I Keep Hearing We're Nearing a Recession. Are We Nearing a Recession?

I Keep Hearing We’re Nearing a Recession. Are We Nearing a Recession?

There’s been more than a few news headlines recently claiming that we’re on the verge of an economic recession.  For many business owners and investors the word recession is a lot like Voldemort.  It’s so evil and scary that you’re not even supposed to say it.  “Recession” evokes fears of falling stock prices, unemployment, and scarcity.

So what exactly is a recession?  And should we treat them with the same respect that Harry Potter treats Lord Voldemort?

Recessions are technically two or more consecutive quarters where national gross domestic product contracts.  Gross domestic product (GDP) is sum of all the goods and services a country produces.  It’s the broadest and most common way to measure economic activity and the strength of the economy.  Growing GDP is a good sign, falling GDP is a bad sign.  This is what US GDP growth has looked like since 1930.  Lots of major swings between 1930 and 1950, and relatively steady since about 1985.  Note that by that time the US dollar was the world’s reserve currency, we were off the gold standard, and interest rates had started to stabilize after stagflation in the 1970s.

I Keep Hearing We're Nearing a Recession. Are We Nearing a Recession?

Now on to why you should care.  The more goods and services a country produces, the better off its citizens are financially.  There’s more wealth being created, more jobs available, and usually faster rising wages.  For businesses this means that your customers have more stable employment and more discretionary income to buy your products.

In a recession GDP contracts.  There’s less economic activity.  From a business’s perspective your customers have fewer jobs, lower wages, and less discretionary income.  Revenue dries up, and you may be forced to lay employees off yourself.  Times are tough.

From an investor’s perspective, recessions are tough on asset prices.  The value of your stock holdings, including index funds, depends on the market’s expectation of future cash flows & profitability.  Recessions are tough on cash flow, tough on profitability, and tough on stock prices.  Recessions often coincide with bear markets.

So where are we now?  Are we actually nearing a recession, or is the rhetoric we’re hearing on the news just propaganda?  I’m no economist, but I do have some background and stay informed as part of my day job.  Here’s my take on whether we’re nearing a recession.

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The Home Office Deduction 101: Simplified Method vs. Actual Expense Method

The Home Office Deduction 101: Simplified Method vs. Actual Expense Method

Even though we don’t currently prepare tax returns for clients at my financial planning firm, tax is a topic that comes up a lot.  Many of our clients own businesses, and most of them share two opinions:

Alongside that there are several tax related questions that come up fairly frequently with our clients.  One of them is the home office deduction.  How can you take it?  Are you even eligible?  What can do to take a larger home office deduction this year?  What are your options?

Whereas employees and small business owners alike were eligible to take the deduction prior to 2018, the Tax Cut & Jobs Act eliminated home office expenses as a miscellaneous itemized deduction.  That means that rather than deducting home office expenses on Schedule A as an itemized deduction, they’re now claimed on Schedule C.  And since Schedule C only contains information related to self-employment, the tax law change essentially means that employees are no longer eligible to take the deduction.

For business owners still eligible to take the home office deduction, there are two options for calculating the amount: the simplified method and the actual expense method.  This post will cover both in detail, and explain what you need to know to take the deduction yourself.

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The Pros & Cons (and Economics) of Leasing vs. Buying a Car

The Pros & Cons (and Economics) of Leasing vs. Buying a Car

For most of us in the US today who do not live in the middle of populous cities, driving a car from place to place is a way of life.  Some of us share a car with a parent, spouse, or friend.  Some of us choose to rent cars by the week, day, or even hour as we need them.  Those of us who don’t are faced with a major financial decision every 3-15 years: should you lease your next car or buy it?

The car buying experience is not one that many people enjoy.  Neither is leasing, for that matter.  You generally start by doing some research online.  You identify what you need from the car in terms of size, capacity, fuel economy, etc., and then look at different makes and models.  Maybe you read some reviews on Consumer Reports or Kelley Blue Book to get a feel for quality, dependability, and price.  Then, once you have an idea what kind of car you’re really looking for, you start to look at the economics.

How much do want to spend?  New or used?  Should you finance it or pay cash?  And then the grand question: what about leasing a car?

