tax?
Another major point – and usually your highest expenses later in life – is covering unexpected medical costs. Do you have a Medigap plan of some sort? Have you investigated long-term care? In addition to the traditional long-term care policies, several annuities are now available specifically to help you have money for your care.
If you’re in a position to leave a legacy, first thing is to have a will in place. If you haven’t reviewed yours in the last 10 years, it may be helpful to re-visit it to ensure you have things going where and how you’d like them to. If you’ve remarried since your will was created, be sure to check your beneficiaries – both in the will and your retirement plans.
Many people are not aware that beneficiaries designated in an insurance contract, annuity or retirement plans have precedence over whomever you place in your will…
You also can consider planning for outright gifts today. You can establish trusts that will take the assets out of your estate. You can set up donor advised funds to allow you both a deduction and control over who gets what and when. The late George Burns, in his book Living It Up, wrote, “I don’t believe anybody should retire, no matter what his or her age is.” If you believe that, then just consider the ideas expressed here as nice to know. If you’re retired, or plan to be, then I trust you shall benefit from them.

Michael J. Maehl
Senior Vice President
Opus 111 Group

The Investment Advisor Representatives (IARs) use the trade name/DBA, Opus 111 Group. All securities & advisory services are offered through Commonwealth Financial Network©, Member FINRA/SIPC, a Registered Investment Adviser. For a current list of our IARs please visit our website. Fixed insurance products and services are separate from and not offered through Commonwealth Financial Network Opus 111 Group 14 East Mission Avenue Suite 4 Spokane, WA 99202 Phone: (509) 944-1790

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OCTOBER 2022

Don’t let the headlines damage your retirement

Last time we had a bad market was almost 15 years ago. And here we are again.
2022 may be known for more than just the size of the losses in the stock market. According to Morningstar, this may be the first time that all 20 types of taxable bond funds have declined together in the same year.
Seeming to reinforce that, the percentage of bearish respondents in a recent weekly American Association of Individual Investors survey ticked up to 56.2%. The historical average bearish reading is just 30.5%, AAII said. This AAII survey, as well as the Investors Intelligence poll of financial newsletter editors, are each considered to be contrarian indicators. Elevated bullishness has historically meant investment risk is high while high bearishness can be tied to less risk. As AAII itself says, “Above-average market returns have often followed unusually low levels of optimism, while below-average market returns have often followed unusually high levels of optimism.” History says the more pessimistic individual investors become, the better the prospective returns look six months out.
Or, as Jason Zweig observed, “fear is ‘the best fertilizer for future bull markets.’” And, as Mark Hackett, chief of investment research at Nationwide, added, “Universal pessimism is bullish from a contrarian perspective, though timing of the pendulum swing is difficult to predict.” If you don’t bail, then you don’t have to be concerned by that timing.
It’s almost as though recent market activity has had the ability to completely shift the mood of investors. People magically became more optimistic after making a bunch of money over the past few years and now have fallen into despair after giving up some of those gains! Today, the financial media would have us believe that stocks seem to be pricing in endless interest rate hikes as far as the eye can see; that inflation seemingly will never lessen; that earnings cuts, layoffs, crashing home prices and energy shortages are all imminent. The fact that these haven’t happened so far doesn’t deter the sky is falling crowd. Maybe they’ll be right. However, based on almost 50 years of personal involvement in the markets, I’ll take the other side. History is in my corner. Things can get worse, for sure, but rarely as bad as the worst that investor’s imaginations can create. And, at the market turn, the successful individuals or institutions of whatever size, will emerge even stronger than before this market environment. Why? Because they’ll have kept cool heads and made good objective decisions – not emotional ones. For sure, not everyone will emerge unwounded, much less being in an even better position. I wish this weren’t so, but you have to focus on the things you can control.
For example:
Your time horizon is all that matters during corrections. Don’t put the money you’ll need for spending purposes in the next 2 years or so into risk assets, such as stocks. Instead, CDs, money markets, savings accounts each can be used to store this money until it’s needed. Given that most of your money is going to be invested for the long-term, whether you’re retired now or not, you need to understand that you’re going to have to endure future corrections, bear markets and even a crash from time to time. That’s all normal market stuff and, historically, have shown up around every 5-ish years. Understanding this and structuring your holdings over your time horizon can save you from becoming a forced seller.
Buy and hold requires you to do both when stocks are falling. It’s feels much easier to buy and hold when stuff is going up…but don’t bail just because prices are lower. If you choose to focus on daily market moves, you’re signing up to make yourself miserable. And for no good reason. A couple market day moves does not a trend make… You don’t get huge gains without volatility. Many of the assets that had the biggest price gains in 2020 have seen considerable drops this year. There are plenty of stocks down 70-80% right now that were investor darlings during the pandemic. This is what can happen on the other side of outsized gains. Peloton comes to mind, as an example. The perfect portfolio is worthless to you if you can’t stick with it when things are going poorly. It’s during corrections that you figure out whether you have a portfolio that suits your personal risk profile, time horizon and personality or someone else’s. When you’re living through a correction, it can feel like your holdings are going to fall even further. Stocks fell 10%? “Of course, we’re going lower” and 20% is next. Stocks fell 20%? Well, a 30% bear “must be” right around the corner. And, if stocks fell 30%? Now, it’s an all-out crash – just ask the financial media. FYI, a full-blown crash is not at all common and shouldn’t be your base case. If you think every bear market leads to a global crisis, you’re going to have terrible long-term returns and a ton of anxiety on top of it. The benefit of you having a long-time horizon is that you don’t need to nail the bottom when buying during a sell-off. And the truth is no one ever really nails the bottom anyway… As mentioned above, if you buy the market, every sell-off in history has been a buying opportunity. I know. I’ve seen it happen since 1973. I know stocks can always fall further from current levels. Buying when prices are lower has always been a successful strategy…as long as you’re patient. But the reasons for a correction don’t really matter in the grand scheme of things. Sometimes stocks go down. Period. It just happens. You don’t know when and you don’t know why but you should know it’s going to happen. Here are some points I believe you should also be considering in this market:
• The risk of holding cash has simply become too high. You’re never going to catch the bottom—no one ever does—so stop worrying about it. • If you’re holding any significant cash for any serious long-term goal, this is the time to start putting it to work. • This massively universal bearishness can’t be very right for very long. It only seems like it when it’s happening. • If you invest now and the market goes down 20% from here, you may regret that for a matter of months. However, if the market runs away from you and you freeze, you may end up with expensive longer-term regrets. You can focus on what actually matters when it comes to investing. And that’s time. A very long time: as in, multiple years. Long-term strategies to lessen risk to your long-term retirement portfolio include saving more to provide a larger buffer, diversifying your portfolio across different asset classes, investing in dividend-paying stocks and considering a guaranteed source of income for a portion of an overall portfolio. Guaranteed sources of income, like annuities, can help ensure that you have money that can last throughout retirement. We’ve been through markets much worse than what we’re dealing with today. Don’t let the headlines damage your retirement…

