Cabot Wealth Management - Preserving & building wealth since 1983
Cabot Wealth Management preserves, manages and builds your wealth so you can achieve lifetime goals. Our mission is to take the stress and complexity out of your finances so you can enjoy life. We help individuals, families and business owners identify their financial needs and offer solutions that will work toward improving their lives.
Schwab Alliance: Keeping Clients Secure by Sonia Ernst
Fingerprint and Passcode Login
Clients can now log in to their Schwab Alliance accounts through the Schwab Mobile App with a fingerprint (or by entering a passcode).
This enhancement simplifies the login process without sacrificing security for users who have fingerprint and/or passcode access enabled on their iOS or Android devices. Clients who prefer to log in with their user ID and password will still have that option.
This is the latest in a series of recent enhancements to the Schwab Mobile App and Schwab Alliance website, including:
Clients can update their login IDs, passwords, and security questions on their
devices using a new feature on the Schwab Mobile App.
Eligible clients can estabilish and verify a MoneyLink transaction in minutes
by entering the external account’s login information in Schwab Alliance.
If you have any questions, contact the Schwab Alliance team.
Keeping Your Personal Information Secure by Steve Davis
As we move into 2019 the attempts to “steal” one’s personal data and information will be on the increase. It hasn’t decreased in the past 10 years; it only grows. Everyone should be aware of the continued sophistication of Phishing (via electronic communication) and Vishing (voice phishing, as in fraudulent phone calls), all with the purpose of taking our personal information to use in an illegal and harmful way. Here are some tips to remember:
• It is good to question a phone call or email from a “trusted source” such as your bank, credit card company, a familiar financial institution or even the Internal Revenue Service, and your state revenue department. Many people misrepresent themselves claiming to be this trusted source.
• Stealing your personal data can come from cyber criminals through emails or phone calls from people who seem like they want to “help you” over login problems, password changes, or other claims in the increased technology world.
• It is unusual for you to be contacted out of the blue with an email or phone call. Be sure to question why.
• As we move forward in our high-tech world, remember you should know exactly who you are giving information to.
• If you are contacted to provide some form of verification of financial information, be extremely cautious. Why do they not have that information already?
Phishing: The process of attempting to acquire sensitive information such as usernames, passwords and credit card details by masquerading as a trustworthy entity and using bulk email, which tries to evade spam filters. Emails claiming to be from popular social websites, banks, auction sites, or IT administrators are commonly used to lure the unsuspecting public. It’s a form of criminally fraudulent social engineering.
Vishing: The illegal access of data via voice over Internet Protocol (VoIP). Vishing is IP telephony’s version of phishing and uses voice messages to steal identities and financial resources. The term is a combination of “voice” and “phishing.”
The thought of saving enough money to sustain your current lifestyle for a long retirement can be daunting– especially for small business owners who face the daily pressures of running their business. A standard IRA or ROTH IRA have fairly low contribution limits. A traditional 401(k) plan is great for larger companies but can be costly to operate and not the best for small business. On the bright side, sole proprietors, small business owners and anyone who generates taxable, schedule C income has excellent retirement savings options available to them.
A Simplified Employee Pension Individual Retirement Arrangement (SEP IRA) allows a business owner to contribute a portion of the company profits to each employee (and themselves, of course). These contributions are based on a percentage of each employee’s earned income. The maximum contribution for a sole proprietor in 2019 is 20% of the business’s NET schedule C income (up to a maximum of $56,000). All contributions and earnings grow tax-deferred until they are withdrawn at retirement and plan contributions can be taken as a tax deduction to the business, thereby lowering taxable income.
A Savings Incentive Match Plan for Employees (SIMPLE) IRA gives each employee the option to make a pre-tax salary contribution (up to $13,000 in 2019 plus $3,000 for those over age 50). The company owner is then required to match up to 3 percent of the employee’s compensation. As with a SEP IRA, the employer contribution is tax-deductible. While the contribution limits are not as high as the SEP, the SIMPLE IRA is a great solution for companies with employees that want to save a portion of their own income for retirement.
The Individual 401(k) gives sole proprietors (and their spouses) the ability to contribute significantly more to their retirement savings than both the SEP and SIMPLE. By combining an “employee deferral” maximum of $19,000 (plus a $6,000 catch up for those over age 50) and the ability to defer a portion of the company’s profits, business owners can hit their maximum contribution limit of $56,000 with a lower level of income. These contributions grow tax-deferred until they are withdrawn for retirement, and a portion of the contributions can be used as a tax deduction for the business. The Individual 401(k) is appropriate for a sole proprietor with no plans to add additional employees.