Leasing a car would require less money down, which probably means you could be driving a nicer car.  Yes, you’d have a mileage limit, but who knows what your life will be like in 3 years after a lease would end?  Would you still want to be driving the same car anyway?

There are several moving parts surrounding the whole “lease vs. buy” decision.  This post will discuss the economics of the decision, as well as the pros and cons of leasing vs. buying a car.

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Q3 2019 Market Update

Market Update: Q3 2019

I’ve written and published quarterly market updates religiously since launching Three Oaks Capital Management back in 2014.  At first I had physical newsletters printed out on six thick pages of card stock, and mailed them out to clients and other contacts.  Shortly afterward I began adding the commentary to www.3oakscapital.com, and started calling the distribution “Investment Insights”.  A few years after that I abandoned the print version, and distributed the commentary solely through the blog.

Writing a market update at all is starting to become less common in the financial planning community.  Many of my peers, colleagues, and friends prefer NOT to publish or distribute market updates at all, as they believe it diverts their clients’ attention away from long term & consistent strategies.

The market updates I’ve written have evolved quite a bit over the years, but they’ve received a good amount of positive feedback all along.  Clients like to know my take on the markets, and feel comfortable knowing that I have my eye on them.  Other readers and contacts seem to enjoy the content too.

This quarter I am making a minor change to the format of Investment Insights.  While I plan to continue producing them, starting this quarter all new editions will live on Above the Canopy as opposed to Three Oaks Capital’s blog.  We have other changes to the blog, format, and site forthcoming, and this change makes the most long term sense.  (Hint: there is a podcast on the way).  But from here on out, you’ll find market updates on this site as opposed to Three Oaks Capital’s.

Speaking of this quarter’s edition, we have a number of items to touch on.  First, the Federal Reserve reduced short term interest rates in both of their third quarter meetings.  There continues to be a lot of trade uncertainty globally, inflation remains low, and there continues to be some weakness in global economic growth.  This is the first time the fed’s reduced rates in ten years – the last time being December of 2008, when it cut rates from a range of 75 – 100 basis points to 0 – 25.

Elsewhere, US equities had another strong quarter, value shares outpaced growth in the small cap space, and the yield curve in US rates inverted for three days in August.  Read on for more details.

 

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How to Determine How Much Life Insurance You Need

How to Determine How Much Life Insurance You Need

Many people I work with realize that they need some kind of life insurance once they start having kids.  The purpose of life insurance, of course, is to ensure that everyone in your household can maintain their standard of living if you die prematurely.  And as soon as other people start relying on income you haven’t earned yet to live, it’s probably time to consider some coverage.

The problem seems straight forward, but the options are confusing.  First, there’s more than one type of life insurance.  Whole, variable, universal, and term are the predominant options available.  While insurance agents love to sell the first three (because they’re the most profitable to the insurance company, and therefore pay the greatest commissions) term is the least expensive and usually the best fit.

I’ve written in the past about why most people seeking life insurance should steer clear of permanent insurance policies.  But what about the second part of the equation: how much do you really need?

There are two predominant ways to figure this out: human life value and a life insurance needs analysis.  Today’s post will explore both methods.

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Value vs. Growth Investing: Will Value Ever Come Back?

Value vs. Growth: Will Value Ever Come Back?

Returns from growth investing have substantially greater than those from value investing over the last decade.  Looking back over the last 100 years or so, this isn’t the norm.  Will value ever come back, or is growth here to stay?  This post will examine the history, along with both sides of the argument.

 

So What Is a Value or Growth Stock, Exactly?

The investing world likes to categorize stocks in a number of different ways.  Geography and size are two of the most popular methods.  Another way is value vs. growth.  Value stocks tend to be older, more established companies with “cash cow” type businesses.  They don’t typically create exciting new technologies that might set the world on fire, but they have stable revenue and profit streams, and often distribute a portion of their earnings back to shareholders through a dividend.  Think of companies like GE, Exxon Mobile, or Home Depot.

Growth companies operate a little differently.  They typically reinvest 100% of their earnings back into the company to fuel future growth, rather than pay dividends to shareholders.  They often have new products, services, or technologies that are spreading around the world like wildfire.  Your FANG stocks are great examples of typical growth companies: Facebook, Amazon, Netflix, and Google.  All have new technologies, services, or models that are taking the world by storm.

