Client Newsletter - Winter
March 2018 Vol. 25
This Quarter: In the Market...

The first quarter has been very bouncy when compared with 2017, which was one of the least volatile years in recent market history. What is volatility? It refers to the distance between points in market prices. Simply put, there have been higher highs and lower lows so far this year than there were last year.

According to Liz Ann Sonders, Chief Investment Strategist at Charles Schwab and Company, Inc., "A wild ride would be an understatment to describe stock market action recently. A more aggressive Fed and a tariff announcement have played key parts, but we don't see these as threats to the bull market; just consistent with the heightened volatility we have been expecting." (Schwab Market Insight, March 2, 2018. Let us know if you would like to read the entire article).

We did see an official correction in early February with the markets down about 10%, but the rebound came quickly and sharply. For instance, let's look at the S&P 500 (the largest companies in the United States). If you invested $1,000 in the S&P 500 on January 1st, it was worth about $1,075 on January 26th. That's a 7.5% increase in less than 4 weeks! Then there was a plunge, and you had $967 on February 8th. If you toughed it out and didn't panic (as you shouldn't), you would be back up to $1,038 on March 13th. Either way, the S&P 500 is still worth more today than it was a year ago and five years before that.

Please keep in mind that these market dips are not always a bad thing. They remind us not to be complacent and not to expect that it will always go up. Maybe you have been taking more risk than you should. It might be a good time to consider reducing your stock exposure and taking some gains (after the market levels out, of course). It may also be a good time to add MORE to the stock market while prices are down. Lastly, it presents an opportunity to do a Roth conversion if you've been considering doing it (ask if you want to learn more about Roth conversions).

The stock market has and will always have volatility. Volatility does not equal a general market decline or some kind of crash. When you take the risk and invest in the stock market, you must anticipate that it will go up and down. It is very difficult to get in and out without making a mess of your portfolio. The goal is to create a long-term plan and stick with it. Be confident that we are well aware of what is happening in the market, and we maintain a diversified portfolio that includes both bonds and stocks. We will not panic and make emotional decisions with your money. Please reach out to your advisor if you have questions or concerns.

- Danielle Taylor Woods, dwoods@mvtinvest.com

DEADLINES TO REMEMBER: April 17th

  • Individual tax returns are due (extensions are allowed to October 16th)
  • Roth and Traditional IRA contribution deadline for 2017
  • Coverdell Education Savings Account contribution deadline for 2017
How Does Tax Reform Impact Me?

On December 22, 2017, the President signed into law the Tax Cuts and Jobs Act, aka the Tax Reform Act of 2017. This is the first major overhaul of the income tax code since 1986. There are two distinct pieces: 1) changes to business taxes; and 2) changes to individual taxes. Most of the changes do not go into effect until 2018.

Business Taxes: The most obvious change is that the highest corporate tax rate has been lowered from 35% to 21% for all corporations or LLC's that are taxed as corporations. It does away with personal service corporations that were taxed higher than others. This change does not apply to pass-through companies. Pass-through companies are those that do not pay federal taxes as a separate entity. Pass-through companies include S-corps, partnerships and LLC's that are taxed as partnerships, and sole proprietors (small businesses that file a Schedule C on their personal tax return). Alternative minimum tax has been removed from the corporate tax return.

While there are a variety of changes that impact different companies in various ways, a big one for all companies is the eliminiation of the 50% deduction of meals and entertainment expenses. If you take clients to dinner or host educational conferences, you can no longer deduct those expenses.

For those companies that are not corporations and are considered pass-throughs, there is a 20% deduction against net income. That means that the first 20% of your net income (income minus expenses = net income) is not taxed. The IRS has not provided any publications or forms to illustrate how that will actually work, but the idea is that you will pay no taxes on the first 20% of your net income as a sole proprietor, an S-corp or a partnership.

Why should you care if you don't own a business? Because you may want to consider doing so. If you have some side income or have always wanted to have a small business of your own, the new tax change to pass-throughs could provide a big benefit.

