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Lessons of the Great Recession

By | 2018, Money Moxie, Newsletter | No Comments

In January 2008, stock markets were near all-time highs, U.S. unemployment was at just 5 percent, and George W. Bush was about to sign the Economic Stimulus Act, which provided tax rebates for Americans and tax breaks for businesses. Americans were unaware that the “Great Recession” had already begun (National Bureau of Economic Research).

The consequences of excessive debt began to slowly spread across corporate America. Several companies were on the brink of failure before being saved, including Bear Stearns (March 2008), Countrywide Financial (July 2008), Freddie Mac (September 2008), and Fannie Mae (September 2008). Each of these was saved by unpopular government intervention.

Then came Lehman Brothers. It was “too big to fail,” and yet it did. At 1:45 AM on September 15, 2008, Lehman Brothers filed for bankruptcy protection—the largest and most complex bankruptcy in American history. It had over $619 billion in loans it could not repay and it marked a tipping point: a moment when investors around the world woke up to reality.

There was too much debt, especially American mortgage debt. In 2008, over 800,000 families lost their homes to foreclosure.1 In 2009, there were around 2.5 million.2 Unemployment doubled to a rate of 10 percent.3

The cost of recovery weighed on the government as it shifted the debt from overburdened Americans to the U.S. deficit (Now over $21 trillion).
The Federal Reserve lowered its rates to zero and kept them there for seven years. When that was not enough, it purchased $4.5 trillion dollars of debt—essentially injecting the American economy with money. It seems to have worked by many measurements.

As the economic recovery firmed, the Federal Reserve began to raise rates. At first, it was cautious. Now, it plans to keep going higher at regular intervals. This change may be an important shift.

One day in the future there will be another recession, but it will be different than the Great Recession.

A lot has changed in the last 10 years. Americans have less mortgage debt. The government has much more. While the housing market is strong, it does not seem to be as inflated as 2008.

For now, move forward with optimism and confidence, but don’t forget the lessons of the past. The risk of another economic downturn is real. Whether it comes in 1 year or 10 years, your personal preparation will be valuable.

 

1. “Foreclosures up a Record 81% in 2008,” CNN Money
2. “Great Recession Timeline,” History.com
3. Federal Reserve Bank of St. Louis
4. “Looking Back at Lehman’s Demise,” Wealth Management

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Shirtsleeves to Shirtsleeves In 3 Generations

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There are many ways to improve a person’s wealth without spending money and there are many ways to destroy someone’s wealth by giving them money. In families, there is a pattern where the first generation builds wealth, the second generation maintains it, and the third generation squanders it. This cycle of wealth creation and destruction in the U.S. is called “shirtsleeves to shirtsleeves in three generations.” It applies to families that have $10,000 to $100,000,000.

This phenomenon is so universal that it happens throughout the entire world. In Ireland, it is called “clogs to clogs in three generations.” China’s version is “rice paddy to rice paddy in three generations.” Ninety percent of families that gain wealth succumb to this parable. So, what do the ten percent of families do right to preserve their wealth?

(1) Families change how they define wealth. Wealth is much more than money. It is human, intellectual, AND financial capital. Human capital is physical, emotional, and social well being. Intellectual capital is knowledge and experience. Financial capital is money and assets.

The goal is to improve the human, intellectual, and financial capital for each generation. Financial capital is only one mechanism to help improve the human and intellectual capital of each of the family members.

(2) Families think of their family as a business. The purpose of the business is a long-term succession plan that tutors each member and prepares them to lead the family in the future. With that comes an understanding that each generation needs to work to build wealth like the
first generation.

(3) Families implement a 7th generation mentality. Inheritors typically have a “rush” of adrenaline and are prone to make poor choices, like buying a new car. On average a new car is purchased within 72 HOURS of receiving an inheritance. Instead, family members must be stewards of assets–not just inheritors. As stewards, the financial capital is intended to improve their lives AND the lives of each successive generation, to the 7th generation.

(4) Families define their values and use stories to pass them to the next generation. Without a helm, a ship will sail off course. If families aren’t governed by values, they will also veer off course. The most effective way to pass on values is through stories. These stories should be documented and shared at gatherings or in a newsletter.

(5) Families understand and manage the risks that are being taken with their financial capital. The third generation tends to either be too aggressive or too lax with the financial capital. Each successive generation should be tutored in investing so they can have a better understanding of potential risks and rewards.

(6) Families teach their posterity how to give. A person’s perception of wealth is changed when they see others who have difficult life circumstances. Families can create purpose, unity, and a changed perception of money by working together to come up with donations for a charity and then going together to do service for that charity.

(7) Families understand that most issues with wealth preservation are qualitative and not quantitative. Like reviewing a family’s financial balance sheet to determine growth from one year to the next, families need to hold an annual council to review the progress of each family member.