From an investment point of view, the reason you might buy a value stock is completely different than why you might buy a growth stock.  In a value investment, you’re purchasing company shares because you think they’re worth more than the current market price.  “Undervalued” is a common term you’ll hear in a value investment strategy.  Metrics you might track to make this determination are price to earnings ratio, price to book ratio, or dividend yield.

Current share prices don’t matter as much in growth investments.  In a growth investment you’re not buying a stock because you think it’s cheap; you’re buying it because you think the company will continue growing at an above average rate.  Look at companies like Amazon.  They’re terribly expensive on a valuation basis, but that doesn’t deter investors in the least.  The company is growing so rapidly that the expensive valuation simply doesn’t matter to those buying shares.  Metrics you might track here are earnings growth rate, EBITDA (earnings before interest, taxes, depreciation & amortization), or momentum.

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A Review of the CalSavers Retirement Savings Program

A Review of the CalSavers Retirement Savings Program

If you’ve been following the California legislative process at all, or if you own a business that employs people in California, you may have heard of the CalSavers Retirement Savings Program.  In 2016, Governor Jerry Brown signed Bill 1234, requiring development of a workplace retirement savings program for private sector workers without access to one.  The resulting program is known as CalSavers.

Basically, the program forces employers with more than 5 employees to defer a portion of their employees’ paychecks into a state run Roth IRA.  These contributions are invested in default target date retirement funds, unless the employee directs their investments otherwise.  Employees may also opt out entirely, if they choose.

The benefit of such a program is easy access to a retirement savings account.  Employees could contribute to one on their own, of course, but that would require opening an account at a brokerage firm & making investment decisions.  CalSavers greases the wheels by providing a “done for you” program that employees are defaulted into.

The positive spin here is that the program will certainly result in more retirement savings for many thousands of employees.  The negative side of the story comes from the business community.  Businesses without retirement plans will be forced to take the time to open a plan, enroll their employees, and deposit their contributions.

CalSavers isn’t at all unprecedented.  At this point 21 states have enacted similar legislation.  The law is taking a good amount of “heat” though.  Several industry groups are suing the state treasurer in an attempt to derail the rule.  Some plaintiffs don’t care for the state government telling them what to do, while others in the financial industry probably see the program as a competitive threat.

Whatever your take on the matter, businesses will be required to comply beginning in June of 2020 as the law stands today.  This post will provide a quick overview of the program, including its benefits and shortcomings.

 

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What I Learned at XYPN Live 2019

What I Learned at XYPN Live 2019

Today’s post is a follow up to last week’s post.  There are a few conferences I try to fit into my travel schedule every year.  XYPN Live is one of them.  XYPN is an acronym for the “XY Planning Network” – it’s a professional organization for financial planners who work with generations X and Y.  (Unlike much of the industry).

This year the conference was held in St. Louis for the second year in a row.  Attendees are mostly all financial planners, with a few reporters, CPAs, and tech providers sprinkled in.  I make it a point to attend this conference for a few different reasons:

  • This is the only time throughout the year that my study group meets in person (I have a weekly study group)
  • Many of the XYPN members who attend have firms similar to mine
  • Many of the attendees are exploring new, innovative service models and ways to provide value to their clients.

For me, XYPN Live is an opportunity to connect with my study group, reconnect with friends I don’t otherwise see or talk to, and pick up bits of wisdom from other professionals in the industry.

Attending these conferences takes some time away from my family, my clients, and the firm.  But because the learnings ultimately benefit all three, I find a lot of value in going.

Here’s what I learned at XYPN Live this year.

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What I Learned at FinCon2019

What I Learned at Fincon19

Like most jobs, my work requires a little bit of travel every year.  Since we moved down to Sacramento from Portland, I head back up to Oregon 2-3 times per year to see clients.  I also attend 2-3 conferences each year, to keep abreast of what’s going on in the industry and to make sure I’m consistently able to deliver the best advice to my clients.

This year I had two conferences on the agenda.  The first conference I had penciled in was one I’ve been trying to attend for several years: FinCon.  FinCon is a gathering of bloggers, podcasters, YouTubers, reporters, financial planners, and others who produce or promote financial content.  FinCon was held in Washington D.C. this year, directly before the second conference on my agenda: XYPN Live, which I just returned from this week.

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