June 28, 2022 by Steve Tomisek, CFP® By: W. Kirk Taylor, CFP® With consumer prices (housing, food, and energy) surging to a four-decade high over the past year, uncertainty about when inflationary prices may ease makes the concept of stretching your dollar or saving more money, significantly more relevant. Moreover, investors are increasingly concerned about the decline in stock prices this year, and the growing prospects for a recession, perhaps later this year or in early 2023. Consequently, now is the perfect time to reflect on how you can cut costs and stretch your cash flow. I recently had the opportunity to discuss this exact topic during an interview with Lindsey Mastis on her ABC 7 show, “The Wellness Desk”. We discussed several beneficial tips for stretching your dollar and negating some of the effects of rising prices. You can watch the hour-long broadcast here or below you can read a synopsis of the money-saving tips and tricks I discussed with Lindsey. Consider Store Brand vs. Generic Brand Products An important yet dismissed tactic to save more money is to explore buying store-brand, or generic, products instead of name-brand ones. For example, when comparing only eight products, shoppers at Walmart can save up to $13.00 or 45%, in comparison to purchasing solely name-brand products. If you were to purchase the name-brand products, you would spend $32.90, whereas the Walmart-brand products (just one generic example) cost only $16.59 in total, resulting in almost a $17.00 difference. This concept of utilizing store-brand products is vital as food price inflation continues to rise drastically in grocery stores and even restaurants. Cut Your Utility Costs When trying to cut your utility bill, here are various options to consider: Install a “smart” thermostat Doing so can save up to 12% – 15% on your heating and cooling costs. One of the most popular smart thermostats only costs around $130.00. Explore the programmable features or settings that your current thermostat may have to reduce your bills. Seal or insulate your home Up to 20% of the inside the walls of your home air is lost due to poor insulation and air leaks, which usually start in the attic or basement. By weatherizing your home, you can save up to 10% annually on your energy bill. Install weather stripping around doors and windows and be sure to caulk around outlets and pipes. Reduce the humidity in your home When your house is humid, the air conditioner has to work harder to lower the temperature. Keep your house at 30% to 50% humidity. You can do this by taking shorter showers with cooler water and covering pots and pans while cooking Install a dehumidifier on your HVAC system. A quality dehumidifier can cut humidity in your home by as much as 50% in an hour and a half. Close your blinds Three-fourths of sunlight from your windows is transferred into your house as heat, which forces your air conditioner to work harder and longer. Close your blinds during the day when it’s hot to promote a cooler household. Try using “smart blinds,” or motorized shades, so you can adjust them according to a set schedule based on the sun rising and setting or remotely, as needed. Use energy-efficient light bulbs Although LED, CFL, and halogen incandescent light bulbs cost more upfront, they use dramatically less energy than regular light bulbs. If you use energy-efficient bulbs, you may be able to save up to $45.00 annually. Conserve water There are endless options to save your water: Turn off your faucet when washing your hands, brushing your teeth, and shaving. Limit your showers to five minutes (or less); install water-saving showerheads. Repair leaky faucets or pipes, and consider a rain barrel. Other Tips & Tricks In addition to cutting your utility bill, consider these ideas: Make more meals at home Although it is easier to go out to eat, making your own food at home is tremendously cheaper, even given the recent surge in food prices. Find a feasible balance between preparing your own meals and treating yourself to a meal at a restaurant. Consider cutting back on expensive habit If you smoke, drink alcohol, or consume coffee every day, consider cutting back on these habits or cutting them out entirely. Utilize inexpensive transportation Consider walking or biking when feasible. This is a great way to save money and stay in shape at the same time. Explore carpooling with friends. Explore comparison shopping Various thrift stores and clearance racks offer the same quality of clothes at cheaper prices. Buy clothing at the end of a season when retailers look to unload unsold inventories. Capital Investments If you are willing to make long-term commitment to lowering your costs, consider these capital investments: Invest in solar panels or solar-powered roofs Solar panels have the ability to capture the sun’s energy and convert that energy into usable energy, even on the cloudiest day. Although solar panels are not cheap upfront, they have become a worthy and important investment. Here’s why… Solar panels pay themselves off over time. They will intensely cut down your electric bill. Fewer fossil fuels will be used for energy, meaning less carbon dioxide will enter our atmosphere. They have little maintenance, are reliable, and are extremely quiet. You may be able to profit from selling your excess energy to the National grid (your house will be connected to the National grid at night when your solar panels are not in use). According to statistics in Ohio, solar panels can save an average of $56,775 during one’s lifetime, while taking 7-8 years to fully pay for themselves. Drive an electric vehicle Electric vehicles (EVs) cost much less to operate than traditional gas-oriented automobiles. You can charge your car either at home or at public charging stations. EVs are completely emission-free. It costs only $9.00 to fully charge a 200-mile range electric vehicle. Some energy utilities may offer incentives for electric vehicle charging. Install tinted windows Tinted windows can reduce energy costs, as your energy bill goes down without remembering to close the blinds. The temperature in your home is more easily regulated as tinted windows create consistency across rooms that may be hotter or cooler. They provide the same benefits of window replacement without the