Some questions to determine this are: Is each member thriving? Is their human, intellectual, and financial capital improving/deteriorating? Is there any assistance that the family can provide without controlling or enabling?

No family is perfect and all families will have issues due to death, divorce, substance abuse, mental illness, etc. However, these issues can be overcome if the family members find common values and strive to show mutual respect, love, forgiveness, and compassion.

Families that have worked hard to build wealth, be it tangible or intangible, don’t want to see that wealth squandered. A family can pass on wealth if family members work together to improve their human, intellectual, and financial capital. This requires planning and work. However, the rewards of seeing a family’s wealth grow are immeasurable.

Source: James E. Hughes, Jr. (2004) Family Wealth: Keeping It in the Family

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Smedley Financial’s New Advisors

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We are pleased to introduce two new advisors at Smedley Financial, Jordan Hadfield, and Leah Nelson. In our search for new advisors, we focused on people who had an in-depth education in all facets of financial planning and advising and demonstrated a high level of integrity. We were fortunate to find two amazing individuals with these sought-after qualities. If you have not had the opportunity to meet them yet, we hope you will over the next several months.

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Jordan Hadfield

On May 27th, 2012, I climbed into the right seat of a small aircraft next to a student pilot and took off down the runway. I was flying a Diamond DA20, and this trip was taking me from Provo to Lake Havasu to Catalina Island then up the coast to San Francisco and over to Lake Tahoe before heading back home. We flew low and slow, trying to take in the changing scenery and beautiful landscapes.

I was well on my way to becoming a professional pilot and hoped to land a full-time job flying very soon. That plan changed when I met my beautiful wife and realized a career in aviation would require constantly flying away from what matters most to me, my family. I now have two amazing boys and a little girl who rule my world. I have a bachelor’s degree in Personal Financial Planning from Utah Valley University and I am working towards my Certified Financial Planner® designation. Although I miss flying, I couldn’t be happier with what I’m doing now.

I used to chart my way across the United States and experience the freedom of flying. I now chart investments and retirement accounts to bring financial freedom to others. I find both activities to be exciting, but the latter gives me a sense of gratification that flying never did. I’m also a drummer. I love photography. And I work as a professional skydiver.

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Leah Nelson

For my whole life, I have watched many people around me struggle and make bad financial decisions. Seeing this inspired me to make the decision to become a financial advisor.

I graduated from Utah Valley University with a bachelor’s degree in Personal Financial Planning and successfully passed my Certified Financial Planner® (CFP®) exam.

I want to be on the client’s side helping them make good financial decisions to lessen the stress they feel because of their finances. I have always had a desire to serve people, and I’m glad I’ve chosen the financial services industry to help people reach some of their most important life goals.

In my free time, I am involved in musical theater. Music is one of my favorite things, and I enjoy passing the time by playing the piano, ukulele, or singing. I also love traveling. I’m lucky to have a sister that is willing to be my travel buddy! I love spending time with my family as well. They are fun to be around, and I love seeing what silly thing my nephew will do next. I am so excited to be part of Smedley Financial!

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Just In Case You Missed It

By | 2018, Executive Message, Money Moxie, Newsletter | No Comments

Dear Financial Partners and Friends!

How is the U.S. economy really doing? Here are a few quotes and facts regarding the past, the present, and the future.

The Past: “We Ran Out of Words to Describe How Good the Jobs Numbers Are,” (“The Upshot,” Neil Irwin, The New York Times, June 1, 2018.)

The Present: The U.S. economy jumped to an annualized rate of 4.1 percent GDP in the second quarter of 2018. That’s almost double the first quarter’s rate of 2.2 percent. This is the fastest rate of growth since 2014. This is great news for all of us!

The Future: The following quotes are from Elizabeth MacDonald’s, “Evening Edit,” Fox Business News, July 19, 2018. MacDonald said,“(Here are) CEO commitments for more jobs over the next 5 years.”

FedEx®: “FedEx® will train or reskill 512,000 people over the next 5 years.”

General Motors®: “General Motors® is proud to offer 10,975 workforce training opportunities.”

The Home Depot®: “The Home Depot® is pleased to provide enhanced training and opportunities for 50,000 associates.”

Raytheon®: “Tom Kennedy from Raytheon® and we pledge 39,000 enhanced career opportunities.”

The U.S. economy is doing well. As a result, most Americans are doing well. Remember this: Your financial success is our passion and our mission at Smedley Financial.

Best Wishes,

Roger M. Smedley, CFP®
CEO

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Trade Helps Make America Great

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Harley Davidson®, the iconic American motorcycle company, plans to close a Kansas City factory and lay off 800 workers. It will consolidate operations and open a factory in Europe. This surprising announcement came despite actions meant to support U.S. manufacturing and jobs. It is an unintended consequence and casualty of our current trade war.

