Monthly Archives: October 2017

Financial Fact | Exchange Traded Funds vs. Mutual Funds: What You Need To Know

 

Did You Know There Are A Few Subtle, Yet Key Differences Between Mutual Funds and Exchange Traded Funds (ETFs)?

 

The Value of Pooled Investment is Diversification

Both mutual funds and Exchange Traded Funds (ETFs) provide diversification benefits to investors because they invest in a basket of securities rather than a single position.

 

There are both low-fee, passive mutual funds and ETFs that track an index. In addition, there are actively managed ETFs and mutual funds, which charge higher expense ratios due to their active management.

 

How Mutual Funds and ETFs Trade

This is where the similarities end. Mutual funds are priced and traded at the close of the trading day and are based on the closing values of all securities in the fund. In contrast, ETFs are openly traded throughout the day, and as a result, their values fluctuate as the trading day progresses. This characteristic gives investors the flexibility to move in and out of ETFs, an advantage they do not have with mutual funds.

 

In addition, while ETF prices can deviate from the value of the underlying securities held in the fund, mutual funds cannot. Because of this flexibility, the number of different ETFs has grown substantially in recent years. Between 2001 and 2014, the number of ETFs climbed from 102 to 1,375 (per the trade association for the mutual fund industry, the Investment Company Institute).

 

ETFs Can Be More Tax-Efficient

ETFs are also more tax-efficient than mutual funds. At the end of the year, mutual funds are required to distribute all taxable gains that are generated by annual trading activity. Even if the fund strategy does not involve significant trading, the act of redeeming shares for outgoing investors can force fund managers to sell positions in the fund and generate taxable gains.

 

ETFs, on the other hand, do not normally generate such capital gains. Therefore, the potential capital gains exposure of a mutual fund is an important metric when assessing the fund’s value. These tax concerns are not relevant except when investing inside of a tax-deferred retirement vehicle such as a 401(k) or an IRA.

 

If you have any questions about which investment vehicle will best suit your needs, please reach out to your advisor to further explore the differences between mutual funds and ETFs.

 

This material is a general opinion and provides general information compiled by the Firm from sources believed to be reliable at the time of this material being distributed. The opinions or views expressed in this material are not intended to be financial, legal, or tax advice and may change without notice. Clients should always seek advice regarding their particular accounts and transactions from their financial advisor before making investment decisions. All investments involve risk. Past results do not guarantee future performance. There is no guarantee that any investment will return a particular performance result or a better performance result over another investment option.
There is no guarantee that a diversified portfolio will out perform a non-diversified portfolio in any given market environment. It is a method used to manage investment risk. 

 

 

 


 

Jason Mishaw, Associate Wealth Managers,Jason Mishaw, MSF

 

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As an associate wealth manager at Willis Johnson & Associates, Jason Mishaw is actively involved in both the Financial Planning role and the Investment Management role. On the financial planning side, he helps to implement customized financial plans for WJA clients. On the Investment Management side, under the supervision of a Senior Wealth Manager, he assesses the financial goals of WJA clients and assists in creating a customized strategy to further those goals.

 

Jason received a Master of Science in Finance at the University of Houston C.T. Bauer College of Business, a B.A. in economics and a B.S. in biochemistry and cell biology from Rice University.

 


 

Thoughts From Willis | Remembering Black Monday: What We Can Learn From the 1987 Market Crash

Last week was the 30th anniversary of Black Monday, October 19, 1987. On this day, the market dropped 23 percent in 24 hours. I remember the day, the week, and the year very well.

 

At the time of the market crash, I was four years into my new career and had recently left the security of working as an accountant to enter the emerging industry of financial planning. Stockbrokers had been around for hundreds of years in one form or another, but financial planning was still in the early stages of its inception.

 

Around the time of the financial planning industry’s debut, the International Board of Standards and Practices for Certified Financial Planners (IBCFP) introduced the official CFP® Certification Examination. I received my CFP certification in March 1990 and went on to establish a wealth management firm dedicated to helping clients build a proactive plan for their financial future.

 

As many of you already know, financial planning is the development, implementation and monitoring of a long-term financial strategy. Your financial planner should be prepared to navigate every potential roadblock, from the typical forced layoff, to an unprecedented event such as Black Monday.

 

Such occurrences can impact your long-term financial plan, especially when emotional reactions are involved. That’s why, as your financial advisor, it’s our job to assess the impact of such events on your financial future before they occur, and work with you to develop a plan that mitigates such risk. Our goal is to respond to such events in a composed, methodical fashion without allowing emotions to negatively impact your financial future.

 

Black Monday: From Willis’s Perspective

So, back to Black Monday, October 19, 1987.

 

Black Monday Social Graphic

The year had big run-ups in the market, which led to a 23 percent decline over a single day. However, the market had already fallen nearly 16 percent over the prior two months, resulting in a peak-to-trough decline of almost 40 percent. The surprise result is that the Dow ended up at a two percent return for the end of the year.