expensive cost. Sun damage on furniture near windows is prevented, while sun glares decrease. Tints can block up to 99.9% of UV rays, reject up to 79% of solar heat, and reduce up to 87% of the sun’s glare. Safety and security increases for your home, as there is privacy from others, and the tint makes it harder for the glass to shatter. Window tinting is around $150.00 to $220.00 per pane. Whereas, replacing windows can cost up to $900.00 per pane. The average cost for tinting is between $1,000.00 and $2,500.00, as it depends on the total amount of square footage covered. They are water-resistant, along with the option of having a scratch-resistant coating. There are three main kinds of window tinting: Solar control, which rejects the sun’s energy, and reduces energy bills and house damage. Decorative, which gives privacy while transferring visible light, can inhibit your view in either direction and are usually frosted or etched. Security, which is a structural brace for glass (supported by a structural sealant) and are anti-tear tints. You can even tint your windows yourself! Although it is usually more cost-efficient to hire a professional, Home Depot and Lowe’s offer two types of window films: silver and ceramic. It is relatively easy to do but it is recommended to practice before application. Some films may not be compatible with your glass causing long-term damage, so make sure to research before purchasing and applying your own tints. Overall, there are limitless opportunities to save money and offset the impact of rising prices. Find what works best for your personal experiences and keep your mind open to any tactic that may assist in conserving cash flow. Organize and prioritize your spending based on your vital needs, so that you are spending money on the things that matter the most to you. No matter the outlook for inflation in the coming years, stretching your dollar, whenever and wherever it makes sense for you, is a smart thing to do. Always remember to keep calm and save!
April 26, 2022 by Steve Tomisek, CFP® By: Gaby S. Dominguez Confident Kids℠ is a newsletter dedicated to helping parents and grandparents educate the next generation of young investors in the family how to think about money, i.e., how to save, how to invest, and how to become financially responsible as children, teenagers, young adults, and eventually as parents. “The earlier, the better” is a popular refrain that is vital in accumulating wealth over time, as it harnesses the power of compound interest i.e., “interest on interest.” Parents dream of financial independence for their children. To that end, many shell out big bucks for the best education money can buy. A quality higher-education, from a respected university often translates into a well-paying, post-college career. All too often though, parent’s stop short of educating children on how to save and invest at an early age. When you are a parent, you want your children to have the most financial success possible. Therefore, influencing them to take steps to save, as soon as they begin earning income, will benefit their future finances even further. The first step that your child can take, once they’ve started earning income, in high school or college, is to fund an Individual Retirement Account, specifically a ROTH IRA, once they have “earned income.” As a parent, you may be constantly stressing over how to ensure your children’s future overall success and what next steps to take. The basic principle needed to improve one’s financial literacy is grasping the overall concept of saving and how to implement it into your own life. Therefore, the use of an Individual Retirement Account, or IRA, becomes more than ideal for opening the door to opportunity for your child’s financial literacy. An Individual Retirement Account, or IRA, is a retirement savings account that is typically funded with pre-tax dollars depending on one’s income. Introducing an account like this into your child’s life will add to their understanding of saving and investing for their future. To re-emphasize, it is extremely important to begin this process with your child earlier rather than later, as they will benefit more from the reinvestment of dividends and interest earnings over time, along with the power of compounding. Embarking on this journey with your child will put them on the path toward financial independence! When your child is old enough to legally work, your children can contribute their earnings to an Individual Retirement Account (IRA), if they have earned income. Opening an IRA account is the first opportunity for your child to take their financial literacy to the next level. They are creating a tangible connection between money earned, money saved, and money invested, with a goal of generating more money for the future, instead of spending it. Since there are different kinds of IRA accounts, there is a need for evaluating the various factors provided and how each type works overall… In general, the ROTH IRA option is utilized more commonly for children as they are likely in a zero-income tax bracket and don’t need the tax break by making a deductible contribution to a pre-tax IRA. Unlike a Traditional IRA account, a ROTH IRA is funded with after-tax dollars. Lastly, withdrawals for ROTH IRAs are tax-free and penalty-free after five years, or after the age of 59½. When opening a ROTH IRA for your child, the adult maintains control of the account until the child reaches age of majority, when control of the account can be transferred from the guardian to the child. In this case, the account will be initially established as a custodial account. Custodial accounts are commonly opened as a Uniform Transfer to Minors Act (UTMA) or Uniform Gift to Minors Act (UGMA – only used in South Carolina). In some states, the UTMA account age of majority may differ from the legal age of majority, which is 18. For example, in Maryland, the UTMA account age of majority is 21. However, in Virginia, it is age 18, but there is an option to change it to either 21 or 25. In Washington, D.C., the UTMA account age of majority is 18 or 21. These options allow the custodian, or parent, to manage the funds until the minor is fully prepared to manage it themselves. Your child can contribute up to $6,000 per year, or the total