Five Key Economic Changes that Affect YOUR Future
Dear Valued Clients, Friends, and Family In October of 2008, I sent out to my clients, friends, and family what I believed to be the most important letter I had ever written. In the face of unprecedented upheaval in our financial and housing markets complicated by sensationalized media reporting, I assured you that the world was not coming to an end. We agreed then, that the common sense, practical values, and smart decisions that have seen Americans through tough times in the past, would see us to the future. As I look back, I think we can say:
At 18 months out, we can also agree that the world didn’t end in 2008. However, some things are quite different now, and I want you to know about them. I also want you to know that we have adapted our operation to help facilitate the practical actions you should be thinking about today. You will find that throughout this letter, I have provided you with additional links in order to provide you with my extended thoughts on each topic. I hope you will appreciate this different style – there is so much that I want to share with you today. As I visit with so many of my tax clients this tax season, I am being asked a host of questions: Will unemployment rates improve or not? My answer is Yes. Most nightly newscasters speak about the economy, the stock market or unemployment as if each move in that market is monolithic in nature, affecting every other segment equally. That’s because in the past, it was said that a rising economic tide lifted all boats. And in the past, perhaps that was true. However, our economy today is seeing a more fragmented and selective scenario: as each segment of the market moves there are winners and losers, not just based on industry, but on geographic location and the degree of individual preparation. Take for instance, Southern California, which has traditionally had a low unemployment rate based on its credit-driven market. The current unemployment rate for California is officially reported at 12 ½%. However, there are eight counties in California that report an unemployment rate of 20%, something confirmed by the lack of traffic in Orange County during rush hour! On the other hand, a CPA friend of mine in the Dallas-Ft. Worth area of Texas tells me that his client base is booming and he is struggling to keep up with all the new work. These are examples of geographic segmentation in the same market; not all boats are floating together. Unemployment is a concern for all Americans; we have 15-20 million people either unemployed or under-employed right now. My perspective of the unemployment market is that in the long run, the winners and the losers are ultimately going to be determined by the level of each individual’s personal preparation and perseverance. This focus can similarly help small business owners improve their chances for winning in this market. Here’s a story I often share: By this, I mean that if you are an executive, a secretary, or construction worker looking for employment, you will be competing with hundreds if not thousands of others looking for the same kind of work. Therefore, upgrade your skill sets; maximize the networking value of your friends, family and business contacts; cultivate a positive outlook; and expand your opportunities by creatively translating your skills into positions and industries you might not have considered before. Make a point of learning about new technology and software. Utilize social networking websites to expand your contacts and opportunities. I recommend everyone establish an account with LinkedIn, it’s free, and it’s great for organizing your business contacts – and for making new ones. You’ll find my profile there as well. http://www.linkedin.com/in/nickhodgescpa For the small business owner, similar instructions are important. Understand the value of your current clients, friends, and business network. Make sure you are treating them like the gold that they are. Ask them who they are working with that might need what you offer. Push to expand your products and services into new markets, and push to expand additional products and services into existing markets. Moreover, remember to embrace technology to increase your business efficiency whenever possible. There will be winners and losers in the upcoming market-share game. In order to help you maximize technology, we have put together a package of online payroll accounting, bookkeeping, tax preparation, and business accounting services every small business must afford. If you own a small business, you can find out more about our Small Business Tools at: We want to show you just how valuable it can be to utilize technology to run your business, so the first month is free when you order by June 30, 2010. Will the middle-class become richer or poorer? My answer is Yes. For at least the last three years, I have encouraged our small business and individual tax clients to raise their cash positions. The over-building, over-priced real estate and excessive use of consumer credit all indicated that significant change was on the horizon. The storm clouds were brewing, and I wanted our clients to survive the turbulent times ahead. Remember all the talk about rainy day funds? In tough times, Cash is King. This recession is no different. What is happening is the American middle-class is splitting apart along the lines of each family’s ability to endure the recession. Since the 1950s, Americans have become more and more accustomed to using credit as their rainy day fund, providing the cushion between their income stream and unexpected expenses. For those that were without a rainy day fund, we’ve seen them raid retirement accounts, max out credit cards, and even file for bankruptcy; their plans for the future have been completely