 

Riding out the events of 1987 without planning or making financial adjustments would not have had a major impact on the financial plans of a majority of individuals. However, selling when the market was as much as 34 percent down, could devastate a comfortable retirement or easily set one back five to ten years.

 

What Can We Learn From Black Monday?

In our current financial environment, I believe it’s critical to emphasize the following two points to our clients:

 

1. The development of a long-term investment plan is more important than ever

2. You should understand and designate which assets and portfolios will serve as your income source during retirement 

 

If you are employed and do not expect to retire within the next three years, stay the course. On the other hand, if you plan to retire and commence utilizing your investments as an income source, it could be an opportune time to adjust your investment allocation.

 

As retirement looms on the horizon, it may be reasonable for you to consider reducing your stock/equity exposure. This is a perfect example as to why I strongly advocate meeting with your financial advisor every six months. During these sessions, your advisor is not always going to change the major plan, but they will work with you take advantage of the current market environment in a way that supports your financial goals.

 

If you’re retired and living on your investments, it’s necessary to establish a cash flow plan. This plan is usually made up of a combination of resources, i.e. Social Security, pensions, bonds, and dividend income along with stock market appreciation. In addition, it’s pertinent that you establish a short-term emergency fund and a cash reserve account to cover any living expenses during your retirement.

 

How Should Those in Retirement Take Advantage of the Current Stock Market High?

If you’re in the retirement stage of your financial journey, you should work with your advisor to capitalize on the current market rally. The most commonly employed financial strategies are:

 

Re-balance your portfolio: 

For example, if our standard recommended stock/equity exposure is 65 percent and your portfolio has increased to 70 percent stock/equity, then it may be time to rebalance your portfolio. Generally, we would advise that you sell five percent of these investments.

Accelerate major purchases:

For example, if you plan to purchase a car in the next 18 months, sell a portion of your stocks/equities and set the money aside to fund the expense.

 

Overall, you should work with your financial advisor to implement and annually review a long-term financial plan. Rely on the facts, your long-term wealth management plan, and the knowledge of your financial consultant to guide your decisions.

 

We strongly recommend that you have a strategic discussion with your financial advisor before taking action. If you have any questions, feel free to reach out to the WJ&A team for more information or to schedule a meeting. 

 

 

 

 

Willis Johnson, CFP®

President and CEO

Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss. Past performance is not a guarantee of future results. This information is not intended to be a substitute for specific individualized advice and should only be relied upon when coordinated with individual professional advice

Financial Fact | How to Make the Most of Your Hurricane Harvey Property Loss Deductions

Did you know that you can deduct personal property losses caused by Hurricane Harvey?

 

The IRS allows you to deduct the value of the losses incurred on personal property as a result of Hurricane Harvey.

 

There are two ways to assess the loss: 1) measure the decrease in the property’s Fair Market Value (FMV), or 2) measure the property’s adjusted cost basis.

 

Property Loss Deductions (1)The total cost of repairs to restore the property to its condition prior to the Hurricane, though not explicitly part of a casualty loss, can be used to measure the FMV decrease if the following apply: the repairs are made, the repairs are necessary to restoring the property to its pre-Harvey condition, the repairs are not excessive, and the property value post-repairs does not exceed the value of the property before the damages were incurred.

 

You cannot deduct casualty losses that are covered by insurance unless you file a timely claim for reimbursement and deduct any reimbursement or expected reimbursement amount from the claim.

 

Personal property losses are considered itemized deductions on Schedule A of your tax return, along with your property taxes, mortgage interest, and charitable deductions. Your allowable deductions for these losses are those that are greater than the sum of $100 and 10% of your Adjusted Gross Income (AGI).

 

For example, consider that a couple incurred $25,000 in personal property losses during Hurricane Harvey. These losses are not subject to insurance reimbursement and the couple’s 2017 AGI is $100,000. In this situation, the couple is allowed to deduct $14,900 in casualty losses, ($25,000 – $100- (10% of $100,000)).

 

There’s an additional benefit to taking a casualty loss for personal property damages. Under IRC Section 165(i), the IRS allows you to treat the loss as if it occurred in the year immediately preceding the tax year in which the disaster took place (i.e. deduct the loss in 2016, not 2017).

 

IRC Section 165(i) is particularly helpful if your AGI was lower in 2016 than 2017, and your casualty losses amount to slightly less than 10% of your 2017 AGI. Thus, your 10% threshold is lower in 2016 than 2017, making it easier for you to qualify for a deduction if you claim the loss on an amended 2016 tax return. This way, you can deduct the losses in a manner that both suits your financial situation and maximizes your tax refund.

 

It is important to note that these IRS rules apply only to casualty losses incurred on personal property. If you sustained damage to business property, the losses are deductible without itemization and are not subject to any limitations. If you were affected by Hurricane Harvey, please consult your CPA or tax professional for advice before taking any action. 

