Client Newsletter - Summer 
June 2017   Vol. 22
UPCOMING EDUCATIONAL OPPORTUNITY!!!
More Details to Come

When:  Late August.  Lunch or dinner?  Tell us what you'd prefer.

Where:  Somewhere that is central for most of Chicagoland.

Duration:  2 hours

Why:  We like to see you!  While modern technology makes it convenient for us to reach out and tap you on the shoulder regularly, it is no replacement for face-to-face contact.  Plus, we think you should never stop learning.  While we appreciate your trust in handling your assets, we want you to understand what we are doing and why.

We hope you will join us and visit with MVT staff and fellow clients.  If there is a particular topic you are interested in, please let us know.  This seminar will be geared toward both individuals and institutional trustees.

The Market - How is 2017 Treating Us?

It may seem like cheating to open up our summer newsletter with a delicious-looking ice cream cone, but we have our reasons.  Investors have about 3 weeks left in the second quarter of the year, and we think that an ice cream cone is the perfect symbol for the 2017 market.  The market, overall, is up!  This is good news, but it's important to note that certain sectors are doing better than others. 

The outstanding performance so far this year has been in internationals. Our actively managed mutual funds and ETFs are up for the year between 16-23% as of 6/7/17.  Just behind internationals are domestic large cap growth healthcare, and global infrastructure, which are all up about 15%. Therefore, they make up the larger and yummier top of the ice cream cone.  We taper down to the middle of the cone where there is still ice cream but not nearly as much.  Here we have a mixed bag of domestic midcap managers and large cap dividend-payers.  The midcap market indices are up around 5% as of 6/7/17.  Midcaps are companies that are slightly smaller than the large household names we know.  However, Baird Midcap (BMDIX) has roared back after low performance the previous 3 years and really belongs at the top of the ice cream cone with a YTD return of more than 16%.  However, Diamond Hill Smid (which includes about 1/3 small cap) is barely getting by with a YTD return of 2.66%.  The bottom of the ice cream cone symbolizes those sectors not doing so well this quarter.  For our clients, that would include small cap domestic companies and real estate.  They are positive, but not nearly as impressive as the ice cream at the top of the cone.  The bottom of the cone is hovering around 2-3% for the year.  

Bond yields slid this quarter with the 10-year declining from about 2.4% on 3/31 to less than 2.2% during the week of 6/2.  The value of existing bonds rose as a result. Year-to-date, bond mutual funds are up between 2-3% with corporates beating government bonds.  However, municipal bonds (those issued by state and local governments) held by Invesco High Yield Municipal Fund (ACTDX) are up over 5% for the year.  

As anticipated, the Fed chose to raise the Federal Funds rate another 0.25% on 6/14/17.  The new rate is 1-1.25%.


- Danielle Woods, dwoods@mvtinvest.com

Roth Conversions -
Using Existing Assets in a Tax Efficient Way

Last quarter, we sent you a long list of reasons to contribute to a Roth IRA.  However, there is an alternative to NEW contributions and that is the CONVERSION.

What is a Roth Conversion?

If you have assets already held in an IRA account (often from rollovers from an old 401k), you can CONVERT those assets to a Roth IRA. That conversion is taxable, but you have effectively converted future taxable income to non-taxable income upon withdrawal.

What will it cost?

The amount you convert will be taxable at your normal income tax rate.  Therefore, if you are in a bracket higher than 28%, it may not be to your advantage.  If you are in the 25% or lower bracket, we typically recommend that you do it.  You can do small amounts each year to lessen the tax burden.  For example, you convert $10,000 per year from your IRA to your Roth IRA.  If you are in the 25% bracket, you will pay $2500 in additional income tax during the calendar year.

How do I pay the tax?

We recommend that you simply increase your federal withholding with your employer.  You DO NOT pay the tax out of the conversion itself as that defeats the purpose of the transaction.  

Why would I choose to increase my tax bill now?  Can't I just pay it later?

The reason we recommend doing conversions now is two-fold: 1) you are earning money now, and you will not be earning money upon retirement; 2) the taxes you pay now will likely be smaller than what you will pay later after the account has grown.  i.e.  Let's say that your current IRA account is valued at $50,000.  You choose to take $10,000 per year to convert.  You are a family of four with gross income of $173,000 per year and fall in the 25% bracket.  You pay tax of $2500 per year on the conversion, for a total of $12,500 in tax over 5 years.  Twenty years later, your $50,000 IRA is now worth $100,000.  You can take withdrawals from it for FREE on the full $100,000.

You may choose to leave all the assets in the regular IRA.  It will grow and grow to look like a big pile of money.  However, once you start taking withdrawals and have no other income, that big pile of money dwindles quickly - especially when you realize that you are paying taxes between 10 and 40% on everything you withdraw.

Who can do a Roth conversion?

Anyone.  There are absolutely no restrictions on who can execute a conversion.  You can do it all at once or do a little bit at a time to keep your tax bill in your current bracket.    Our IRA clients will be receiving a letter in the mail soon to remind them that this is an option that may be very cost-effective.

What does MVT get out of it?

Nothing.  We just want to help you get the most money you can out of your investments.  We do not earn any more or any less on our investment management fee for assisting you with a Roth Conversion.  However, it is essential that you have a knowledgeable tax preparer assist you with the details when filing your taxes.  If you do not have a tax preparer, let us know.