of a child’s earned income for the year, whichever is less. These contributions must come from earned income generated from activities such as, yard work, washing cars, babysitting, cleaning homes, selling lemonade, or caring for or walking pets. In addition to getting a traditional job at places like McDonalds’ or Chipotle, earned income can also come through helping family businesses. For example, if you own a small business, have your child assist you by fulfilling tasks such as filing and shredding paper, bookkeeping, or social media management. Parents can also contribute to a ROTH IRA for their child, which is commonly known as “parental matching.” As an example, if your child earned $1,000 this year and decided to spend $225 on clothes, video games, and other wants, they could contribute $775 of the money they earned into their ROTH IRA, while you can make up the $225 difference, if you choose to. If you believe that you and your children are prepared to take on this financial voyage together, then there are steps to consider that will assist in properly achieving your goals… First, work with your financial advisor for guidance and use them as a valuable resource for educating your child on saving and investing. Second, research financial institutions that provide custodial IRAs. It is important to create a plan on how contributions will be invested, such as determining asset allocation and exploring desired stocks, mutual funds, and ETFs. Finally, it is time to begin venturing on this path with your children. They will learn to become financially aware and responsible, while building on valuable lessons, like compounding and importance of saving. Jump into this process confidently with your children, so they can become financially savvy at a young age! ■ Please stay tuned for Part 2 of this Confident Kids℠ Series where I will discuss my personal experience opening my first investment account!
April 7, 2022 by Steve Tomisek, CFP® W. Kirk Taylor, CFP® In March of 2021, after more than three decades of advising individual investors, I founded Kirk Capital Advisors, LLC with the goal of delivering investment and financial planning advice that is 100% conflict-free, 100% transparent and 100% personal. During the past year, our commitment to excellence and our desire to provide our clients with a remarkable experience that is unique and personal to them was recognized by our peers as KIRK made: The Top Financial Professionals list for 2021; Northern Virginia magazine The Best in Wealth Management list for 2022; Washingtonian magazine In addition, in January of this year after six years of service as an FPA board member, I began my tenure as the 2022 President of the Financial Planning Association (FPA) of the National Capital Area (NCA). FPA NCA serves the DC Metro area and is one of the largest FPA Chapters in the country. It’s a privilege to lead our Chapter and it’s an honor to give back to a profession that has served me and my family since 1988. As I reflect on the past year, I am thankful to have such a dedicated team by my side and I am especially grateful for the trust and confidence that our clients continue to place in us and in our abilities. With warm regard, W. Kirk Taylor, CFP® Founder & Chief Investment Officer
March 18, 2022 by Steve Tomisek, CFP® Mark D. Troutman, PhD, CFP®, Director of Financial Planning The famous baseball coach Yogi Berra once famously observed that “…It\’s tough to make predictions, especially about the future.” Yet, sound investing requires combining a fact-based view of the future with reasonable assumptions about essential information that is needed to make fully formed decisions. Furthermore, sound investing requires the humility to question widely accepted assumptions and identify unknown but necessary facts. As former Secretary of Defense Don Rumsfeld once said, “you don’t know, what you don’t know”. Finally, and perhaps above all, when new information appears and it’s clear that the facts have changed, it’s critical that you change your view and pivot accordingly. The crisis in Europe is truly different and navigating it requires all of the facets of sound investing cited above. Russia’s invasion of Ukraine has thrown financial markets into disarray, and by all measures, the outcome is highly uncertain. In situations like this, i.e., when uncertainty is high and predicting what happens next is challenging, it is helpful to consider a range of possible outcomes and to assign probabilities to those outcomes. This exercise helps us identify what is known and unknown, and it helps us pivot in the right direction with confidence, once we are able to clarify and combine unknown information with known information. What appears below are a range of scenarios and outcomes. Some are very dangerous but unlikely and some are less dangerous and more likely, and are importantly based on the facts presently at hand. These scenarios come to us from national security professionals with whom I have worked with in the past, and from whom seem to have made the right calls early on. I’ve interpreted these scenarios with my fellow colleagues in the field of economics to assess the macroeconomic landscape both in the immediate term, and over the long run. First, Ukrainian forces might be able to extend their early successes and reach a standstill, potentially leading to a Russian withdrawal. This outcome, however, seems very unlikely given the depth and breadth of Russia’s military forces in comparison to Ukrainian forces. History tells us that such an outcome is possible but only with outside support, which the US and Europe are providing to Ukraine, albeit in a very risk averse manner i.e., support thus far, has come in the form of economic sanctions, not troops on the ground or the enforcement of a no-fly zone. Even if this ideal scenario comes true, i.e., Ukrainian forces win the war, both Europe and the larger world would be less secure. Such an uncertainty might lead investors to adopt a more conservative investment posture. A second and more likely outcome is a grinding campaign by Russian forces that results in a replacement of the Ukrainian government by a pro-Russia puppet regime. Another possibility involves a negotiated settlement whereby Ukraine continues as a state, in part or