DEFINED BENEFIT PLAN
Defined Benefit (DB) plans offer business owners the opportunity to save significantly more than they could if using a SEP, SIMPLE or 401(k). With a DB plan, the contributions are based on a projected retirement “benefit.”
In other words, a business owner decides how much income they want at retirement (up to the 2019 benefit maximum of $225,000) and an actuary determines how much the business needs to contribute each year to provide that level of retirement income. DB plans are a great option for small business owners looking for a way to boost their retirement savings in a short period of time. These plans are more expensive to implement and administer than other retirement plans due to their complexity, but they work well for sole proprietors (or business owners with a small number of employees) with a profitable business and a desire to save aggressively for retirement.
In summary, finding the right plan is a critical piece of the retirement savings puzzle. Company‑sponsored retirement plans offer the benefits of tax-deferred growth, tax-deductible contributions and high contribution limits. The decision about which plan to choose should be made within the context of your overall goals and the size and profitability of your business.
Amid a Volatile Year, We Find Smart Ways to Cut Losses
As part of our year-end tax planning, we strive to increase the tax efficiency of our investment portfolios. We implemented a tax loss harvesting strategy to help reduce current year tax liabilities, and, in some cases, carry over the remainder to future years. “Tax Loss Harvesting” refers to the process of liquidating a security to capture or realize capital losses that can be used to offset realized capital gains. Importantly, the investment strategy does not change in nature, since we maintain the same market exposure with a different security that has very high correlation with the security that was sold. By implementing this strategy, up to $3,000 of the recognized capital losses can be used to offset current year ordinary taxable income ($1,500 for married couples filing separately), and the remainder can be carried over to future years, indefinitely.
What happened in 2018: Volatility returned. In 2018 the US economy hummed, profits grew, and jobs were plentiful. But Mr. Market had already expected this rosy picture. Always looking ahead, stocks began digesting risks on the horizon, primarily trade tensions and the ongoing withdrawal of central bank liquidity. Let’s remember the quiescent climb of the prior year: in 2017 the S&P 500 returned almost 22% with barely a noticeable dip at any point. Throughout that year, stocks were slowly but steadily taking into account the rising probability of business-friendly tax reform (which wasn’t official until December 2017) and ongoing deregulation.
Thanks largely to that tax cut, 2018 corporate profits rose more than 20%. The economy grew about 3%, buoyed by fiscal stimulus (again, the tax cut) and a confident consumer (low unemployment, rising wages) …all good news. Yet, the S&P 500 index lost more than 4%, experiencing some wild swings. What happened? There were two major worries that weighed on stocks in 2018:
• Trade tensions rose, and tariffs began to take effect, with potentially more on the horizon. China is the main focus of the administration’s hawkish trade policies. The goals of getting China to open its market to more US products, and to enforce intellectual property (IP) rights rather than facilitate the theft of IP, are important. But the market clearly worries that this could devolve into a damaging battle of wills and cultures. And in the meantime, the direct business effects are rising prices, falling sales, and sinking sentiment in some key industries.
• The US central bank sped up its return to “normal.” The Fed hiked short-term interest rates four times and continued to slowly sell or let mature the bonds it had purchased to boost the recovery following the Great Recession. Central banks in Europe and Japan are also trying to reduce monetary stimulus. All that emergency central bank liquidity had served to pump up the value of risky assets from depressed levels, and aid economic recovery. Draining that liquidity may mean deflating some risky assets like stocks, so central banks will need to thread a needle.
I’ve focused here on US stocks, but the two big issues I discussed were global ones. 2018 started with “synchronized global growth” but the Chinese and European economies have slowed. Overall, international stocks fared worse than US ones, ending the year down about 14%.
So where are we now? Because 2018 brought rising corporate earnings and falling stocks, the market has gone from more expensive than average to cheaper than average (comparing P/E ratios across history.) And while the global economic signals are wobbly and do contain visible risks, they are on balance positive; the US is still growing and creating jobs. We’ll be watching developments globally in the new year. For an outlook, I invite you to read Rob Lutts’ letter in this publication.
It was a bit of a wild ride in the fixed income markets this year. We started the year off with a bang as rates rose rather dramatically throughout the first half of the year. As of June 30th, 2018, the Bloomberg Barclays Aggregate Bond Index, which is a broad index commonly used to represent investment grade bonds in the U.S., was in the red with a -1.62% total return. The U.S. treasury yield curve, a line that plots the interest rates at set points in time for differing maturity U.S. Treasury bonds, shifted higher during the first half of the year in a somewhat parallel fashion. For example, the three-month T-Bill yield went from 1.35% up to 1.90% (+55 basis points), two-year yield from 1.90% to 2.5% (+60 basis points), ten-year yield from 2.40% to 2.85 (+45), etc.