Trade promotes global peace, grows our economy, and brings greater opportunity to the greatest number of people. The United States has experienced huge benefits over the last century because of increased trade, and Americans want to continue to compete fairly in the global economy. No matter how tough the trade talk, Americans should want more trade, not less.

The trade war is a tactic for negotiating better agreements. Hopefully, we get there soon because we are only beginning to see the effects and the uncertainty.

Don’t Let A Trade War Become A War On Trade
One of the greatest risks the United States has taken is to raise tariffs on so many countries at the same time. This year, the United States has raised tariffs on China, India, Mexico, Canada, and members of the European Union. These have reciprocated U.S. action and have quietly been making better agreements with each other.

China created the Asia Pacific Trade Agreement and as of July 1, it lowered tariffs on approximately 10,000 goods coming from trade partners, including South Korea, India, and other regional countries. China is considering similar agreements with Mexico, Canada, Brazil, and Europe. Japan recently signed its own “free-trade” agreement with the European Union.

The forceful approach could backfire just as it has in the case of Harley Davidson® and Whirlpool®. Farmers, for example, are also feeling the pinch. With fewer international buyers, the value of many crops has fallen. They have been offered a bailout, but seem more interested in farming than handouts.

Can We Emerge As Winners?
The United States is engaging in a risky tactic in order to obtain something quite reasonable: fair trade and protection of our intellectual property.

To make it happen, we need to start winning by focusing on more friendly trade partners. The more good agreements we get, the easier it will be to get the final countries to negotiate a fair deal.

Trade allows Americans to focus on what we do best. This specialization allows for higher innovation and new technologies. It leads to less expensive food and better prices on items that we want. Specialization also makes us more productive so that we can earn more working. All of this translates into a higher standard of living for most Americans and a more peaceful society.

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Purchasing a New Car?

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Purchasing a new car can be a harrowing experience. So much has changed over the years. Remember when the average term for a car loan was three years? Rising prices have pushed lenders to draw auto loans out to 7 and even 8 years. Is this a good thing or a bad thing?

Think back to your beginning finance classes where you learned the difference between appreciating assets and depreciating assets. With a few exceptions, cars fall squarely into the depreciating asset side of the ledger. If a loan is stretched out over a longer period and the car is dropping in value, it is not hard to end up on the wrong side of this equation – owing more than the car is worth.

Sometimes the purchase of a vehicle is driven – pun intended – by wanting something rather than by applying logic to a need. You can avoid a costly situation by doing some homework before you make a purchase. Here are some things to consider before your next purchase.

(1) How much can you afford monthly?
This should be a starting point. Take this payment and find out how much you can afford to spend with a 4-year or 5-year loan. If you can afford a $325 payment, you should look for a car around $17,500. This is based on a 5-year loan at 3.99% APR. Most banks and credit unions offer online calculators to help estimate monthly payments. Don’t forget about the extra costs: sales tax, licensing, and insurance.

(2) Should you buy new or used?
It doesn’t take long for the excitement and new car smell to wear off. Buying used is often a better value and prevents you from owing more than the car is worth.

Most new cars have a high level of depreciation in the first 12 to 24 months after purchase, some see a drop of 30 percent or more. Others will lose that amount over three years. Even if you plan to hold onto your car for a decade, you will come out ahead with a little research. And keep in mind, a vehicle that depreciates quickly in the first couple years may be a poor choice for a new car, but worth considering if you are looking to buy a used car.

(3) How is the car rated?
Consumer Reports offers a wealth of research-based information on new and used vehicles. The focus is on safety, reliability, and resale value. You can sign up online to use the service and it’s well worth the price, or find similar information for free on the website of another trusted source.

Treat yourself well financially. Before hitting the car lot, know what you are looking for and how much you can afford. Make your car-buying experience less stressful and sidestep remorse when the deal is done.

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Retire without Debt

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Only 38% of American retirees are debt free. The type of debt may surprise you—mortgage, credit card, auto loan, and even student loan. The impact of debt on a fixed income can be distressing as it reduces discretionary spending and, in some cases, forces retirees to cut their standard of living.

Source: Society of Actuaries® 2017 Risks and Process of Retirement Survey – Report of Findings

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2017: Record Breaking Year

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Entering 2017, I was more optimistic about the potential growth in stocks. In fact, my expectations were higher than 13 of 15 major investment companies. This optimism became a basis for staying invested throughout the year whether the market went up or down. The results were very positive.

I also assumed that at some point in 2017 we would wake up to some major down days. This never happened. The market just continued to climb all year long.

The S&P 500 (with dividends) rose every month last year for the first time ever! A positive return in January 2018 would bring the streak to 15 months in a row. Second place goes to a streak of 10 months stretching from December 1994 to September 1995.