whole, with a form of Finland-like neutrality. In any case, we can expect continued Ukrainian resistance coupled extreme brutality brought upon them as Russian forces seek to consolidate their current gains. This crisis seems destined to drag on for longer than any of us would like, likely continuing the volatility of late, while bringing about the risk of lower asset prices until the crisis has concluded. If Ukraine successfully fights back, such setbacks would likely lead to political unrest in Russia and greater uncertainty for the markets in general. Ukraine and Russia account for about thirty percent of world wheat output. The Economist points out that Russia is the source of ten percent of the world’s oil, 24% of world natural gas, and is a major supplier of basic industrial materials such as nickel and more advanced materials critical to high technology manufacturing. The world can replace these basic commodities, but the adjustments will be costly and painful, and they will not be replaced in the short run. In short, even the best of outcomes, will not come with a cost and negative implications for the economy. A third and immensely more dangerous set of outcomes, involves direct clashes between NATO forces and Russian forces. While western governments are seeking to avoid such an outcome, Russia’s provocative behavior raises the risks of accidental contact, or worse, direct military contact that leads to escalation. In fact, just this past weekend, Russia bombed a Ukrainian military base that just 15 miles from the Poland border, killing 35 people and injuring as many as 100 more. This is undoubtedly too close for comfort. Moreover, Russia’s reckless behavior around Ukrainian nuclear power facilities risks radiation discharges and introduces multiple hazards to greater Europe. A radiation discharge could warrant the presence of US and European response teams to assist in clean up, thereby increasing the risk of direct clashes between Russian and NATO forces on Ukrainian soil. A few conclusions clearly flow from the facts at hand: One, the Russian invasion of Ukraine, may only seek to further ignite inflation that sits at a 40 year high, pushing out even further the timeframe in which inflation will subside. By all measures, it is likely that high inflation will persist at least through 2022 before it cools. Moreover, there is the real possibility that inflation might be permanently higher, even after this military crisis subsides. Two, business conditions have entered a new period of uncertainty, and this is particularly evident given supply chain disruptions and the need for physical security of supply chains. Companies will respond by seeking more secure and reliable sources for materials, intermediate inputs, and final production. This is positive development in the long run but hereto, it does not come without costs in the short run. These costs manifest themselves in the form lower corporate profits, while the uncertainty around future profits implies lower price-to-earnings multiples. In aggregate, lower asset prices may be the end result. Third, expect western governments to invest more in defense security. I attended a recent defense sector conference at which the Department of Defense Chief Financial Officer stated that the pending defense budget bill on its way to the President for signature, contains a 5.7% increase in the DoD’s topline. Germany, long seeking to minimize defense spending, announced a greater than $100B investment in its defense. Companies that have provided standout capability to the present crisis such as Lockheed, and Raytheon (Stinger and Javelin missiles), and European manufacturers SAAB (Sweden), Thales (France), MBDA (Multinational Europe) and Bakar (Turkey) will likely be looked to for innovation in the days that follow. I opened with humor and seek to close what might be a dark commentary with wisdom. The saying “…keep calm and carry on…” which was common in the UK during the dark days of the World War II, seems to be a good mindset given the set of circumstances in front of us. Kirk and I are calm. We have mapped out a range of scenarios and outcomes as discussed above. We are vigilantly monitoring short-term developments and we are prepared to adopt a more defensive investment posture, if warranted. At the same time, we are opportunistically focused on uncovering rewarding investment opportunities for long-term investors. While there is undoubtedly more volatility to come in the near term, in the years ahead we will look back on this time as an opportunity to buy quality assets at depressed prices. We pray for peace and count it a privilege that you allow us to partner with you during these uncertain times. ■
March 8, 2022 by Steve Tomisek, CFP® Kirk Capital Advisors is honored to be named to the 2022 Best in Wealth Management list for the Washingtonian Magazine! This recognition is a testament to our firm\’s core values: integrity, excellence, connection, and vision, while highlighting our passion for helping you and your family achieve your life goals. You can view the Washingtonian March 2022 issue called \”Our Pets\” via the link: https://www.washingtonian.com/2022/02/24/march-2022-our-pets/. The 2022 Award: The nomination period for the 2022 award was March 16th – April 16th. The 2022 award was published in March 2022. January. Kirk Capital Advisors, LLC did not pay to be included in this list. View Disclosure Information here… https://kirk.321staging.com/disclosures/ Kirk Capital Advisors, LLC is a fee-only registered investment advisor. We provide comprehensive wealth management services to affluent families, entrepreneurs, and business owners. At KIRK, we believe that “family comes first” and that generational planning holds the key to reaching your life goals. Our approach to wealth management takes into consideration the unique needs of all members of your family and includes financial literacy, education, and investment coaching for younger generations. At Kirk Capital Advisors, each and every interaction with our team is extremely personal and unique to you and your family. Visit us at kirk.321staging.com/ to learn more. Washingtonian Magazine, Best in Wealth Management (Volume 57, Issue 6: February 24, 2022): 108. https://www.washingtonian.com/2022/02/24/march-2022-our-pets/
