Good as Gold?

Headline:  Good as Gold??

Date:11/19/2020

Body: I read an interesting article in Investor’s Business Daily, about Gold.  The link to the full article is below.

Gold is the store of value that many investors are encouraged to run to when they are unsure of the direction of the stock market.  In August, prices were near $2,070 per ounce and is approximately $1,860 now.  This would seem to indicate weakness in the gold market, but Berkshire Hathaway just made a major investment in a gold exploration firm, so, there seems to be some difference of opinion.

Gold has a very long  history as a store of value.

2,000 B.C.E., Egyptian and other traders began to use gold jewelry as a store of value, but some would get a very good deal, and some would get bamboozled by others.   So, starting in 560 B.C.E., there began to be gold-currency that carried a seal of some political power to imbue it with an official value.  The U.S. used to be on the “gold standard” meaning that each dollar printed entitled the holder so some quantity of real gold, but this reliance ended in 1971.

How would one use gold and gold-mining stocks in a portfolio?

Most investors seem to use investments in gold as a hedge against inflation worries.  Currently, nearly every nation in the world is pumping liquidity into their markets and keeping interest rates low; This makes some people very worried about inflation. (In point of fact, a significant amount of assets in the balance sheet for the International Monetary Fund, is held in gold.)   Added to this, it appears that U.S. currency might lose its place as a world reserve currency (what will replace it is unclear.)   But, gold will still be gold so people might migrate there in an attempt to hold value in their money, as the U.S. Dollar weakens.

How can the small investor get in on this investment?

  1.  The small investor can purchase gold coinage or bullion.  But, choose this option and you also have to pay for insurance and secure storage.   Please figure these costs into your investment.
  2. The small investor can buy these gold-mining company stocks directly in the market.  If you do this, understand that the stock prices are often volatile.   If you are serious about one company, look carefully at the dividend history and the dividend payout ratio very carefully.
  3. The small investor can also purchase an ETF that purchases gold-mining stocks.

However, there seems to be one more way.   Finding and exploiting a gold mine is both risky and expensive, and there are companies that have sprung up to “help” gold-mining companies in this initial funding; These companies are called “royalty companies.”   Royalty companies typically loan investment money in return for rights to buy gold later at below-market-prices. 

If one wants to get in on this profit, but at a lower price point, perhaps one should consider an investment in silver.   Silver is a precious metal (It used to be 1 of the 2 metals that backed U.S. currency) and has industrial applications.    As manufacturing is currently down, before it ramps back up significantly, they need to invest in raw materials.  In this way, one might profit from an investment in silver.

Conclusion: Should I flip a coin?

I think the conclusion depends a lot upon the time horizon that you have in mind.  If you have a tranche of money earmarked for your retirement in 1-2 years, an investment in gold could make sense as a store of protected value.   (This is especially because the value of gold seems to have a significant reverse relationship with interest rates, and it seems that in the near future, national governments will exert effort to keep interest rates low.)  But, if you have a longer time horizon, you might be better off putting your investment money elsewhere.   It has been estimated that over several decades, an investment in the stock market has yielded a return of 6.5%, and an investment in gold just over 1%.

REFERENCES

How Can I Invest in Gold? (investopedia.com)

The Beginner’s Guide to Investing in Gold | The Motley Fool

How To Invest In Gold – Forbes Advisor

Gold as an Investment: Should You Buy It? (thebalance.com)

Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice.   Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA

Don’t let one Storm leave you Soaked!!

Headline: Don’t let one Storm Leave you Soaked.

Date: 11/17/2020

Body:  Rain.  Too little and crops don’t grow.   Too much, and there are landslides and massive flooding.  Your financial life can be similar in some ways, and that is why you should consider getting an umbrella insurance policy.  There is a great article on this topic written by Kiplinger’s, and the  link follows https://www.kiplinger.com/personal-finance/insurance/umbrella-insurance/601650/what-is-umbrella-insurance-and-do-i-need-it

What is an umbrella insurance policy?

Umbrella insurance is a flavor of personal liability insurance that “steps in” if your have a claim against you that can’t be covered by your other liability insurances.  It will cover things like libel and slander.  If you are a landlord, this insurance can protect you from claims filed by your tenants.    Upwards of $1,000,000 of coverage can cost you only $150-$300 per year.  Be aware: the umbrella coverage will only kick in if you have also maintained sufficient primary insurance on your car or home.

Interestingly, an umbrella policy can also be used to pay for your legal expenses in a liability suit.   So, if you lose, it would pay for the judgement against you and the legal fees. (Please note that it you DO lose, the judgement will likely also include a portion against future earnings, and the umbrella coverage would also shield these future earnings.  If you win, I umbrella liability coverage could also be used to pay for your legal fees.