redefined by the day-to-day need to survive. Even those with a small rainy day fund have been challenged by the length of this recession; cash is getting thin for them and they are making lifestyle concessions. With recent reports that during this time, over 16 million people achieved millionaire status, it is more than clear that the American middle-class is dividing. In any case, it’s the folks that have their finances ORGANIZED that will see this recession successfully to the end. Organizing your financial world is a tedious process that most folks put off to ‘another day’. The significance of having an organized financial world is that when the markets start to change, you can make smart changes with it, preserving what is most important to you. In good times, you can successfully grow your rainy day fund. In hard times, you can analyze what is truly important to you and adapt before your financial world is in an uproar. Remember, organizing your financial world is one of those things that you don’t realize is important until it’s too late. That’s why I have made a point the past two tax seasons to offer all my clients an upgrade to their tax return services that will provide them with a simple, secure online account that will organize their entire financial world in one place. It also includes financial planning services with the wealth advisors in the firm that can help guide the decisions you need to make to stay ahead of the changes. The service for new clients is our Premier Tax CFO Service, described at www.PremierTaxCFO.com. For our existing NCH Wealth tax clients, we are offering it as an addition to your tax return preparation at a substantially reduced rate until June 30, 2010. We believe so strongly in getting your financial world organized, that we offer this package addition at monthly rates that are less than eating out for dinner one night. You can find out more about our CFO Upgrade Package for Tax Clients by clicking here: http://www.nchwealth.com/Upgrade.php Will we have inflation or deflation? My answer is Yes. Historically, hedges against inflation have typically been gold, real estate, and foreign currencies. Here’s why I think those hedges will be ineffective for the future. While gold has been advertised as a hedge against inflation, it has not ever been a viable vehicle because it is a trading asset rather than a growth asset. Real estate has traditionally been more of a safe harbor to protect against inflation; however, I am not certain that we have reached the bottom of the real estate market. Even though it’s a buyers’ market for real estate, a purchase made today may not provide the near-term growth needed to be a protection against inflation; it may be ten years or more before the real estate market recovers. Some are recommending the purchase of Euros, thinking that our dollar will deflate in relationship to the European Union. However, the debt situation in the European Union (i.e.: Greece, Portugal, Spain, UK) is even worse than our own. Therefore, I expect that they will likely be inflating their currency as well. My conclusion is that what has worked in the past to hedge against inflation is not particularly viable today. I am maintaining my position that investing in the stock market, particularly the large, multinational corporations may likely be one of the best inflation hedges available at the moment. In the downturn, many of these corporations responded well, reducing costs and improving production. They are now showing significant profits and experiencing sales growth. However, it is important to note that I feel more strongly than ever that any investment in the stock market needs to be protected by reduction of the downside risk. Please read more about this in my answer to the markets question. I believe that our government, as well as many governments around the world, will have to substantially inflate their way out of the debt crisis. So, over the next five, ten, even 15 years, we should expect to experience substantial inflation in many areas of our economy. However, if we look deeper into this question, we can see that we will also experience deflation in many areas of our economy. The best way to frame inflation/deflation is to separate our thoughts between Needs and Wants. Those things that we NEED as consumers: gasoline, milk, medical care, etc., will likely continue to have pricing power, which will lead to greater inflation, but only on these items. Those things that are major WANTS: oceanfront condos, third and fourth family cars, second homes, and expensive vacations will likely encounter decreasing values, or deflation. In the face of decreased demand for these discretionary purchases, the prices will go down in order to attract buyers. In discussions about deflation, we are back to the concept of Cash is King. For those with remaining cash positions, all kinds of bargains are to be found. We are seeing businesses that are strapped for cash beginning to unload merchandise at substantially reduced rates. Individuals that are at the end of their rainy day funds are selling family heirlooms and other family assets at rock-bottom prices. In fact, our pawnshop owners report that they are having a banner year! The bottom line is that we will see the end of this cycle, and while no one likes to say so, good can come out of this recession. We can be prepared for inflation by being properly invested in the stock market and we can take advantage of deflation by picking up new assets at bargain prices. In all of these situations, it is important to make choices that best suit your unique needs and goals, choices that we can help you make. Will the market go up or down? My answer is Yes. I believe that the stock market will continue to post historic growth trends over the next three to five