March 3, 2022 by Steve Tomisek, CFP® Mark D. Troutman, PhD, CFP® I’m sure many of you, like Kirk and I are watching the unfolding events in Ukraine with shock and horror. This chain of events is quite personal to me, having served 28 years in uniform stationed in Europe, Asia, and the US with two combat deployments to the Middle East, all aimed at deterring conflict. Even now, I teach an economics course within the Georgetown and Johns Hopkins securities studies programs, where subjects discussed in the news such as energy flows and financial sanctions are regular seminar topics. The economic impact of such conflicts is my domain, but I would be remiss to call us all first, to remember the human cost of conflict. Our hearts break for the many who have suffered loss in this unfolding crisis, and we pray for the swift restoration of liberty and accountability for those responsible for needless conflict. We have been speaking with many of you over the last few days about the impact of unfolding events in Europe. Specifically, many wonder where they might end, and what steps you should take to secure yourself, your family, and your finances. This article will not speculate on the outcome in Ukraine. War never unfolds in the manner combatants intend as they start. However, we can identify some prudent steps that are appropriate for these times. First, expect more volatility and uncertainty as the weeks progress. The Russian government has clearly planned its moves for years, and its leadership will not be easily swayed by temporary setbacks. Likewise, the Ukrainian people have a long and proud history of resistance, and they will staunchly defend their homes. This crisis will take unexpected turns before it concludes, and markets will be volatile as a result. Simply stated, it is unwise to “play” short-term turns in markets such as these. At one point on February 24th, the S&P 500 was down 5% from its opening, and almost every market commentator predicted a 10%-15% additional loss. After President Biden spoke on Thursday afternoon, markets recovered, moved into positive territory, and continued to climb through Friday. The S&P closed Friday within eight points (0.2%) of its Monday opening. An untrained observer would conclude that the market has “fully priced in” the conflict in Ukraine. Don’t believe it. Rather, expect more such roller coaster rides in the weeks and months ahead. Historical evidence indicates that unexpected conflicts on average bring market downturns of 10%-20% as they unfold. Once conflicts conclude, markets recover quickly. This is a key reason why investors should not be fixated on the headline news risk but rather focus on history which tells us that the recent correction will likely be short-lived. In fact, if historical evidence is a guide, financial crises (e.g. The Great Recession) should concern us more than wars – they bring average market downturns of 33%. First and foremost, client portfolios generally hold more than enough liquidity in the form of fixed income and cash, to weather any near-term storm. At the same time, we will continue to be judicious about where and when we invest in the equity markets on your behalf, and as always, we will seek to wisely exploit the investment opportunities that develop as a result of market volatility. Second, this conflict has unique features. The conflict is taking place in a region that involves significant resource flows. Ukraine is a major provider of food and basic materials to the European Union and China. The sanctions announced by the US and its European and Asian allies deeply impact energy (oil and natural gas), commodity, and financial markets. Supply chains are already tight, and our earlier market analyses indicated ample evidence to support a view of mounting inflationary pressures. The developments in Ukraine will add to commodity shortages, and they will stoke inflationary fires and further roil supply chains. So, we double down on our conclusion that winds have shifted and that portfolios must evolve to favor the Value investment style, in lieu of the Growth investment style, as the preferred protection mechanism against inflation. For more insights on the rotation away from growth toward value, please see Kirk’s recent article “Are You Prepared for “The Great Rotation?” Third, the developments in Ukraine place central banks in an untenable position. Their usual reaction to the crisis is to provide liquidity. Having been late to curb credit growth, the Federal Reserve and major central banks are in the difficult position of having to restrain inflation amid a crisis. They are likely to favor easing, which reinforces inflation. So, this enhances the imperative to protect your portfolio against unforeseen inflation. Fourth and finally, a new aspect of this conflict is the potential for cyber-attacks. We had a taste of this new warfare domain in the recent Colonial Pipeline incident, which impacted fuel supplies flowing along the eastern corridor for several months. Russia and its allies have highly developed internet attack capabilities and have demonstrated the willingness to use them. Many companies have realized this new domain of conflict and protected themselves. Many have not. There is a high probability that Russia will attempt to attack key infrastructure, which could lead to further market volatility. On a personal level, ensure that you have updated your virus protection and backed up key files. Kirk Capital Advisors, along with the support of our custodians, has sought the best in cyber security protection for your accounts. You should be vigilant, yet calm. We certainly are. While deeply unsettled by the assault on eighty years of relative peace in Europe, I remain optimistic about the resilience of the United States and its community of free nations. Likewise, the unique resilience of the US economy has weathered wars, political and financial crises, and pandemics. Mr. Putin, I firmly believe, will learn the lesson that other autocrats have learned throughout history: that the sons and daughters of liberty are fearsome adversaries once aroused. Protect yourself, weather the storm, and focus on a long-term strategy to protect yourself and the ones whom you hold dear. We stand ready to assist you in that calling.