Individual Taxes: There are a lot of changes to individual tax returns. However, we would not consider these changes a simplification of your current tax record requirements. For those taxpayers who have typically itemized deductions on Schedule A, you may not be able to do so beginning in 2018. However, you or your taxpreparer will still need to weigh your deductions against the new standard deduction to determine whether or not you will itemize going forward. Here is a list of things to look out for in 2018:

  • Lower income tax brackets, but the brackets are different.
  • Personal exemptions are gone, except for limited instances.
  • The Standard Deduction has basically doubled for all taxpayers.
  • Itemized Deductions will not be used as often as before.
  • If you itemize, be aware that only the first $10,000 of ALL state and local taxes will be allowed. That's the same for married and single filers.
  • If you still itemize, unreimbursed employee expenses are no longer allowed. We recommend negotiating with your employer for reimbursement of these expenses. Companies can still deduct those expenses, but you, as the employee, cannot.
  • If you get divorced and must pay alimony after 2018, it will not be deductible to you, nor will it be considered income to the receiving ex-spouse. This goes into effect in 2019.
  • The Child Tax Credit is now $2000 per child. This is huge for parents. The income limits are higher than they were for 2017 and earlier as well.

There are a number of other items, but these are the big ones that impact most taxpayers. Many people will see a reduction in income tax, so be sure to adjust your withholding accordingly. There is no point in struggling to make ends meet during the year and waiting for a very large refund next year. In fact, it's a GREAT reason to increase your savings! If you need help, just let us know.

- Danielle Taylor Woods, dwoods@mvtinvest.com
Bond Yields on the Rise...Finally

The 10-year Treasury yield has moved from 2.15% on September 1st, 2017, to 2.89% on March 19th, 2018. What causes yields to rise?

Three main factors have contributed to the rise in interest rates: 1) Inflation; 2) Higher Budget Deficits; and 3) Structural changes that are being put in place at the Federal Reserve Bank.

Inflation: As the US approaches full employment, we see wages go up. Stronger economic growth is a positive thing, but it does tend to increase inflation. With the demand for more workers, we should see nice increases in wages paid as the growing economy needs more and more workers to meet that demand. The old "dollar down, inflation up" theory is still around and followed by lots of economists. As the value of the dollar goes down, import prices will go up, which will cause inflation to go up. The positive consequence is that the US should see an increase in exports, since it is now less expensive for other countries to buy our goods.

Deficit: What about the higher deficits that everyone is talking about? Yep, that talk alone increases inflation because we will have to borrow more and more money from national banks to cover the costs of carrying and forwarding these deficits on to our grandchildren.

The Federal Reserve: Simply put, the Federal Reserve will likely be raising interest rates at least 4 times this year. The bonds on the Federal Reserve Balance sheet are being paid back with borrowings on new bonds. How much will we need to increase borrowing? Without trying to be precise, a good ball park figure is $400 Billion (yes, that is a capital B) over last year. More supply usually means less demand which quickly turns into higher yields on Treasury Bonds issued by the Federal Reserve.

What about YOU? How will this affect the value of your current fixed holdings? Remember that bond prices and yields have an inverse relationship. When yields go up, prices go down. It is never too late or too early to learn that Bond Rule. I even have a video of my 5-year old granddaughter (who will be paying the national debt that her grandfather is racking up) reciting it!

Our plan at MVT to combat the rise in the prices of fixed income portfolios and preserve capital is to purchase very high quality corporate bonds that mature in 1-5 years, in addition to Treasury holdings. Historically, this has been a good place to be in a rising yield environment.

Any Questions? Feel free to call or email me. The best part of my job is catching up with and answering questions from the people that have trusted MVT with their investments for all these years.