Further those people who are on a board of directors for any company should get Directors and Officers Insurance (D&O), and the umbrella policy interacts with this coverage.   If a person is a consultant of any type, and has obtained Errors and Omissions Insurance (E&O), the umbrella policy will act to backstop this policy as well.

Some people are wrong about what it is

Some people think that the umbrella policy is the same as “excess liability insurance” and it is not the same at all.  For example, you might opt for “excess liability insurance” for your car.  So, if you get into an accident, the other person’s medical costs will not bankrupt you.   But, excess liability insurance will not protect you from any slander or defamation suits that were related to the accident.

What is NOT covered by the umbrella insurance policy?

The umbrella policy will not cover your own personal injury or liability arising from breach of contract.   Also, please make note that these policies often exclude boats.  It should also make one feel better that assets that are inside an employer-sponsored retirement account like a 401(k) or a 403(b) are often shielded from civil liability under ERISA of 1974.  Further, the value of your house will often be excluded from your wealth calculation under the homestead exemption.   The level of exemption depends largely upon state law.

Who should consider this coverage?

You should consider this coverage if you have significant assets to protect.  (For instance, if you have a house, a car collection or other assets.)  Also, people who are responsible for others (e.g. coaches) should consider this insurance.  There are also some other situations (that I didn’t even think of) that could apply to broad swaths of society, that could lead to personal injury in a purely accidental manner.  There are 8 common situations addressed by this article, where the consumer could benefit from an umbrella policy:

  1. If you have vacant landà and anybody gets hurt on your land, even if unintentional.
  2. You have “fun” vehicles like motorcycles or watercraftàWho knows what could happen if the friends of your children try out the vehicles and hurt themselves?
  3. You have an “attractive nuisance” like a treehouse or trampolineà If a neighbor’s kid gets hurt on these, it’s your money the parents come after.
  4. You drive a luxury car.
  5. A close family member shares volatile opinions online.–> What if your kid posts a provable libel on social media, and now you are on the hook.
  6. You rent out your propertyà If somebody gets hurt on your property and sues you for more than landlord insurance will cover, the umbrella policy covers you.
  7. You have a public profile of success and wealth.

How do I find the cash to pay for Another Insurance policy?

Many experts suggest that a good way to afford the umbrella policy is to increase the deductible on their car insurance.   What?  You might asik?   Well, if you increase your deductible, you will be paying out-of-pocket for smaller conditions, but you will wind up saving much more on the monthly premium.

The Verdict

I would recommend umbrella insurance to anybody who has significant assets that they would want to shield from people looking for targets with potentially deep pockets to sue.  The more obvious reasons to have this insurance are those who are landlords, but even homeowners might want to consider this very reasonable insurance.  

Say you have a crew doing home improvements, and somebody slips on a ladder due partially to a defect in your home construction, you could be on the hook for being sued.  But, if you had an umbrella insurance policy, this would cover everything your homeowners’ policy didn’t.  This one incident could involve tens of thousands of dollars or more in medical expenses, lost wages… the list goes on. 

So, I guess the advice might be to consider this insurance, and have a series of conversations with your partner, and decide together whether or not you have the financial need to protect your assets with this very cost-efficient insurance policy.

REFERENCES

How Umbrella Insurance Works (investopedia.com)

Umbrella Insurance: What Does It Cover? – NerdWallet

Best Umbrella Insurance Options of 2021 (thebalance.com)

Umbrella Insurance Policy | Personal Umbrella Policy | The Hartford

 Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice.   Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.

The ‘ol Politics-Finance 2-step.

Headline:  A Financial Two-step Follows any Political shuffle.

Date:11/181/2020

Body: I found a very interesting article on Yahoo Finance.   I know that I promised to not get political, but, in this case, several facts are facts and should be clearly stated, because, these facts have consequences.   The link is below:

https://www.marketwatch.com/story/i-think-everybodys-taken-a-deep-breath-biden-didnt-get-a-blue-wave-but-heres-how-he-can-advance-his-tax-agenda-2020-11-13?siteid=yhoof2

No matter where you sit on the political spectrum, there is a seismic change taking place in DC, and these shocks are transmitted all across the country.   Just as night always follows day, when there are huge political tremors, the financial aftershocks will follow.  Most of the experts cited in this article seem to suggest that the changes will be mostly in the regulations enforced by the IRS and an increase in staffing at the agency.   An increase in audits, especially concerning higher-income individuals seems a likely outcome.