years. However, it will still be a highly volatile market, going up and going down in wide swings. The key changes at this time have little to do with the stock market, and more to do with a change in investors’ risk perception. For the first time in nearly two decades, Americans experienced their first major market turn in 2008. We all learned by personal experience that we are 10 times more sensitive to market drops than market gains in our investment accounts. As a result, there is a new interest in implementing measures protecting our downside risk instead of chasing returns. As I initiate new conversations on this topic, the folks that played the roulette wheel for winners in the last market and cashed out at the bottom, still feel frozen with fear. They now struggle with calculating fractional differences in interest rates on their low-interest CDs. Clients that are over-exposed to the stock market are relieved to have survived the worst of the downturn but are nervous about their plans for retirement. Notice how each of these descriptions are fraught with strong emotions? The lesson to all of us is that we need to get back to the basics of investing by taking the emotions OUT of our investment decisions. I realize that we are still very, very emotional about our money – and rightly so, for it often represents a lifetime of hard work. However, we need to take the emotions out of investing and become educated about the opportunities to stay involved in the stock market while reducing downside risk. Just as you make rational decisions about buying auto insurance, homeowners insurance, life insurance, a new car, a new home – I have been encouraging my clients for years to learn how they can insure some or all of their investable assets. There are many different ways to maximize opportunities in the stock market, while allowing you to protect your downside risk. There is no one-size-fits-all solution here; it is something that must be worked out for each individual investor. This is the time to have thoughtful, intelligent conversations about how and how much you are invested in the stock markets, AND how you are mitigating your downside risk. We are talking with clients every day about how they can make smart decisions in this arena. Will my retirement be better or worse? My answer is Yes. The changing economic landscape is challenging all our previous descriptions of retirement. Retirement planning was once just a dated goal for the future that we put all our energies into achieving, hoping we would get there healthy and have enough money to last the rest of our lives. We were going to stop working and start enjoying all the hobbies we had put off during our working years. We were going to travel or build or relax. However, many baby boomers have realized that the future now means continuing employment because they will need the additional income stream to maintain a preferred standard of living. Rather than be disappointed by this change, many are taking the time to rewrite retirement as a lifestyle preference. This means integrating employment with hobbies and travel and defining how that can happen. It means assessing real estate needs and considering downsizing to reduce current and future expenses. It means understanding how to best protect the lifestyle they have while preparing for the lifestyle they want in the future. As a result, we are also having detailed conversations with clients on these topics: Identity Theft: Your identity is your most valuable asset. It is no longer a matter of IF your identity MIGHT be stolen; it is a matter of WHEN. One of the foremost vendors for identity theft protection is Life Lock. By clicking the link below, you can sign up at a discount and receive additional benefits as well. https://home.secureenrollment.com/(S(l4vied55aie4rarn3dulfav0))/step1.aspx?groupnum=mfs6&AID=nickhodges&source=miQuotes Long Term Care: With turbulent changes on the horizon in the health care industry, who can be certain that long term care contracts implemented today will be enforceable five years from now? At present, there are a number of creative, flexible, and extremely inexpensive ways to handle long-term care needs; some may even permit a return of premium payments if unused. Income: Everyone wants to make their lifestyle plans on a predictable foundation. Identifying an income stream you can count on is an important part of that foundation. While the past 18 months have introduced change into our lives at an alarming rate, we can adapt to that change if we remain flexible and make informed decisions. You can protect what you have today and prepare for tomorrow by organizing your financial world, redefining your lifestyle needs, and making smart decisions. Well, we can say that the world did not end in 2008. We did not see soup kitchen lines around the block as in the Great Depression. However, our world today is different in so many arenas and you can expect to see more changes in the future. Make sure you adapt to these changes and prepare for YOUR future. We can help. As I mentioned at the beginning of this letter, we have made changes within the firm to be able to help you manage your entire financial world with confidence. Through our Premier Tax CFO Services, clients can have their tax return prepared by a qualified CPA, see their entire financial world on one secure website, and receive individualized financial planning advice all in one place. With our Small Business Tools Package, we are helping small businesses manage their payroll accounting, bookkeeping, tax preparation, business accounting and more. We are still a full-service tax, accounting and financial planning firm, offering holistic solutions for your unique situation. Contact us today to find out what we can do for you. All the best, |