Michael J. Maehl
Senior Vice President
Opus 111 Group

The Investment Advisor Representatives (IARs) use the trade name/DBA, Opus 111 Group. All securities & advisory services are offered through Commonwealth Financial Network©, Member FINRA/SIPC, a Registered Investment Adviser. For a current list of our IARs please visit our website. Fixed insurance products and services are separate from and not offered through Commonwealth Financial Network Opus 111 Group 14 East Mission Avenue Suite 4 Spokane, WA 99202 Phone: (509) 944-1790

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SEPTEMBER 2022

INVESTMENT CONSIDERATIONS IN RETIREMENT

Capital One Group surveyed 1,005 adults for their Financial Freedom Study. In the questions regarding retirement issues, the responses suggest that, apparently, it’s not a major thing for most pre-retirees. Here’s some of what they found.

Just 16% of those surveyed named increasing retirement savings as a top priority. 27% said traveling and 23% said weight loss was a priority. And people spend more time planning and preparing for a vacation than for a 20+ year retirement. And that’s regardless of their income, age, education, etc.

We have the privilege of working with many of our clients’ prior to and during their retirements. We’ve seen many of the surprises they’ve experienced during their retired lives. I want to share three of the most common adjustments we’ve seen them have to make.

  • Learning that Medicare won’t pay for all your health care expenses. Generally, becoming eligible for Medicare at age 65 certainly helps make your health care planning easier. And it can help lower your out-of-pocket spending on many health care expenses. However, most are unaware that long-term care, perhaps the biggest health care expense you may have to face in retirement, isn’t covered by Medicare at all.

So, you need to have a plan in place for these costs. And, in addition, you’ll still have premiums and deductibles for all your regular care, as well as if you opt for a Medicare supplemental policy.

  • You’ll likely still need money invested in the stock market.This can be a stunner for those who have been taught to believe that you must “be very conservative with your funds when you’re retired” school.

Depending on how early you choose to retire, it’s not unreasonable to expect your retirement will last 20 years or even longer. To help you keep up with inflation and, in my experience, improve the likelihood of maintaining your standard of living throughout your retirement, I strongly believe you need to have exposure to growth. And that means keeping, or placing, a good portion of your retirement assets in the stock market

It’s this need for long-term growth why we recommend using a strategy of asset allocation to meet the timing and duration of your various goals. It’s never an “all in one” approach as there is NO one investment that can meet all your different needs. It’s all about the timing of your needs, whether that need is a one-time or ongoing requirement, that will help create the best mix of investments for you.