Regulation Changes are also possible

The pandemic has been terrible by any metric, but, it has also underscored the need to have some supply chain capability for vital equipment (such as PPE) within the U.S.   So, some experts expect new regulations to promote the production of such supplies by domestic companies.   The experts in the article also suggest the likelihood of enhancing both the Child Tax Credit and the Dependent Care Credit, both aimed at improving the lives of people in the lower SES strata of our society.

There are other probable changes too

Capital gain tax

Most normal households (like mine and likely yours) make the lion’s share of their income by the sweat of the brow, and the occasional, “Ow” at a job.    But, higher-income individuals and families, though they have good jobs, make a lot of their money on capital gains.  (To simplify, think of buying and selling stock.)   The attractive feature of this is that there is a preferential tax rate for capital gains that is appreciably lower than the taxation on “ordinary income.”  So, there appears to be a desire of the President-elect to alter the tax rate on capital gains for people over a certain threshold of income in such a way as to make it more equivalent to ordinary income.  This proposed change could be argued as either “good” or “bad” based upon your point of view.   I prefer to just see it as a reality, and ask how the behavior of taxpayers will change.  And, I think I can see stocks that offer dividends becoming even more popular:  This might be an investment opportunity.

Charitable donations

There is some talk that the President-Elect will change the tax attributes related to charitable giving.  Under current tax law (allowing deduction of income from AGI), you are effectively “earning” a 37% tax benefit if you donate under rules promulgated now.   Insiders expect that the President-elect might be thinking about changing the deduction to 28% for high-income taxpayers.  Would this change be good or bad?  I don’t know, but I can make a few educated guesses.  The likely effects I can think of, are:

  1.  In the near future, in order to obtain the maximum deduction possible, high-income individuals may be motivated to accelerate their charitable giving.
  2. In the longer-term, because they derive less benefit, high-income individuals might be less motivated to make charitable donations to not-for-profit causes and organizations.

Estate Taxes

Sorry, most people dislike talking about taxes, and even fewer want to think about death.   But, with the estate tax, these two go hand in hand.  Estate tax is the tax charged to the estate after a taxpayer passes.  You have likely never thought about this tax, because, as of this writing, there is an $11.58 Million exemption on the federal estate tax.  Reportedly, the President-elect is considering changing this and decreasing the exemption down to $3.5 Million.  (I would like to emphasize here, that this is NOT a tax-planning strategy being advocated.   Offing your elder relative early for tax-planning purposes is both ghastly and illegal.)

Please note that the states are all different.  Many have an inheritance tax where the donee is taxed when he/she receives the asset.    So, it is indeed possible that there is no Federal Tax Liability, when there is still a state-level tax liability.

REFERENCES

5 Ways Joe Biden’s Presidency Will Affect Your Money – and How to Act Now | NextAdvisor with TIME

It’s a tough year for year-end tax planning – Journal of Accountancy

What You Need to Know About Your 2020 Taxes (investopedia.com)

Explaining Biden’s Tax Plan (investopedia.com)

Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice.   Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.

Is the SECURE Act 2.0 in Congress, or incongruous?

Headline:  Is the SECURE Act 2, secretly insecure?

Date:11/17/2020

Body  I just read a Great article about the SECURE Act 2.  The link is below

https://finance.yahoo.com/news/washington-aims-to-pass-secure-act-20-with-more-changes-to-the-retirement-system-150553724.html

This Act is actually called the “Securing a Strong Retirement Act of 2020.”  This is a truly unique bill as it seems destined for bi-partisan passage through BOTH the House and Senate.   The only thing needed now, is the President’s signature.

What did the SECURE Act Pt. 1 do?

The original SECURE Act had one main (but important) change: it offered tax credits to small businesses if they would automatically enroll new employees.   There was some consternation because these small employers often offer annuities as part of their plan menu and critics felt that this Act was too kind to the insurance companies that administer these vehicles.  Additionally, under the 2019 Act, if a person inherits an IRA, they have only 10 years to liquidate the assets of that inherited IRA.

How does the SECURE Act Pt. 2 change things?

One of the chief components of SECURE 2.0 would be automatic enrollment of new employees into an employer’s retirement plan.   They would have an opportunity to “opt out”, but this would require and affirmative act on their part, and research suggests that new employees usually take the easier approach when starting a new job.  And under this potential legislation, all that they would have to do to be enrolled is to do nothing.  This has been proven to increase participation in retirement plans, and this would allow Americans to depend less upon an over-stressed Social Security system.