At the same time U.S. treasury rates began to climb, investment grade credit spreads began to rise also. The extra yield the average U.S. investment grade borrower (U.S. Corporations) had to pay versus the government to borrow reached the lowest amount post-financial crisis in the first month of 2018, approximately 0.80%. To put this into perspective, this “credit spread” measure has averaged 1.2% or (120 basis points) over the past five years. Given the fact that many U.S. corporations have used this era of low interest rates to extend out the maturities of their debt liabilities, the U.S. Corporate Bond Index has a longer duration index versus the Aggregate Index. As a result, as of June 30th the Bloomberg Barclays U.S. Corporate Bond Index was strikingly in the red with a -3.27% total return.
We were positioned well for the rise in rates with a defensive interest-rate risk profile. Our credit portfolio held up well also, with a much shorter average maturity than both the Aggregate and Corporate Bond Index. We continue to favor shorter-maturity corporate bonds.
The Federal Reserve (Fed) raised the federal funds rate once in March and again in June. The expectation mid-way through the year was for another two hikes in 2018, followed by three to four more in 2019. The Fed also began to decrease the size of its balance sheet, in essence, another form of tightening monetary policy. After nearly a decade of easy money and low interest rates as a backstop, the financial markets began to cry foul when it realized the proverbial “punch bowl” was being taken away. The U.S. Treasury yield curve began to flatten considerably. The graph below points out a strange-looking yield curve represented in green. The kink in the front end represents a small inversion. Inversion simply means shorter-term bonds yield more than longer-term bonds. Without getting too technical here, we’ll just point out that every recession going back to the 1950s was preceded by an inverted yield curve, so market participants get a bit nervous when they occur. We will be watching the slope of the yield curve closely in the coming months for clues as to how the end of this economic cycle may play out. For more extensive commentary regarding our fixed income and economic outlook, keep an eye out for a follow-up piece in the coming weeks.
As we close the books on 2018, the outlook for 2019 is better than you think! So, what’s our view of the US economy and markets as we begin 2019? You might be surprised to learn we are optimistic that the economy will continue to grow, and earnings will continue to rise. Why? The bear case is simply starting to look less likely to develop and is not gaining traction. However, there are forces in place that will counter most of the bear market concerns. We have experienced a long period of expansion – but there is no guarantee it all ends now. Interest rates continue to remain low (2.65% ten‑year treasury rate) and many sectors continue to grow nicely. Clearly some issues of confidence have been affected, and confidence will have to rise to make sure we do not talk ourselves into a recession. The Federal Reserve is aware of this and they are altering their course now. Markets in the USA fell close to 15% in December. We just experienced one of the worst December market performances in many years. Therefore, after close to a 20% correction in stocks, the markets today have pretty much priced in the impact of the negative concerns noted above.
So where do we derive our optimism on the economy and markets? Our confidence is rooted in our belief in the men and women who create innovation and contribute daily to capitalism globally. We are at a critical period of expanding innovation in nearly all sectors of our economy (transportation, healthcare, finance and banking and energy to name just a few). This is the digital transformation we are now in the midst of. I like Gregg Esterbrook’s 2018 book, It’s Better Than It Looks. I highly recommend it. Easterbrook refers to a concept of “That Which is Seen and That Which is Not Seen”, an essay by Frederic Bastia as an important and correct view point here. Here are just a few of his observations of what has NOT happened in the past decade: 1. Resources are not exhausted; 2. There are no runaway viruses and plagues; 3. The western nations are not choking on pollution; 4. Crime and war globally are not getting worse; 5. The economy drives everyone crazy, but it is functioning well; 6. Dictators aren’t winning, those economies embracing freedom and democracy continue to grow and prosper.
I know many of you are thinking I am way too optimistic. I do believe I am not just looking at the world through rose-colored glasses. I am clearly aware of huge problems in many parts of our economy. My confidence comes from my belief that mankind continues to innovate and develop solutions to problems. Our capitalistic system creates excellent rewards for those willing to try new ways of doing things. The result: growth in companies like Goggle, Apple, Salesforce.com, Netflix to name just a few. Yes, there will be a recession and contraction in our economy at some point in the coming years. It is inevitable. The key problem for investors is identifying just when that may be. It may be next year, or it could be in four years. In the meantime, life goes on and companies continue to innovate and grow and change for the better. We much prefer to focus on finding the new leading companies and let these companies work to grow our capital. Therefore, our advice is to take all those scary economic forecasts with a huge grain of salt and to not put too much credence in the gloom and doom economists. We are appreciative of the opportunity you have given us to manage your family’s wealth. We believe nothing is more important than to take sound steps forward in the preservation and growth of your hard-earned wealth.