These are powerful trends, considering the probability of any month being positive is around 60 percent. Strong momentum like this typically continues even after the streak is broken.

A second record was set that began in the final days of December. The Dow Jones Industrial Average had its quickest 1,000 point gain ever!

For three consecutive years I have accurately predicted the major actions of the Federal Reserve. I wrote: “This year, I am going to try something new: accepting the Federal Reserve’s forecast that it will raise rates 3 times in 2017.” That is exactly what happened.

I believe that keeping an eye on the Fed this year will be even more important than it was in 2017. You can see my analysis for 2018 here.

 

*Research by SFS. Investing involves risk, including potential loss of principal. Dow and S&P 500 indexes are widely considered to represent the overall stock market. One cannot invest directly in an index. Diversification does not guarantee positive results. Past performance does not guarantee future results. The opinions and forecasts expressed are those of the author and may not actually come to pass. This information is subject to change at any time, based upon changing conditions. This is not a recommendation to purchase any type of investment.

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Will You Benefit From the Recent Tax Cut?

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Changes to the marginal tax-brackets will benefit those who are close to the threshold for the 10 percent thru 32 percent brackets. If your income is $400,000, you will hit the 35 percent marginal bracket with less income than in 2017. One notable change is the top bracket–now 37 percent–affecting those with income of $600,000 or more.

2018 Marginal Tax Rates

Contribution Limits

Retirement contribution limits for some plans have been increased while others remain the same.

Standard Deductions

By increasing the standard deduction, the government will effectively reduce the number of filers who itemize. The new married limit is $24,000 and the single limit is $12,000. Both are double last year’s limits.

Itemized Deductions

The new law contains limitations that change the value of itemizing deductions for many filers.

Alternative Minimum Tax

The number of filers affected by the Alternative Minimum Tax is expected to drop by 96%. And many filers may not have to pay AMT again. This is due to two big changes (below).

Higher exemption levels–the amount of income automatically exempt from AMT calculation has increased to $109,400 for married and $84,500 for single.

Higher exemption phase-out levels–the income level above which you gradually lose your income exemption. The phase-out levels increased to $1,000,000 for married and $500,000 for single.

*Smedley Financial and its employees do not provide tax advice; therefore it is important to coordinate with your tax advisor regarding your specific situation.

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What’s Up with the Stock Market?

By | 2017, Executive Message, Money Moxie, Newsletter | No Comments

Dear Friends and Financial Partners!

In spite of turmoil, tragedy, and terror, the U.S. stock market has not been suppressed during the last 12 months. Rising jobs and wages continue to support strong economic growth. In the U.S. we are experiencing the lowest unemployment in 17 years, according to the Bureau of Labor Statistics. Simultaneously, we have the highest consumer confidence in 17 years, according to The Conference Board Consumer Confidence Index®. Keep in mind that seventy percent of the U.S. economy is driven by consumer spending.

This rise in the stock market is not limited to the United States. It is a global phenomenon. The stock markets of Britain, France, Germany, and a host of other countries are also performing well.

Here’s how the S&P 500 has performed in the last two years. In 2016, the S&P 500 reached 18 new highs and was up 9.54 percent. This year, through November 30th, there have already been 57 record highs for a return of 18.26 percent. The Dow Jones Industrial Average and the NASDAQ have also set new record highs this year.

Dealing with the Wall of Worry
Many of us will readily recall Black Monday, October 19, 1987 when the Dow Jones Industrial Average (DJIA) dropped 508 points and finished the day at 1,738.74. That’s a decline of 22.61 percent. Thirty years later, on October 19, 2017, the DJIA finished the day at 23,557.99 points. That’s a compounded interest rate of 9.08 percent per year. (By the way, most people forget that even with that large of a drop in 1987, the year finished up a positive 2.26 percent.)

Gross Domestic Product (GDP) is one of the most important indicators used to gauge the health of our economy. GDP is the value of all finished goods and services produced by the U.S. Here’s the GDP by quarter in 2017: 1st Quarter—1.6 percent, 2nd Quarter—3.1 percent, and 3rd Quarter—3.3 percent. Wow! It has been several years since GDP has been this high. Researching money managers around the country, most managers believe that this climb in the stock market can continue and, yes, that there may be a Santa Claus rally in the works.

Bullish Best Wishes in 2018,

Roger M. Smedley, CFP
CEO

*Consumer Confidence Index is a registered trademark of The Conference Board.
**The S&P 500, NASDAQ and Dow Jones Industrial Average indexes are widely considered to represent the U.S. stock market. One cannot invest directly in an index. Investing involves risk, including potential loss of principal. Past performance does not guarantee future results. The opinions and forecasts expressed are those of the author and may not actually come to pass. This information is subject to change at any time, based upon changing conditions. This is not a recommendation to purchase any type of investment.

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