In a second change, the timing of Required Mandatory Distributions (RMDs) would be altered.   At first, under the Traditional IRA plan, participants had to begin taking RMDs at age 70, and SECURE Act 1.0 increased this minimum age to 72.  If passed, SECURE Act 2.0 would raise this minimum age again to 75.  Before your eyes get too heavy, this is important because it is usually to the benefit of the retiree to maintain as much money as possible within their retirement plan.  Once out, they lose the tax deferral (under the Traditional  IRA) and they further have to now manage these funds personally.

In a third important change, the proposed Act would introduce changes to the credit for contributions to a retirement plan.   This change would afford certain lower-income individuals further motivation to contribute to their own retirement.  

One final change in the proposed Act would create a national database that would record if retirement accounts were “left behind” when an employee changes jobs.   This is so important to recognize the reality of today’s workplace.   In the past, a person would often work for one company for their entire working life.     No longer do companies give pensions or gold watches upon retirement, people  are much more often changing jobs in order to acquire new experiences or improved salary.  When they do switch employers, they sometimes forget to move their retirement account to the new employer’s plan.  This clearinghouse would provide Americans the opportunity to make sure that there is not a pot of money with their name on it, languishing in the program of a former employer.  I have switched employer 5 times since I graduated from college, and I am not unique.   So this national clearinghouse would help many Americans to depend less upon Social Security.

WHEW!!!

What does all of this mean for me?

This got more technical than I really wanted to.   Sorry. 

Taken in total, it seems that the changes enacted by the 2019 Act and proposed in the 2020 Act appear to be good for most people.   There are some people who could be negatively affected, but largely, these are high-income individuals and families that have access to proficient Financial Planning professionals.   Rest assured, these professionals are quite busy reviewing the legislation and strategizing the best way forward for their clients.  (For instance, the AICPA already has an educational product for sale to better inform their practitioners about the changes.) 

I really did mean to make this entertaining…

I understand that this might all be very dry, but I promise that it is vital to your future.   One of the largest concerns of retirees is outliving their savings.  These 2 Acts, taken together, do quite a lot to assuage these fears.     Though we now have much more responsibility for our own financial future, we can look forward to being supported by our national legislation.

REFERENCES

Congress Considers a New Round of Retirement Legislation (shrm.org)

2.0Sectionbysection_final.pdf (house.gov)

How the Secure Act 2.0 Will Put Your Retirement Savings Into Full Swing (moneywise.com)

New bipartisan retirement bill builds on SECURE Act – Willis Towers Watson

Editor’s Note: Please note that the information contained herein is meant only for general education: This should not be construed as Tax Advice.   Personal attributes could make a material difference in the advice given, so, before taking action, please consult your tax advisor or CPA.

Investing is Hard Work, Just Ask a Pharma.

Headline:  Investing can be hard work, just ask a pharma.

Date: 11/17/2020

Body: According to this article at Yahoo Finance, Mr. Warren Buffett is making a very large bet on Big Pharma.   Please see the article in full, at the following link

https://finance.yahoo.com/news/warren-buffett-stock-moves-in-third-quarter-212734618.html

Now, Mr. Buffett is an investing genius, and has decades of hard-won experience and hard, hard work behind him, and I cannot believe that he’d make a HUGE mistake making these investments.   But, in case you need a reminder, I am not Mr. Warren Buffett, and I don’t believe you are either.  (If you are reading this, Mr. Buffett, please don’t laugh too hard at my less than perfect style or knowledge.   You might get Cherry Coke up your nose, if not cautious.)

Jokes aside, it might seem a no-brainer to invest in Pharma stocks.  In the short term, there is vaccine production and distribution to be done, and a lot of government money being earmarked to encourage this.  In the longer run, the Baby Boomers are aging, and older people consume more pharmaceuticals, usually.  So, yes, a cogent argument COULD be made to make such an investment.  But, a lot of mistakes could be easily made.

How does one make a good decision regarding potential investment in this area?

Well, that is the nub of the rub, isn’t it?   In fact, most people are NOT doctors, and cannot completely understand the science behind vaccines.   Those who are doctors don’t often have the business connections that Mr. Buffett and his trusted colleagues have to fully evaluate who is the most probable to profit by vaccine sales and other responses to the pandemic.  To say it differently, it seems clear that there will be some companies that do well, but, which ones?  I suspect that Mr. Buffett and his colleagues are paying VERY close attention to clinical trials and actively working to decide who has the better mousetrap.  Or virus-trap, whatever you like.

Investing in the “Wrong” company could make you feel ill.