Thank you to all who attended our fixed-income session at the conference this year. Unfortunately, we didn’t have quite the level of interest we had at last year’s session. I suppose next year I will have to come up with a more exciting title! If anyone has any ideas, please let me know. For those of you who are curious, I will review some of the main talking points here.
We began the session discussing our fixed-income portfolio construction process. Successful bond management starts with two very critical components, forecasting the future direction of interest rates and the future pricing of corporate credit risk. It all begins with our macro‑economic outlook which then helps us to formulate our forecasts. As the diagram below demonstrates, there are several steps in our thought process that ultimately lead us to individual security selection.
After we wrapped up our discussion around process, we reviewed the rising interest rate environment over the past twelve months. The chart below shows the rather dramatic rise in yields across a wide range of different U.S. Treasury Bond maturities. We also pointed out how closely the short‑term bonds move with the Federal Funds rate, which is set by the voting members of the Federal Open Market Committee at the U.S. Central Bank (Federal Reserve).
Chart Source: Bloomberg
We finished the session reviewing several key indicators concerning the current state of the economy and discussing our outlook over the next year or so. We covered the employment picture, inflation, the budget deficit, consumer and small‑business confidence, monetary policy, yield curve flattening as well as growing debt levels for households, governments and corporations. I encourage anyone who may be interested in this to call the office for a full copy of my presentation from the conference. Thanks again for all who attended, and I look forward to seeing you again next year.
Pictured here is Rob Lutts with an executive of Western Pest Services, a division of Rollins, Inc. Rob Lutts attended an investment program in August at the New York Stock Exchange by Rollins, Inc. (ROL). Rob was there researching the company for possible investment for Cabot growth portfolios. Rollins, Inc. has been listed on the NYSE for 50 Years and the company was celebrating that milestone with an investor day.
Rollins has an extraordinary record of shareholder value creation. Rollins has grown earnings consistently for decades. They are the leading provider of pest management services in North America and are a great example of corporate governance and consistent growth. They serve more than 2 million customers in protection against termites, rodents, and insects in the United States, Canada, and many overseas locations.
The IRS mandates that owners of retirement accounts (other than Roth IRAs) must take minimum distributions upon turning 70 1/2 and each year thereafter. The penalty for not taking the required minimum distribution (RMD) by the end of the current year, or by April 1, of the following year if you turned 70 1/2 in the current year, is 50% of the amount of the shortfall.
The RMD calculation must include all of your IRA accounts (except Roth IRAs). You can take the minimum distribution for each of your IRA accounts from any combination of your IRA accounts (other than Roth IRAs). However, the minimum distribution requirement for your profit sharing plan account must be calculated and counted separately from your IRA distribution requirements.
Contact your wealth advisor or client service representative today with questions regarding your RMD.
This year marked Cabot’s 29th Annual Wealth Management Conference held at the Hawthorne Hotel in Salem, MA. Thank you to all of our clients and friends who attended.
Our theme, Then and Now took us back over time to look at the changes and lessons learned over 35 years. The conference began with a welcome from Jim Gasparello followed by the morning keynote from Greg Stevens, Tom Vautin, and Steve Davis who discussed the 2018 Tax Law Changes. Following the morning keynote, attendees broke out into their choice of the following sessions:
Equity Investing Strategies
Stock Selection: Balancing Quality, Value and Growth presented by Craig Goryl
The Monopoly Portfolio: Power to Perform: New Technologies & Disruptive Innovation presented by Rob Lutts and Pedro Palandrani
Fixed Income Investing Insights
Configuring the Barbell Strategy: The What and Why presented by Nick Burwell
Portfolio Management Perspectives
Post-presentation discussion along with questions and answers from Cabot’s Portfolio Management Team (Rob Lutts, Craig Goryl, Nick Burwell and Pedro Palandrani)
Wealth Management and Estate Planning
Trends in Wealth Management: Things to Consider When Creating Your Financial Plan presented by Greg Stevens and Tom Vautin
Luncheon Keynote & Closing Remarks
Then and Now (1983 to 2018): Change and Lessons Learned presented by Rob Lutts