Financial Planning Tips and State of the Economy with Kevin Barlow | Coronavirus Update April 30

April 30, 2020 update quick update

April 30 Topic: Financial planning and the future of the financial markets

State of the Economy

• GDP number annual loss 4.8% means over course  next year shrink by this amount from last quarter

• Growth next year is expected to be between -12%--36% annualized thats a 4 quarter number so growth -3 and -9% growth next 

• 8%drop annualized in 2008

• Bigg reason- shutdown business and 30 million unemployed

Federal Response & Additional Stimulus Aid

• The Fed response has been to flood the economy, learned lesson in 2008/9, in hopes it gets us through 3-6 months

• Stocks move ahead of economy, stock market drops we saw in February March telling us economy is rough over next 3-6 months and then started to recover after stimulus aid that relieved some pressure

• It's not a financial driven recession, if we can get through the next 3-6 months by putting money into the economy the system will revert

• The stock market response over past 5 weeks has been positive 

General Financial Planning Advice

• Look at what is happening to the broader market, don’t just focus on the S&P 500 since that is really made up of a few big companies

• Small businesses are going to fare more in line with smaller companies in the market than the Facebooks of the world so instead look to the smaller public companies to see how your business is more likely to fare

• Advantages Right Now

• • Having a year with lower business income can be a good things since it can mean that you qualify for things like a ROTH IRA where you maybe wouldn’t have beforehand and this can help grow your portfolio over time. Interest rates are at an all time low and this is tied to business loans, mortgages, almost everything except credit cards

  • • Speak to your lenders to see if it makes sense to refinance your loan, they would rather refinance than you default on a loan

How should you choose your bank?

• • Banking relationships still matter. The local and regional banks were spending more time helping their customers process applications for PPP whereas the large banks didn’t do this

  • You can still build a relationship with smaller banks that are outside of your community too, don’t feel like you have to stay with just your local bank

Taking Money out of Retirement Accounts

• If you are seeing a hit in your short-term business, we never recommend taking money out of a retirement account but if you have to they have eliminated penalties on that temporarily

• If you borrow money from your IRA you have 60 days to pay it back

• Most 401K have a provision that allows you to pay the interest back to yourself

• Credit Cards interest rates are 18 times higher so avoid this route if you can

Tax Extension to July 15

• You now have some optionality in when you pay your taxes or get your refund

• There are some changes in laws to allow you capture past losses, so reach out to your accountant or CPA to see if revising past year taxes might save you some more money

When to Buy

• If you are a first time investor, a stock market drop is a good time to get in if you have excess cash

• The dividend yield in S&P 500 is 3x what you can get in a 10 year bond right now

Diversification

• Betting on yourself is the best way to create wealth but in order to grow wealth you need to diversify your portfolio and bet on the US Economy rather than one company

• For business owners we recommend that you own different assets with different risks than your own

• S&P 500 you can buy as an index fund or ETF- this means you are owning shares of 500 of the biggest US companies in America. You can do this on an industry basis too

• ETF and Index funds make it easy for you to diversify your portfolio.

If You Have Money in the Stock Market - What to Do?

• Larger companies have access to bond market and loans and there is a better risk adjusted return on bigger companies in the US

• On a global scale, the US still has stronger business growth and investing in emerging markets is very risky. Remember that the US dollar is still the world’s currency so you have more stability when investing in US companies

• In the long-term you can’t make a bad bet if you diversify your portfolio, even if there is short term instability

• The US stock market averages 6-7% above interest rates.These don’t seem like big returns but it means that you are doubling your assets every 6-7 years

Focus on Companies with strong balance sheets and Income Statements

• Strong balance sheets you tend to see oppos where others see threats, more consistent businesses

• Companies that generate cash flows tend to be ones that withstand

• Johnson & Johnson - ppl still buy diapers and toothpaste etc

• Consumer staples, like CLorox, Costco, Walmart tend to do well regardless of good or bad times

• Some technology companies like Apple and Microsoft are also ones that hold up well through economic ups and downs

• Avoid companies with high debt and diversify through ETF and Index Funds

Timing the Market

• Don’t try to make one great decisions, try to make a number of small great decisions

• When the market drops and you become fearful, don’t pull your money out at that time because there is an opportunity cost to do so

• No one can get the timing decisions right every time so make decisions as unemotionally as you can

• Advisors are not emotional about your money like you are 

Tax Loss Harvesting Basics

• When you have an investment that is down and it has a loss you can sell the stock and take the loss and buy something similar or wait 30 days and buy something else and you can use that loss on your tax return up to $3000 per year. You can use this against capital gains

• This year might be a good year to take the gains on your taxes since income might be down and you will be in a lower tax bracket

529 Educational Savings Plan

• Grows tax free and in some states you get a deduction for putting money into account.

• Savingforcollege.com

  is a helpful resource to see how this is handled in your state.

• You can only use this money for educational expenses for your children or grandchildren to be tax exempt.

• If you use the money for non educational purposes you pay taxes on it. 

If you had $10,000 right now what would you do with it?

• I would invest it in the S&P 500

• We don’t know what the economy is going to do over the next 6-12 months but this is a good investment decision because when times look bad its the time to invest.

• Brokerage houses like Vanguard and Charles Shwaab and TD Ameritrade allow you to set up an account for free. 

Questions from Audience

• Banks love to do government backed loans

• Standards will tighten for standard business loans

• Interest rates are low now but this won’t last forever and interest rates will have to go up

• Now is a time to lock in your credit lines

• Its an environment where big banks don’t want to be seen as not helping the small business owner

• Rates are so low that as long as you aren't taking on too much risk by doing so you should invest it and will be getting a return on that money. 

• When times are tough having such cheap capital on your balance sheet is a good thing.

• It depends on objectives

• In general a Rollover IRA a good place for growth 

• You can’t touch the money until you are age 59 ½ without penalty and you don’t have to touch it until you are 72 years old

• It’s money you won’t be using. If you have a horizon over 10 years it makes sense to have a lot of stocks in your IRA 

• IRAs are a better place generally speaking to take more risk since it's such a long time horizon

• You should have one for each child since they will individually be named as beneficiary but if one child doesn't go to college you can move that money to the one kid that does go to college. 

• A question I always get is who are your happiest customers? And the answer is always those that spend less money than they make.

• Look at your personal life very similar to your business life with a balance sheet and income statement and an understanding of your profit margin - how much money you spend versus bring in. Position yourself so your assets are bigger than your liabilities.