Tradewinds Navigating Life & Finances
AUGUST 1 2022 / VOL 15, NO 2
Regatta Capital Group is hosting several educational seminars this upcoming Fall! Join Us!
See What’s Inside Baring the Bear Markets
2022 Benchmark Returns: 6/30/2022
Determine Your Retirement Number.
MSCI All Country World Index: -20.18%
Are A-B Trusts Worth the Tax Risk?
Morningstar Moderate Target Risk Index: -15.94%
Why You Should Hire Your Children
S&P 500 Index: -19.96%
US Aggregate Bond Index: -10.35%
N E W S L E T T E R / AU G U S T 2 0 2 2
Baring the Bear Market
By Spencer Kelly, Co-Founder & Head of Advisory Services
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arkets bottom when we least expect it – oftentimes, well before the actual news or economy changes course. Trying to time the bottom can be a fool’s errand as markets are forward looking and predicative in nature. Recently, I read an article by Jason Zweig, who writes “The Intelligent Investor” for the Wall Street Journal. I thought he summarized what it feels like to be an investor in a bear market well, so I wanted to pass his words along to you [edited to fit our newsletter]: “Part of what makes bear markets so unbearable is that nobody—and I mean nobody—knows when or how they will end. That doesn’t stop everyone on Wall Street from flogging measures, hunches and folklore purporting to foretell when stocks will finally stop falling. However, intelligent investors don’t bother trying to predict the unpredictable; they focus on controlling the controllable. That’s the psychological key to surviving this—and any—bear market, no matter how long it lasts. To see clearly why it’s so important to get your priorities straight, let’s look quickly at three beliefs about when bear markets end. Supposedly, bear markets do not end until: 1. Individual investors throw in the towel, 2. Fear hits new heights or 3. Stocks finally get cheap again Taking each in turn, here is why they are myths. 1. Retail investors have to capitulate. Professionals love to argue that bear markets hit bottom when individual investors give up on stocks in a crescendo or “capitulation” of panic selling. Only trouble is, that isn’t what happened in 1932, 1974, 1982 or 2002, among many examples. Bear markets sometimes end in a selling frenzy, but
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they often end in an indifferent stupor. 2. Fear has to spike. Many professionals contend that the CBOE Volatility Index, or VIX, is “too low” right now. The VIX, commonly called Wall Street’s “fear gauge,” spiked to then-record highs in October 2008, during the global financial crisis—but stocks still fell more than 19% before the bear market finally ended in March 2009. “When markets are trying to reprice their expectations of the future, they only nibble away at that truth,” says Mr. Colas. No single indicator like the VIX can capture the moment when those expectations are about to shift. 3. Stocks have to get a lot cheaper. Many investors believe bear markets end only after formerly overvalued stocks finally become bargains again. It just isn’t so. In March 2009, in the pit of the global financial crisis, stocks traded at more than 13 times their longer-term earnings, adjusted for inflation, according to data from Yale University finance professor Robert Shiller. That was only about 20% cheaper than the average all the way back to 1881. Although stocks didn’t seem like a statistical bargain at the time, they went on to gain roughly 15% annually over the next decade. All this shows the folly of trying to figure out when stocks have hit bottom. So, you should distinguish what you can control from what you can’t. Instead of wasting your time trying to read the market’s tea leaves, take charge of the risks you run, the taxes you incur and your investing time horizon. Being a buy-and-hold investor doesn’t obligate you to use a death grip. If some of your stocks or funds have performed abysmally in this downturn, you can sell them, [find better companies] and reap significant benefits. Dumping your most dismal invest-
ments should enable you to book a loss. You typically can use this to offset capital-gains taxes on investments you sell at a profit, either this year or in later years. [Regatta has been doing this where applicable over the past few months]. You can also deduct up to $3,000 of those losses each year against your ordinary income, carrying any losses in excess of $3,000 forward to use as offsets against your taxable income in future years. Another decisive step investors can take in a bear market is to consider converting a traditional individual retirement account into a Roth IRA [again, we/Regatta have been looking for these opportunities where applicable]. Normally, the deterrent to converting a traditional IRA to a Roth is that the conversion is taxable at your ordinary-income rate. Now that so many investments are down 10% to 20% or more, however, the amount on which you will be taxed is significantly lower. So, forget about squinting into a crystal ball to try figuring out when the bear market will end. Instead, control what you can.” Here at Regatta, we have been proactively building your portfolios to be ready for the inevitable storms. And here we are, in the eye of the storm, with the stock market having its worst start to a year in 50 years and the bond market having its worst start to a year in 40 years. This does not feel good. But I can assure you, we have done the planning, had the conversations and constructed the portfolios to weather this storm. To Jason’s point above, we need to focus on what we can control and avoid making permanent mistakes to well thought-out, long-term plans. This storm will pass and will be by your side along the way to navigate every twist and turn. The planning we have done for you does not mean we get to avoid the short-term pain of this downturn, but it does mean you can have the confidence to know that your long-term plans are still on track.