Danielle Woods, dwoods@mvtinvest.com, 865.271.9439

MVT Speakers Out and About:  IPPAC May 2017
 
Here at MVT, we are big advocates of investor education and training. On May 18th and 19th, members of MVT were invited to speak on several topics at the annual statewide conference of the Illinois Public Pension Advisory Committee in Rock Island, Illinois, on May 18th.  The primary attendees are trustees on Illinois police and firefighter pension funds.

John Mitchell was a member of the first investment panel entitled, " The New World of Investments: What The Donald Will Mean for the Investment World." The panel was chaired by David Klein of RBC Wealth Management, Economist Dr. William J. Polley and Matthew Strachan, Chief Investment Officer of Thorntons Investment Management. Mr. Strachan's came over from Scotland to attend IPPAC along with Stephen Webster, their firm's CEO. Following the day's events, MVT clients and managers, as well as  Thorntons Investment Management Executive Team, enjoyed dinner and a discussion about international investing.

On the 19th, John also chaired a panel entitled "A Primer on Performance," with panel members Spencer Klein from MB Financial, Bruce Ebel from Great Lakes Advisors and Attorney Barbara Bell.

William Yocius, MVT CEO, led a session on "Pension Board Jeopardy," a fun and informative way to review trustee issues, as part of the Ethics Section of the agenda. Year-after-year Bill's presentations remain among the most widely attended and highly rated at IPPAC meetings.

If you are interested in learning more about IPPAC or getting a schedule of upcoming events, you can find information at  www.realippac.com .  In addition, we are always glad to speak to investors on a variety of topics.  If you would like us to speak at an association gathering or simply sit down with an individual board or group of individuals, just let us know.  - John Mitchell, jmitchell@mvtinvest.com


IPPAC Website
The Cyclical Nature of Wealth:  
Preparing for the Ups and Downs

Did you know that 1 in 9 people will be in the top 1% of wealth in this country at some point in their lives?  And 70 percent of the U.S. population will find themselves for at least one year in the top 20th income percentile.   In contrast, between the ages of 25 and 60, 54 percent of the population will experience at least one year in poverty or near poverty.  The income distributions are not composed of static groups, but demonstrate fluid movement into and out of different income levels.

Individual fortunes rise and fall in this country.  An examination of the Forbes wealthiest lists shows some examples of how this can happen.  In 2016, a number of people (Jeff Bezos, Mark Zuckerberg, and Larry Ellison) moved up the list of the 400 wealthiest Americans due to rising tech stocks.  Bill Gates remained at #1 for the 23rd year in a row.  Note that Gates still owns 13% of Microsoft, but holds stakes in various other companies across different market sectors.  Elizabeth Holmes, the founder of Theranos, fell off the list due to the failure of her company, along with Bill Ackman, a hedge fund manager who bet wrong on one stock: Valeant Pharmaceuticals.  

Forbes also ranks the world’s billionaires.  Gates tops this list as well, as do Warren Buffet, the tech CEOs from the wealthiest Americans list, and Ortega, founder of the Spanish clothing chain Zara.  Notably, there were 195 new people on the list, with most from China.  The U.S. remains the country with the most billionaires, followed by China, Germany and India, in that order.

Another illustrative example of changing fortunes is Curt Schilling, who earned more than $114 million over 19 years as an MLB pitcher.  After investing in a failed video game company, Schilling declared bankruptcy in 2012 and was forced to sell his home.  While this case may be extreme in terms of dollar amounts, it illustrates that we are all subject to rising and falling fortunes no matter how talented we are. Talented, smart people are capable of making (and losing) incredible amounts of money.

What are some ways to hedge against the rising and falling fortunes that will occur during our lives?

  • Get Help:  Hiring a smart, experienced investment advisor is a great first step to help you and your family with investment decisions and to protect you from bad ones.

  • Pay yourself:  Making regular contributions to your IRA, Roth IRA, and/or other investment vehicle.  

  • Diversification:  A lack of diversification can occur when individuals fall in love with one stock.  Unlike Curt Schilling who invested a substantial sum in a video game company, MVT generally advises diversification of your portfolio.  Investing in only one company or one business sector is generally way too risky.  We follow the example of Bill Gates, who has sustained wealth by diversifying his investments.

  • Timing: In 2009, the market dropped to some of its lowest levels in history.  After this scare, many people failed to get back into the market, and, subsequently, missed one of the largest gains in stock market history.  MVT avoids timing the market by using an all-weather strategy of broad diversification and recommends consistent build-up of investment accounts through spending less than you earn through good budgeting.

  • Leverage:  MVT generally advises against leverage in a portfolio.  Individuals tend to over-leverage in real estate more than anything else through low down payments or by carrying too many or too high mortgages in rental real estate.  Another example of over-leveraging is by use of derivatives in accounts.  Call and put options create leverage by their small outlays to create options on a larger investment amount, which is why MVT does not maintain them for clients.  Margin accounts can compound this effect, but are useful as a temporary hedge against overdraws in custodial accounts.     

Let us know if you have any questions and thank you for your continued confidence in our firm.  
 
 
 - Amanda Vaught, avaught@mvtinvest.com

Mitchell, Vaught and Taylor, Inc.
Investment Advisors
53 W. Jackson Boulevard
Suite 905
Chicago, Illinois 60604
Phone: 312-922-1717

Wealth is the ability to fully experience life.

 - Henry David Thoreau