 


Jason Mishaw, Associate Wealth Managers,Jason Mishaw, MSF

 

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As an associate wealth manager at Willis Johnson & Associates, Jason Mishaw is actively involved in both the Financial Planning role and the Investment Management role. On the financial planning side, he helps to implement customized financial plans for WJA clients. On the Investment Management side, under the supervision of a Senior Wealth Manager, he assesses the financial goals of WJA clients and assists in creating a customized strategy to further those goals.

 

Jason received a Master of Science in Finance at the University of Houston C.T. Bauer College of Business, a B.A. in economics and a B.S. in biochemistry and cell biology from Rice University.

 


 

What Nick’s Reading | The Prospect of Corporate Tax Reform is Moving the Market

 

Despite what happens in regards to the proposed tax reform effort, the outcome will impact the market. This is to be expected, considering the heavy Republican focus on tax reform action. Policy makers have established the issue as a priority on the legislative agenda, and market pricing will shift as investors weigh the likelihood of the reform’s approval. This political uncertainty is one reason we believe valuations have been stretched above their long-run averages. If tax reform is passed, the market may experience an even more dramatic run.   

 

How does tax reform affect stock valuations?

 

According to Capital Economics, American companies are holding over $2.6 trillion overseas. Republicans argue that a decrease in corporate taxes will allow companies to bring these cash hoards back home, thus creating further investments, jobs, and industry opportunities in the U.S. They predict this shift will grow the U.S. economy and enlarge the national tax base, resulting in an improved financial standing for all Americans. Many Democrats steadfastly disagree and expect the money will contribute solely to the wealth of equity owners.

 

Regardless of the effect corporate tax changes will have on overseas investments, after-tax corporate earnings are a primary factor in determining the value of the stock market. As corporate taxes decrease, after-tax earnings increase, and so does the market’s value.

 

Consider that the current forward price-to-earnings (P/E) ratio of the S&P 500 is about 20x. In other words, the market is willing to pay 20 times every dollar’s worth of earnings, or a P/E of 20/1. If corporate taxes are decreased from 35% to 20%, companies will pay less in taxes, and after-tax earnings will likely increase.

 

If reducing corporate taxes to 20% results in a 20% earnings increase, the P/E ratio will also change. The original P/E multiple, 20/1 (or 20), will change to 20/1.2 (or about 17), which we regard as a fairer valuation.  

 

Willis Johnson & Associates believes the prospect of tax reform has been a driving force in the recent market run. Even if market pricing only reflects a 30-40% chance of tax reform, valuations can be dramatically affected. If reform does not occur, the market may decline as valuations adjust. If reform does occur, we may be off to the races once again. Either way, our wealth managers will monitor the market diligently to determine the best investment strategies for the future and prepare our clients for either outcome.

 

This material is a general opinion regarding current markets and economy outlooks and provides general information compiled by the Firm from sources believed to be reliable at the time of this material being distributed. All contained opinions and material relied upon may change or become outdated without notice.  The Firm makes no representation or guarantee of the accuracy of the opinions or views expressed or information relied upon from third parties. The opinions or views expressed in this material are not intended to be financial, legal, or tax advice. Clients should always seek advice regarding their particular accounts and transactions from their financial advisor before making investment decisions.
All investments involve risk. Past results do not guarantee future performance. There is no guarantee that any investment will return a particular performance result or a better performance result over another investment option. 
This material may contain forward-looking statements and projections. There are no guarantees that these results will be achieved. It is our goal to help investors by identifying changing market conditions; however, investors should be aware that no investment advisor can accurately predict all of the changes that may occur in the economy or the stock market.

 


nickNick Johnson, CFA®, CFP®

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Nick Johnson believes that financial planning is more than numbers on a balance sheet and a standardized process. People are unique and should be treated as such. 

 

As Vice President and Wealth Manager at Willis Johnson & Associates, his goal is to really get to know his clients, all the while providing a proactive approach to comprehensive wealth management.


Market Update | The Markets (as of market close September 29, 2017)

Trading during the summer months is customarily slow, and the summer of 2017 proved no different. July kicked off the third quarter with equity markets enjoying noteworthy gains over their June closing values. Both the Dow (2.54%) and S&P 500 (1.93%) posted significant gains, as did the Global Dow (3.13%). The Nasdaq posted a very favorable 3.38% monthly increase. The yield on long-term bonds changed very little from June as investors seemed to focus on surging equities. Crude oil prices reached $50 per barrel by the end of July after closing June at $46 per barrel. The national average retail regular gasoline price was $2.269 per gallon on July 31, down from the June 26 selling price of $2.288.

 

Chart

 

Equities held their own in August, despite hurricanes that devastated several southern states and Puerto Rico, causing extraordinary economic loss. Conflicts both at home and abroad certainly influenced investor sentiment. Clashes between protestors in Charlottesville, Virginia, and escalating tensions between the United States and North Korea dominated the news. Nevertheless, a late-month rally in August pushed equities ahead of their July values. The Russell 2000 decreased from its July closing value as energy stocks plunged. The Dow and S&P 500 posted marginal gains, while the Nasdaq led the month ticking up 1.27%. Long-term bond prices rose, with the yield on 10-year Treasuries falling to 2.12%…Click here for full article.

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