With stocks, it’s a very real possibility that investors in them to have to suffer very long periods of minimal, if not negative, returns.  Furthermore, these long droughts don’t seem to have much to do with easily explainable events such as natural disasters or war.

You also need the growth that comes from your stock investments in order to fight the inflation monster…the hidden tax, which has again reared its ugly head.

A piece from the WF Investment Institute said, “Today, despite the relatively modest inflation from 1985 through last year, you need more than twice the number of dollars you would have needed to buy the same amount of goods and services that you could in 1985.” This is because, historically, consumers have seen prices rise by about 3% per year.

You can use something called the Rule of 72 to help you determine how long it will take something to double. It works like this…

Using this example, simply take the 3% long-term average annual inflation rate and divide it into 72. The answer is 24. That means, assuming the 3% average over the period, it will take 24 years for something to double in cost.

Using the same rule, you can determine how long, assuming an annual rate, it will take an asset to double in value. I think this really helps demonstrate why, without involving any emotions, it’s important to have assets invested in stocks.

As this is written, the US 10 yr Treasury was 3.2%. A good quality corporate bond would give you about 4.6% for the same period. By dividing each of these bond returns into 72, you will find that the corporate bond would double your money in about 15.5 years. The T-note would take 22.5 years to double.

So, if inflation resets to the long-term average of just about 3%, your overall costs shall have doubled in 24 years. At 9%, while unlikely to stay at those levels in my opinion, your costs are double in just 9 years. The corporate bond, again assuming the long-term average for inflation, would have doubled your money in just over 15.5 years. However, the lower paying, higher quality 10-year T-note, having taken 22.5 years to double itself, says you would have seen your buying power drop very significantly.

And, in both cases, this is before taxes are even considered.

Think total-return – growth, plus any dividends or interest. Your stock portion can be thought of as building future income.

  • Transitioning from being a saver to being a spender can be harder than you think. After years of saving for retirement, the shift to becoming a spender can be emotionally challenging for many. Think about it: Watching your account balances vary as you draw down your savings, as opposed to growing with regular new contributions as they were during your working years, can make some retirees feel guilty when it comes to spending the savings they’ve worked so hard to accumulate.

If you were a diligent saver, remember that it’s OK to spend down your savings (after all, that’s what that money is there for). Just make sure that your spending levels can be sustained throughout the duration of your retirement.

No matter how much you plan, retirement will find a way to surprise you — that’s just a fact of life. Hopefully, though, the planning you do will help mitigate any potential downsides from those surprises while helping you cherish the joyful ones.

You can mitigate the effect of inflation on your retirement savings by doing these things:

  • Save more than you think you’ll need, and don’t be too conservative in your investments…except for any money needed for a specific use within three years should be very conservatively invested.
  • Again, don’t be afraid to stick with mostly stocks. Despite their volatility and potential losses, stocks historically offer the best returns. These long-term gains will help you outpace inflation so your retirement can stay on track.
  • Contribute to your 401(k) or workplace retirement plan at least up to any company match. Increase contributions as much as you can every year until you reach the maximum limit.
  • Put money away for retirement outside of your workplace plan. If you qualify, contribute to a Roth IRA. If you’re self-employed, use tax-advantaged accounts, like a Sep IRA or Solo 401(k). And if you’re over 50, be sure to take advantage of the catch-up contributions to add a little extra in all of these kinds of accounts. Save money in a taxable account, too.

I love this quote, courtesy of super blogger Eddy Elfenbein, when discussing why stocks outperform bonds over time:

My point is that common stocks are completely different from other classes of investments. It’s the only one that captures human ingenuity, which is the ultimate asset.

Following the 2008 market drop, many people swore off the stock market forever. People began to believe – and seemingly are again – that the market was a roller coaster casino with the odds heavily stacked against them.

They’re missing the fact that markets and economies are always and forever cyclical. The downturns in the cycle just happen to be feel more painful. You can always count on the certainty of uncertainty regarding most any investment class…

Michael J. Maehl
Senior Vice President
Opus 111 Group

The Investment Advisor Representatives (IARs) use the trade name/DBA, Opus 111 Group. All securities & advisory services are offered through Commonwealth Financial Network©, Member FINRA/SIPC, a Registered Investment Adviser. For a current list of our IARs please visit our website. Fixed insurance products and services are separate from and not offered through Commonwealth Financial Network Opus 111 Group 14 East Mission Avenue Suite 4 Spokane, WA 99202 Phone: (509) 944-1790

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AUGUST 2022

Gold and inflation?