www.regattainvest.com
S T O C K M A R K E T U P D AT E
Executive Summary
By Russell Mohberg, Co-Founder & Chief Investment Officer
THE ECONOMY There is a lot of debate about the current strength of the economy as job growth outsourced expectations in the recent measures. But we know for certain that GDP was negative during Q1 and may come in negative for Q2. That means we very well may be in a recession now. An extra bout of Covid was the main culprit in Q1 but Q2 was derailed by continued supply chain disruptions, and inflation of the likes we have not seen in 40 years! The consensus is inflation had peaked in April, but an even higher point triggered another leg lower in stocks, as investors knew the Federal Reserve would respond with larger interest rate increases. Now, the consensus is recessionary conditions will persist over the next couple of years, but the loss of jobs and the hit to the economy should be mild. This should be no 2008-2009 crisis because we have full employment and corporate and personal balance sheets are much stronger. Both short and long rates are risky, so this signals a belief in the resiliency of the economy. STOCKS
will begin getting cut. This is a healthy reckoning with reality and should be a key component of the bottoming process. We are adding to undervalued and smaller company stocks. REAL ESTATE
Publicly traded real estate acts a lot like stocks and has also sold off this year. Vanguard’s VNQ ETF was off -20.6% at mid-year. The four funds of primarily private REITs and individual properties were all positive during the same period. Private real estate valuations tend to lag and somewhat bridge mild economic slowdowns. These funds are less subjected to short-term trading emotions and investors tend to take more of a “wait and see how the rents hold up” position. With this said, we have had quite a good run in these funds and will be taking a touch of profits when we rebalance back to our target allocations. Our managers of direct private apartment buildings are now thoroughly in a “patiently waiting for deals” stance. However, they do frequently make offers at prices that would produce good returns if accepted.
U.S. stocks entered an official bear market during Q2, as defined by a -20% drop in the major benchmarks. The valuation compression was much worse in the growth stocks—even those like Amazon, Apple, and Alphabet (that weren’t particularly expensive going into this year). Some stocks were sold off so deeply that they may have bottomed but others are likely due for another leg down. Nearly all ALTERNATIVES professional investors believe that estimated earnings for the For non-accredited investors or next year are way too high and situations where daily liquidity
is required, we added a merger arbitrage fund to our managed portfolios with income allocation last February. This fund buys shares of select companies that are being acquired (merging) and sells short the shares of the company doing the buying. The strategy is half a century old and aims to arbitrage the spread between the target company’s stock price after the merger announcement and the actual purchaser price upon the close of the merge. We would prefer to own simple investments like bonds that pay income, but with such low bond yields and rising rates we need a bond alternative with lower interest rate sensitivity.
Alternative income sources for accredited investors may come from many different sources. Your Regatta Financial Advisor can provide you an update on your specific holdings. Needless to say, we continue to look for and invest in assets that should do well in a low growth but inflationary environment. These include farmland, renewable energy, containerships, select real estate development and quick service restaurants. BONDS
Bond rates have risen but we are still looking at the low 4% for a core bond fund. The current yield is a very good indication of the forward total return for at least the next five years. We are lucky if we keep up with inflation with that type of yield. We don’t own much of corporate bonds and where we do, we view them as an insurance policy. Tax-exempt bonds and private debt are a different story. Depending on your tax rate, municipal bond yields look attractive again.