February 18, 2022 by Steve Tomisek, CFP® W. Kirk Taylor, CFP® We’re pleased to provide you with the Kirk Capital Advisors 2022 Tax Guide. The tax filing deadline (April 18th) is less than two months away and taxpayers are busy gathering their tax documents e.g., W-2’s, 1099’s, K-1’s, bank statements and expense receipts and making the mad dash to their tax advisors office for their annual checkup. Since taxes, and most importantly minimizing taxes, are on everyone’s minds currently, we thought this would be a good time to share with you our 2022 Tax Guide. We find this handy reference tool invaluable in our daily investment and tax planning discussions with clients. In this guide you will find information on tax rates for ordinary income, capital gains and gifts, as well marginal tax rates and contribution limits for retirement plans. As always, the information provided in the 2022 Tax Guide is general in nature and is not intended as tax or legal advice. The information provided is believed to be accurate, but no assurance is made to that effect. Tax laws are subject to change. Please consult with your tax advisor before acting on any of the information contained herein. As you make the push to wrap up 2021 taxes, don’t forget to use this Tax Guide as a planning tool for minimizing your 2022 taxes. Please view the Tax Guide by clicking the button below! Kirk Capital Advisors 2022 Tax Guide
February 15, 2022 by Steve Tomisek, CFP® W. Kirk Taylor, CFP ® 2021 was a year in which investors consistently climbed “A Wall of Worry” and looked past a long list of issues to worry about such as the January 6th Capitol Hill assault, rising inflation, supply chain disruptions and two new Covid-19 variants, to name a few. The S&P 500 [1] gained 26.9%, the Dow Jones Industrial Average (DJIA [2]) gained 18.7% and the Nasdaq Composite gained 21.4% in 2021. In fact, the S&P 500 notched 70 all-time new highs in 2021, a record not seen since 1995. There is no doubt that the ability to shrug of obvious risk factors is the hallmark of bull markets; that was certainly the case in 2021. So far in 2022 however, the market has not been able to look past emerging risks, especially with regard to inflation and the prospect for higher interest rates as the Federal Reserve Board looks to taper its bond purchases and lift the Federal Funds rate multiple times over the balance of the year. Indeed, fears that the Federal Reserve Board is “behind the curve” is creating daily volatility that has not been seen since the COVID-19 induced sell-off in early 2020. The Dual Mandate In our last Kirk Confident article, Winds of Change?, my colleague Dr. Mark Troutman laid out the case for persistently higher inflation over the coming quarters and pointed out that some inflationary inputs (notably labor wages) may be with us for longer than we’d like and is currently expected. Moreover, the Fed’s dual mandate of keeping inflation in check while maximizing employment is likely to be tested in a way that has not been tested in decades. With both the equity and fixed income markets trading at, or near all time highs, and P/E multiples well-above the long run median, the risk of a policy mistake by the Fed, is likely not inconsequential to investors. Consequently, we think this new investment landscape infers meaningful portfolio changes for the average investor with regard to risk management, asset allocation and security selection. Value versus Growth As the title of this article suggests, our view is that we are in the early stages of The Great Rotation. We believe that the economic backdrop in front of us, sets the stage for a multi-year rotation away from companies that trade at lofty price earnings (P/E) multiples a.k.a. growth companies and into low P/E multiple companies a.k.a. value. Growth, as an investment style, has outperformed value for the better part of the last decade and noticeably over the three and five year periods as shown in the chart below, so one has to ask if we’re not on the cusp of a large reversion to the mean, with regard to investment style. According to Morningstar, the iShares S&P 500 Value (symbol: IVE) ETF currently trades at 16.7 times next year’s earnings, while the iShares S&P 500 Growth (symbol: IVW) ETF currently trades at nearly 21 times next year’s earnings. As you can see in the chart below, large cap growth and large cap value delivered nearly identical returns in 2021 but the strength in growth quickly reversed course as we flipped the calendar for the new year. In our view, the market has sent a clear signal that a changing of the guard is at hand. Although growth stocks are much cheaper than they were only a few months ago, this near term trend of value outperforming growth is likely to persist for quite some time. We believe that the economic backdrop in front of us sets the stage for a multi-year a rotation away from companies that trade at lofty price earnings (P/E) multiples a.k.a. growth companies and into low P/E multiple companies a.k.a. value. In our view, the market has sent a clear signal that a changing of the guard is at hand. Go Where the Hockey Puck is Going, Not Where it is When a reporter asked famed NHL hockey player Wayne Gretsky why he was such great hockey player he responded by saying that he went to where the hockey puck was “going”, not where it “was”. The same