If you invest in the wrong company (and that would be SO easy to do) , it will not bankrupt you, because you can only lose the money you invested.  But, if you incur debt to make your investment, and the stock goes down, you lose.  Worse yet, if you decide to short-sell the stock, and the price increases, there is no limit to your exposure.  The key word here seems to be caution; Investing here could be very profitable, but, know that you’ are gambling, and ensure that your other needs are covered first, then you can feel somewhat justified in making this investment, in the normal manner.

It is important to know that the current vaccine race is just like any other time you might try to invest based upon current events: Sometimes, you have to face that you might not have the expertise to make the call.   Take, for instance, the 2 seeming front-runners on the “Vaccine scene.”   Pfizer has developed one vaccine that seems to be effective in 90% of the subjects they inoculated.  Moderna has a different vaccine that seems to be effective in 95% of the subjects that they inoculated.   Add this to the fact that the latter vaccine has a 30-day shelf life and the former has less, AND the one from Moderna can be kept in an easily-available refrigeration unit (Whereas the one from Pfizer needs to be kept in a VERY sophisticated one that gets a lot colder) and your choice seems obvious.   But, Moderna is a pretty small company with a market capitalization of about $39 Billion, and Pfizer is a huge pharma company with a market cap of almost $208 Billion and you can clearly see that there is a monumental difference in size.  This difference in size could allow Pfizer to either develop a better distribution strategy or buy out the smaller company entirely.  Either one could potentially leave you with a relatively bad hand of cards.   This example might be a bit complex, but it is illustrative of the technical differences that can make an enormous difference in stock performance.  (And, this is all BEFORE politics is figured in.)

So, what are we to do?

If you are a normal human being (like me) with a job not in this particular field, I would recommend that you do not invest to take advantage of current events.    You should talk to an advisor and devise a plan that makes sense no matter what the conditions of the market.  

REFERENCES:

Pharma Stocks Poised to Move Higher (investopedia.com)

Best Pharmaceutical Stocks to Buy in 2021 | The Motley Fool

How to Buy Pharma Stocks | Investing Advice | US News

14 Best Biotech Stocks for a Blockbuster 2021 | Kiplinger

Welcome!!

Welcome to my blog called, “The Drew Line.”   The main objective of this blog will be to start with a discussion of a financial topic in the mass media or seen on one of the many credible websites.   I will make reference to this primary material and provide a link to that original material.   In addition, I will consider similar information from a different point of view.   So often, I read these financial articles and I have fundamental problems with how they present information.   Very often, to make the article timely, the author will focus on a very narrow question related to a larger issue.   Only a few scant sentences are used on this background information.   I envision The Drew Line as an attempt to add this background information, to better inform you about information you are hearing presently in the media.

To those of you who are still awake, THANK YOU!!  It is also my objective to make this blog as interesting as possible.   Over the years, as a society, we have added cumulative layers of complications to financial matters.  But, when we strip away the confusing words (usually written by accountants and lawyers, trying valiantly to either put us to sleep or convince us that they are brilliant) we often find that there is a pretty good reason why a law was passed, or why a procedure is used.   Often, there is an interesting story (well-hidden) within this occurrence. I will attempt to elucidate this kernel of logic to the best of my ability and present it in an entertaining manner.

Each blog entry will be rather short, 500-700 words will be the standard length.   This allows for a comprehensive overview of a topic, but it is short enough to be able to read it quickly, in the midst of the madness of a regular day.  For those of you who would like to know more on a topic, I will add a section at the end of each post, called, “References.”  In this section I will add 3 or 4 excellent references on the topic, culled from only credible sources.

I realize that this is a rather august set of objectives, but I think I am fairly well-equipped to take on this challenge.   In 2008, I obtained my license as a CPA in the State of Maryland.   In 2012, I obtained my certificate as a Certified Fraud Examiner from the ACFE.  And in 2015, I finished my MBA at Frostburg State University.  Also, I have been employed by the IRS, in various positions, since 2008.  All of this has given me a good broad view of the financial field, and more importantly, a thirst to know even more.  This, more than anything else, is the passion I want to share with you.

I very much look forward to “seeing you” as I present other blog posts.  Please feel free to add comments.  I will make every attempt to reply to as many as possible.  Further, while on my website, please feel free to look around.   I plan to add several resources that you might find useful or entertaining (possibly both.)   Please stay tuned: This blog and website are a work in progress, and I am excited to learn and  I appreciate your input and contributions.  In particular, if there is a subject you would like me to address, I would be interested to know of it.

Thank you for your attention.   I look forward to our conversations!

Andrew W. Kolody, M.B.A., CPA

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