ALTERNATIVES: PRIVATE Short-term floating rate business loans and short-term comEQUITY mercial mortgages should also We use funds of private com- produce inflation beating inpanies that are available for come and hold up well in a mild both accredited and non-ac- recessionary environment. credited investors. The two primary funds we use were It isn’t fun to read all of the both positive mid-single negative headlines and artidigits at mid-year. The fund cles during a bear market, not managers we use both to to mention the value declines buy companies at fair prices in your accounts, but it is the and a margin of safety so the time for us to make the most of funs tend to be less volatile the opportunities at hand while and economically sensitive. avoiding permanent loss of capBut there is no perfect in- ital. vestment, and these too will come under pressure if a recession materializes.
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N E W S L E T T E R / AU G U S T 2 0 2 2
What is Your Retirement Number? By Lisa Margulies, Financial Advisor & Transformational Coach
FIRM UPDATE Regatta Capital Group is hosting a variety of educational seminars this fall and winter season!
T
he above is an iconic picture from a series of ads by ING Insurance taken over by Voya. I wish they would bring it back. What is your number?
In order to know how much money you need to save for retirement, it is important to start by calculating your annual expenses. Let’s say for example that you saved $1,000,000 for retirement and withdrew 4% of your retirement savings each year. This would mean that you would have a budget of $40,000 for annual expenses. With inflation at all-time highs, these numbers become very meaningful. Now, let’s say you know that you will actually need $120,000 a year in retirement. How much would you need to accumulate by retirement age if you were withdrawing at 4%? The answer is $3,000,000. We may feel overwhelmed with the idea that we might need to accumulate $3,000,000 before retirement to support our annual expenses of $120,000. However, closing the gap between where you are now and $3,000,000 might take less time than you realize. Have you heard of the Rule of 72? Let’s assume you are 47 years old with $750,000 in retirement savings and your money is growing 8% annually. If you divide your annual rate of return into 72, it will tell you how many years it will take to double your money. 72 divided by 8% = 9 years. The following rate of doubling would get you to $3,000,000 without any additional contributions. Age 47 Age 56 Age 65
$750,000 $1,500,000 $3,000,000
Regatta strives to engage our clients in these fundamentals. Being organized and having a plan is key. Knowing what you have, where you have it, and reviewing it often is crucial. You should review your plan whenever there is an important change in your life. We were in a rising market for an extended period due to low-interest rates. Rising rates are the new normal and the market has adjusted. Do you know what return assumptions are being used to create your financial plan? Are you talking to your advisor about the effects of inflation on future income and expenses? It is time to get back to the basics. Schedule a review with your advisor. Times are changing. Make sure you know your number!
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Topics that will be discussed include but are not limited to Regatta’s Favorite Funds for your Investment Portfolio, Multigenerational Legacy Planning for Your Family, and more! To learn more about the upcoming seminar schedule, please contact us at regatta@regattainvest.com!
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Is Your A-B Trust Worth the Tax Risk? By Marc Joyce, Founder of Regatta Trusts & Estates
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arried couples in California with a [Revocable / Living / Family Trust] should quickly estimate their total net worth and check to see if their family trust divides upon the death of the first spouse. This trust provision is generally drafted as a “division of property upon the death of the first [grantor / trustor],” and directs the trustee (usually the surviving spouse) to allocate a specific fraction or dollar amount of the family trust assets between multiple new sub-trusts—typically a survivor’s (or “A”) trust and a bypass trust (also commonly referred to as): B Trust Credit Trust Credit Shelter Trust Marital Trust Family trusts structured this way have critical tax and administrative implications. On the one hand, they primarily enable the surviving spouse to defer the payment of any estate taxes owed until after their own death, but on the other hand they risk very large capital gains taxes in the process, which could significantly diminish the net
trust estate available to distribute to children or other residual beneficiaries. Though not without exception, for most married couples, there are only two primary reasons why their family trust should divide on the death of the first spouse: 1. The couple’s total net worth, including all community and separate property (aka their “total estate”) is approaching or over the federal estate tax exemption limit. a. The exemption is currently at an all-time high of $12.06 million per individual, or $24.12 million per couple.
For these couples, a dividing family trust needlessly offers virtually pure downside, significantly complicating the trust administration, and critically preventing assets allocated to the bypass trust from receiving the single largest tax benefit in the country—a full step-up in basis on the death of its owner. Assets allocated to a bypass trust are subject to capital gains tax on the total appreciation in value between the death of the first and second spouse. Therefore, married couples (and surviving spouses) should consult and determine if they should keep the division, or modify their family trust to remove it.