is true for investors; the trick to staying “ahead” of the market on a “risk-adjusted basis” is to anticipate where the puck is going. From the perspective of optimizing a portfolio, investors should follow these basic investment principles: overweight/underweight stocks and bonds given underlying economic conditions overweight stocks when the economy is expanding and underweight bonds overweight bonds when the economy is contracting and underweight stocks overweight/underweight S&P 500 sectors based on the current and near-term outlook for the business cycle when the economy is expanding, sectors such as consumer discretionary as they tend to outperform the market on a relative basis when the economy is contracting, sectors such as consumer staples tend to outperform the market on a relative basis In short, we believe that the conditions have changed such that expansion will slow, and it calls for a shift to favor value over growth. In closing, now is the time for investors to seriously scrutinize their portfolios and know quite clearly where they stand with respect to growth versus value. Additionally, investors who profited nicely by riding the growth wave over the past decade are likely woefully underinvested in value stocks and in sectors of the economy that tend to perform best in an inflationary environment coupled with rising interest rates. That’s only logical. Afterall, when was the last time boring companies like Chevron, Alcoa and Coca-Cola were making headline news? One final point. We’re not saying that well-known growth names like Amazon, Apple, Google and Costco etc. should not be represented in a balanced portfolio. Rather we are saying that if these companies represent an outsized part of your portfolio, either directly or indirectly via mutual funds or ETFs, know exactly what your exposure is and have a strategy for rebalancing. While there’s little reason to fear a recession in the near-term, it’s clear that if the Fed cannot engineer a soft-landing once its rate hike campaign is underway, the risks will be to the downside for investors in the form of bear market. As the saying goes, “bulls make money, bears make money, but pigs get slaughtered”……and now is not the time to be piggish! Footnotes: [1] What Is the S&P 500? How Does It Work?, Benjamin Curry December 8, 2021, https://www.forbes.com/advisor/investing/what-is-sp-500/ [2] Dow Jones Industrial Average: What Is the DJIA?, Benjamin Curry March 3, 2021, https://www.forbes.com/advisor/investing/what-is-djia/
February 8, 2022 by Steve Tomisek, CFP® By: Mark D. Troutman, PhD, CFP® The band The Scorpions was formed in 1965 in Hanover, Germany at a time when music caught the hearts and minds of listeners worldwide. By the mid-80s, the Scorpions had risen to prominence in the world of rock-n-roll with future mega-bands such as Metallica, Def Leppard and Iron Maiden standing in as their opening act . In 1985, they released several hit songs including “Send Me an Angel” and “Wind of Change” [1]. The latter very popular hit celebrated the changes signaling the end of the Cold War. Most notable was the band’s tour through the Soviet Union, a development unheard of just a few years earlier. This remarkable sign of the times eventually drove people behind the Iron Curtain to bring down a wall. In June of 1987, Ronald Reagan delivered his now famous “tear down this wall” speech in Berlin. Many historians believe this speech marked a seminal turning point in the Cold War. Indeed, this was the start of something big! Much like in 1987, the financial markets today are also signaling the coming winds of change – in the form of inflation driven by a combination of supply and demand effects more persistent than was first believed. In previous articles, we have indicated that we were watching the recent rise in inflation pressures closely as the rebirth of inflation carries with it, significant investment implications. In our estimation, times have changed – and the Winds of Change have turned conditions away from low interest rates and easy money to persistent and higher inflation. Given the prospects of persistent and higher inflation for the foreseeable future, the question now is not whether interest rates will rise, but how fast will they rise and when will they peak? This rising interest rate environment calls for a different approach to portfolio construction. In this article, I present the base case for the different approach based on economics, and in an article next week, we make the case for “The Great Rotation” and discuss the implications on asset allocation and portfolio composition. It is worth noting that while market conditions drive a change in portfolio composition, they do not alter the long term strategy of wealth accumulation founded through investments in high quality equities coupled with prudent asset allocation and rebalancing, consistent risk management, cost management and tax efficiency. What conditions have changed? A combination of policy change, supply constraints and demand shocks have raised the risk of more persistent inflation. Two years ago, we were at full employment. The sudden COVID pandemic caused businesses to shut down and drove up unemployment that reduced consumer spending. Countries closed borders, which disrupted supply chains. The US government responded with massive stimulus and the