- John T. Mitchell, President, jmitchell@mvinvest.com, 312.922.1717 (office), 630.388.9006 (cell)
Why Investors Should be Requiring the
Fiduciary Standard of their Advisors
Mitchell, Vaught & Taylor, Inc. is an independent investment advisory firm that has always been a fiduciary to its clients. In fact, independent investment advisors were a new idea back in the mid-90s. Before that, clients were all subject to the sales pitches of various brokerage firms and had very little protection. Those protections have increased, and now investors can hire an independent investment advisor that is REQUIRED to put its clients' needs first.

You may not be aware of it, but it is not a legal requirement for all financial advisors to make decisions in your best interest. A fiduciary standard is the highest standard for client care that requires the advisor to make decisions that will benefit the client even when they will not benefit the advisor. The lesser standard is that of suitability , which simply requires that a broker only recommend assets that are appropriate for you but not necessarily the best option or bang for your buck.

A recent Appellate Court decision in the southern section of the country has struck down the Department of Labor's attempt to extend the Fiduciary Standard to all advisors. Over the last year or so, there has been a movement in the financial industry, spearheaded by the Department of Labor, to require the fiduciary standard for all advisory and brokerage firms. Brokers have staunchly opposed it, claiming it will make it more expensive for them to operate; and they can still give good advice while still receiving commissions. Why would it be good for investors for all advisors to adhere to the Fiduciary Standard?

I found a great example in an old Forbes online article titled, "The Difference Between Fiduciary and Suitability Standards," by Peter Lazaroff, dated April 6, 2016. (https://www.forbes.com/sites/peterlazaroff/2016/04/06/the-difference-between-fiduciary-and-suitability-standards/#f932a0d25563). I'll summarize that writer's illustration:

Scenario 1: You go car shopping and stop at Dealership A, which sells Candy Cars (go with it). You give the salesperson a list of requirements you have for your new vehicle. What you are describing is obviously a car sold by Crispy Cars. However, the salesperson at Dealership A is only required to follow the suitability standard. They tell you that they have a car that is very close to what you want. You ask no further questions and buy it.

Scenario 2: You go car shopping at Dealership B. When you give the salesperson the list of requirements you have for your new vehicle, they are a little bummed. This salesperson is a fiduciary and must advise you that they have a car similar to the one you are looking for, except it's more expensive. The car you really want is sold by Crispy Cars, and you should go there to get it.

In Scenario 1, you have no idea that you should have gone to Crispy Cars to get what you were looking for because the salesperson was not obligated to tell you. They were very nice, very professional, and told you what you wanted to hear. However, the salesperson in Scenario 2 was obligated to do what was best for you even if it meant they lose the commission on that car purchase.

Obviously, there is no car dealership in the world that would offer you the sort of support that Scenario 2 offers, but the example makes our point. What do you think?

- Danielle Woods, dwoods@mvtinvest.com

A Letter to Our Clients: "I'm Sorry to Bother You..."
I don't think I'm exaggerating when I say that I get at least one phone call, email or text each week that begins with the phrase; "I'm sorry to bother you."

I know that I speak for myself as well as my colleagues when I say that I strive to be accessible and approachable. We all make an effort to respond to phone calls, texts and emails as quickly as possible. I hope that none of us come off bothered or tired or annoyed when we respond to our clients' requests.

That only leaves me with one conclusion: Our clients are just too nice!

In case we have not made it abundantly clear, let me state for the record that YOU ARE NOT BOTHERING US. We work for you. We want you to call with questions and concerns. It helps us to keep things in mind that we might not have thought of. We prefer to have contact with you, and we want to know what is going on. This is a relationship that requires trust and communication. So please know that you are not bothering us. If we are busy, it's because we do good work and have accumulated a nice group of clients that rely on us. We are never too busy for you, and we are not bothered. Please never hesitate to call, email or text us.

- Danielle Taylor Woods, dwoods@mvtinvest.com
Mitchell, Vaught and Taylor, Inc.
Investment Advisors
53 W. Jackson Boulevard
Suite 905
Chicago, Illinois 60604
Phone: 312-922-1717
Fax: 312-922-1772
Today people who hold cash equivalents feel comfortable. They shouldn't. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value.

- Warren Buffett