2. The couple has a blended family with children from prior relationships. There are other considerations too, but these are the big ones. And for many couples, neither applies; their total estate is well below the estate tax exemption, their only residual beneficiaries are their kids of their own marriage, and other uncommon considerations do not apply.
The Regatta Financial Weather Report Key Economic and Market Indicators
Economic Growth Forecasts 2022
U.S. Retail Sales Growth, 1 year
8.4%
Sharp Decline, Low Sentiment
U.S. Unemployment Rate
3.6%
Lowest since Feb 2020
Inflation (CPI)
9.1%
Highest since Nov 1981
Manufacturing Economic Health (PMI)
52.7
Slowest Growth since July ‘20
S&P 500 Valuation (Forward P/E Ratio)
16.95
-8.76% From a Year Ago
Source: TradingEconomics.com, ycharts.com)
Interest Rates 30-year mortgage, fixed
5.88%
3% Hike This Year
Money Market
0.11%
Steady decline towards 0
Five-year CD
1.60%
Revert to Upside Since Q1 ‘22
Prime rate
4.75%
Increase by 1.5% Since Q1 ‘22
US
3.7%
Euro ex UK
2.8%
UK
3.7%
Japan
2.4%
EM
3.8%
China
4.4%
India
8.2%
World
3.6%
Source: OECD
Source: wsj.com/market-data/bonds
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N E W S L E T T E R / AU G U S T 2 0 2 2
SBO: Why Hire Your Children?
By Ellen Himmel, Financial Advisor & Branch Manager
I had considered hiring my daughter to do office work for me this summer while she was home from college but she managed to get work on her own. However, it did get me thinking about the pros and cons of hiring your child as an employee. This article summarizes some of the most common advantages and disadvantages and provides some parameters to be aware of. RELATIONSHIP
Pro: You get to spend extra quality time with your child. They can see your work ethic in action and you can see theirs. Consider: Working together might cause friction between you and your child if boundaries go unmanaged. Also, you need to be careful not to favor your child to the detriment of other employees. TAX STRATEGY
Pro: Your child’s earnings are likely to be tax free. This assumes they are not working elsewhere nor have other income. This shifts family money from you (higher tax bracket) to your child (lower tax bracket) in a tax efficient manner. Your child will only have to pay tax on the wages you pay them to the extent the wages exceed the standard deduction. For 2022, the standard deduction for single filing status is $12,950. Given that your child’s tax rate and liability is likely to be low, this also presents an opportunity to open a Roth IRA for them. The maximum Roth IRA contribution for 2022 is $6,000 or the amount of their earnings, whichever is lower. Investing early in a Roth IRA sets your child up with an awareness of the benefits of long-term investing particularly given the Roth IRA grows tax free.
same schedule as your other employees.
Consider: Follow some basic protocols to avoid issues with the IRS. Your child should be a bona fide employee and be treated as one. The work they perform should be ordinary and necessary to your business (for example, filing, ordering office supplies, answering phones, database work, and creating social media posts) and what you pay them should be reasonable and commensurate for the services performed. Your child should keep a record or time sheet of their hours and they should be paid on the
Consider: You will need to prepare and file a W-2 for your child that reflects wages paid and any withholding that may have been done during the year. Give the W-2 to your tax preparer to determine whether your child needs to file a tax return. The need to file may arise given any investment accounts under your child’s SSN.
BUSINESS CONSIDERATIONS
Pro: Wages paid to your child can be deducted as a business expense reducing your gross income and you may be eligible to benefit from payroll savings. If your form of business is as a sole proprietor, general partnership, or LLC, you do need to pay social security or Medicare taxes (FICA) on wages if your child is under 18. If your child is under 21, their wages are exempt from the annual FUTA taxes. If your business is in the form of an S-Corp or C-Corp, then you will need to withhold both employer and employee contributions and remit for FICA and FUTA. Make sure you pay your child from your business bank account, not your personal account.
Regatta encourages you to consult with your tax preparer as you work through the advantages and disadvantages of hiring and working with your child.