It’s no fun paying up for essential goods and services. But, mostly overlooked is the fact that many people will buy these kinds of things regardless of price. So, they may be suffering from inflation, but by paying much higher prices for discretionary purchases, to an extent, they’re also helping to create even more inflation. “The cure for high prices is high prices” goes the old commodity trader’s adage. In other words, more supply, or less demand, helps bring prices down. Paying up does not.

Inflation has hit successive 40-plus-year highs, finishing June at 9.1%, year-over-year. A bear market. Bond market is the worst since the 1840s. Recession worries.

And with all this, gold prices still can’t rally.

If ever there was a consensus of longstanding conventional thinking that many have said should favor gold, this environment is it. The so-called “safe haven” of gold is supposed to provide its owners protection from rising prices, falling stocks, recession and chaos generally. Let’s look how that thinking is holding up, in circumstances that would seem super favorable to the yellow metal.

In January this year, when world stocks fell more than 5%, gold traded sideways – falling by -0.6%. In February, with the invasion of Ukraine – gold gained. As of 8 March, as war and inflation fears peaked, gold had moved up 12.9% on the year alongside bigger gains in other commodities like industrial metals and grains. At that time, world stocks had dropped ~13%, making the gold hedge look like it was actually working.

By the way, the silver ETF (SLV) has also been making new all-time lows relative to the S&P500, and, on an absolute basis, it’s been making new multi-year lows.

Commentary in the financial press, and people promoting gold in commercials as the “safe place to be”, touting gold and commodities as inflation hedges – saying or suggesting that it was a surefire investment for these times. More precious metal ETFs were launched, offering investors exposure, without having to own the metal outright. As Bloomberg reported, Bank of America’s April Global Fund Manager Survey—published early in March—showed respondents were “… now the most net overweight ever for commodities.”

In investing, it’s very often a bad idea to follow the herd – the consensus/conventional wisdom – and make decisions based on widely known information. By the time all the articles about “How to Invest” in these things come out, it’s usually too late to benefit.

March 8th has, so far, proven to be gold’s high-water mark this year at $2,051/oz. From then through 19 July, it fell over 17%, nearly doubling the global stocks’ 8.4% drop in the same period. This isn’t to pick on gold alone. Commodities generally moved down. Basically, this helps demonstrate that there isn’t anything unique about gold. It definitely isn’t magic. It’s just a commodity – a rock.

Consider all that’s happened between March and now. On inflation, the US CPI moved up from 7.9% y/y in February to 9.1% in June. Matter of fact, inflation rates in pretty much every major developed nation are up a bunch over this period, and at high rates. If gold was truly an effective inflation hedge, it should be up. It’s not. Gold’s inflation-hedge status is mostly mythical.

If we go back to 1980, to a time of hyperinflation, gold hit $800/oz (not adjusted for inflation).  Dow was at 800 as well. Adjusted for inflation since that time, gold has never hit that high level again, whereas the Dow has done much better.

Let me point out some simple realities: Gold is more volatile than stocks. It pays no dividends or interest. It has no inherent value as it doesn’t produce anything, and its long-term returns are much lower than stocks. Its price is more related to the relative value of the US dollar, i.e., opposite of the direction of the dollar. That is, gold doesn’t actually go up; it’s that the dollar sometimes moves lower.

I believe this year is reinforcing that (a) gold isn’t negatively correlated to stocks and bonds and, (b), it isn’t much of an inflation hedge. In my view, unless you have a need to use a rock as a door stop, the case for owning gold is basically a waste of your asset allocation and money, as this year is proving quite readily.

Headlines are also a giant distraction to the business of investing. Losses are an annoying feature of successful long-term investing but there’s not much you can do to avoid them if you wish to earn decent returns over time.

If you can avoid paying frequent attention to your own long-term investments and staying with your strategy, that’s probably a win for you and most investors.

Seems to me that if you want a proven inflation hedge over time, US stocks, together with their typically rising dividends, would be the logical choice. In my opinion, having them currently marked down in price makes them much more attractive.

Michael J. Maehl
Senior Vice President
Opus 111 Group

The Investment Advisor Representatives (IARs) use the trade name/DBA, Opus 111 Group. All securities & advisory services are offered through Commonwealth Financial Network©, Member FINRA/SIPC, a Registered Investment Adviser. For a current list of our IARs please visit our website. Fixed insurance products and services are separate from and not offered through Commonwealth Financial Network Opus 111 Group 14 East Mission Avenue Suite 4 Spokane, WA 99202 Phone: (509) 944-1790