federal reserve shifted its policy to support employment and worried less about price stability. We find ourselves now with supply side impacts that are more persistent than first suspected. Some supply chain disruptions such as microchip shortages are likely to persist for some time, as new capacity will take time to build. Other disruptions such as port backlogs and energy shortages will sort out more quickly as higher prices provide incentives for suppliers to bring idle capacity back online. But some supply constraints – most notably labor shortages – face more uncertain paths to resolution. Workers have been slow to return to labor markets, and demand for goods has produced an extraordinarily tight jobs market. This forces employers to compete for workers with higher wages and drives up overall labor costs. The labor force since the start of COVID is 4.1M workers smaller than February 2020, a time of near full employment. Most departed workers fall into two categories [2]: Older full time workers who decided to retire. These workers are unlikely to rejoin the workforce on a full time basis. Younger workers, often women, who serve ongoing caregiving demands such as illness or school age children. These workers may rejoin the workforce as the effects of COVID subside and wages rise. What is not in short supply in this picture is demand, which has been stoked by unprecedented fiscal ($5.3T) [3] and monetary ($4.7T) [4] stimulus. While these demand effects are beginning to fade, there is an enormous spending momentum that is competing for limited supply. These effects combine to raise the risk of higher and more persistent inflation. In large measure, the view that an end to COVID will resolve these price pressures through restored capacity, untangled supply chains and returned workers (a supply side approach) is sound. But the persistent inflation causes damage and runs the risk of outlasting patience to wait for market resolution. In labor markets, the risk is “wage push inflation” where workers demand wage increases in response to rising prices and tight labor markets give workers bargaining leverage. Companies have already begun to raise wages as they compete for workers in an extraordinarily tight workforce. Near term inflation places the Federal Reserve under pressure to shift from an emphasis on full employment to an emphasis on controlling inflation. The Fed has curtailed the growth of its balance sheet and signaled a rise in interest rates. These conditions have begun to flatten the yield curve and impacted financial markets. A risk in the weeks forward will be a Fed that makes the policy error of raising rates too aggressively, crushing demand and triggering a recession. As stated earlier, our basic strategy of building wealth has not changed. Rather, what has changed is the selection of investment vehicles we favor. In particular, the era of low inflation, market slack and plentiful, cheap money are likely behind us for the immediate future. These conditions favored the performance of “growth” stocks that provide high returns in a low growth economy [5]. Conditions of rising inflation and interest rates favor a “value” based approach [6]. Under these conditions, companies that can impose price control on their supply chains along with the ability to impose price rises on their customers to offset higher input costs generally perform better. Also, companies with future cash flows undervalued relative to market competitors will fare better. In addition, we’re looking for income producing assets that perform better than bonds, as bond prices fall when interest rates rise. In this category, real estate and companies that produce essential commodities appear more attractive. Stated another way, these methods seek to purchase rising future cash flows at a discount and find alternatives to fixed debt payments that will be repaid with dollars of inflation reduced purchasing power. Therefore, we are engaged in an ongoing effort to seek companies with growth opportunities at discounted prices and a market position that allows them to control their input prices while raising their own prices. We also seek fixed income alternatives that preserve underlying capital values. We will continue to emphasize low cost and tax efficiency, so our clients build wealth to meet their goals. Good strategists change their tactics when the wind of change blows, but they stay focused on the long term goal. The facts have changed. So, we’re changing tactics to protect and grow your wealth. ■ Footnotes: [1] Send Me An Angel, Scorpions November 1, 2009, https://www.youtube.com/watch?v=1UUYjd2rjsE [2] The Employment Situation, Bureau of Labor Statistics January 2022, https://www.bls.gov/news.release/pdf/empsit.pdf [3] Here’s Everything the Federal Government Has Done to Respond to the Coronavirus So Far, Peter G. Peterson Foundation March, 15, 2021, https://www.pgpf.org/blog/2021/03/heres-everything-congress-has-done-to-respond-to-the-coronavirus-so-far [4] Assets: Total Assets (Less Eliminations from Consolidation): Wednesday Level , FRED Economic Data February 2, 2022, https://fred.stlouisfed.org/series/WALCL [5] Growth Stock, Adam Hayes January 10, 2022, https://www.investopedia.com/terms/g/growthstock.asp [6] Value Stock, Tim Smith December 4, 2021, https://www.investopedia.com/terms/v/valuestock.asp