Managing Your Mental Health By Grant Nabell, Client Service Associate In a world full of chaos, divisiveness, and ever-growing tension; mental health is more important than ever. It affects the young and the old, your neighbor across the street, you, and me - it has no bias.
suffering from mental illness or stress may have problems managing their finances and making smart financial decisions. A recent report put together by Bankrate and Psych Central found that 42% of US citizens cited money concerns as having a negative Mental health was often a word we would impact on their mental health. Reportedly, ignore, but given the state of our country millennials suffer the most as an estimated and world, it is becoming increasingly im- 48% of millennials are affected mentally by portant that we address this issue. Often, financial concerns. people jump to the conclusion that when asked about their mental health, they think Poor mental health due to financial reasons others are only referring to their worries, may lead to poor sleep, low self-esteem, depression, and stress. However, there and decreased energy levels. In short, it is another aspect to this that tends to be can affect any aspect of someone’s life if ignored: our financial mental health. Have not addressed properly. The pandemic has you checked on your financial mental health illuminated the importance and urgency to lately? take care of our mental health. So, what are you doing to keep yours in check? Mental health stress can have an impact on your income, the amount of debt you Studies show that an increase in exercise, carry, and even your ability to save. Those better quality of sleep, and increased family
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and friend time all have a positive effect on our mental health levels. For me, if I feel down or stressed, I go for a run or a walk. Another key in today’s world full of technology is to simply step away from your phone, T.V., and computer. Get away from that screen! Go outside and do something fun that brings you joy. Even if it is just for 30 minutes a day. Increases in sunlight exposure boost our serotonin levels and can help with mental stressors. Here at Regatta, we care about your financial wellbeing and care deeply about you as a person. If you are stressed about anything going on in your life, financial or not, I would like to challenge you to implement any of the simple, suggested remedies to combat stress listed above. Feel free to email me anytime at grant@regattainvest. com to share your tips and feedback.
www.regattainvest.com
Finance-ology GOOD FAITH VIOLATION - A good faith violation is a cash trading violation. It occurs when
an investor deposits cash into a brokerage account and purchases a security before the intial funds have settled in that account. When you intially deposit funds into an investment account, it usually takes atleast two business days for funds to settle (depending on the custodian). Be sure to check with your custodian how long it takes for cash to settle in your account as there are consequences. For trading accounts with Fidelity, if you incur three good faith violations in a 12-month period in a cash account, your account will be restricted for 90 days, so plan accordingly.
Do you have questions about your estate plan? Schedule your free consultation with Regatta Trusts & Estates today! Give them a call at (310) 220-2225.
If you have comments or questions, please do not hesitate to reach out to us at info@regattainvest.com
Main Branch Office
Westchester Branch Office
Brentwood Branch Office
Spencer Kelly, Nick Ozer,
Lisa Margulies
Ellen Himmel
Britt Joyce, Lee Clay, Ben
7135 W. Manchester Avenue, Ste 2
12011 San Vicente Blvd. Ste 320
Satterfield & Russell Mohberg
Westchester, CA 90045
Los Angeles, CA 90049
880 Apollo Street, Ste 129
Office: (424) 255-1045
Office: (310) 471-6461
El Segundo, CA 90245 Office: (310) 725-9102 7
Regatta Newsletter Volume 15, Number 2 Editors: Kristin Grant Russell Mohberg, CFP®
880 APOLLO STREET, STE 129 EL SEGUNDO, CA 90245
Contributing Editor: Spencer Kelly, CFP® Contributors: Venessa Robinson Grace Yu, CFA, FRM Britt Joyce, CFA, CFP® Lisa Margulies Erika Jenkins, CPA Ellen Himmel, JD Nick Ozer, CFP® Lee Clay, CSRIC Marc Joyce, Esq. Brian Mollo Grant Nabell Benchmark Data Source: Tamarac, Inc
Your personal performance report has been posted to: https://regatta.portal.tamaracinc.com
ABOUT US
We are unabashed in our commitment to scouring the investment universe to find the best possible solutions for our clients and their money. We know there’s an easier way to manage money, but we choose to take the road less traveled.
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Regatta Capital Group
egatta Capital Group provides investment management and financial planning advice to individuals, families, business owners and endowments. The firm manages more than $890 million for clients in Los Angeles and more than 32 states.
For example, we invested in Facebook pre-
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IPO, own clean energy facilities and have directly invested in over 50 private, multi-family apartment building LLCs.
2022 Regatta Capital Group, LLC. All rights reserved. Reproduction by any means is prohibited. While data contained in this report are gathered from reliable sources, accuracy and completeness cannot be guaranteed. All data, information and ©
opinions are subject to change without notice. Investments referenced are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so they may lose value. Past performance does not predict future results.