Not according to well known author Robert Kiyosaki. The best-selling author of Rich Dad Poor Dad and many other books makes the case that an asset is anything that brings in cash flow. He defines a liability as anything that sends cash flow out
If you think about your home, cash flow goes out doesn’t it? You pay insurance, property taxes, repairs and maintenance costs, mortgage interest and principal, alarm monitoring fees and more.
So therefore, under Robert Kiyosaki’s definition of assets and liabilities, your home is a liability.
I know that is hard to get your mind around. However, I also know I pay a lot of expenses on our home and receive no cash flow in. On the other hand, I oversee a rental property for my in-laws and every month they have cash flow that is paid to them on the rental of their home that is well in excess of such costs.
Now I know you may be thinking, what if I factor in the appreciation on my home?
I would counter right off the bat that appreciation is not cash flow, but obviously some of that appreciation could be monetized with a home equity line on the property. That aside, what if we factor in appreciation? Does it offset the costs of ownership?
I will use my home as an example since I am not sure how else to answer this question. We bought our home in 1994 and have lived in it now 25 years. Yikes!
We purchased the home for $130,000. Today our 1700 square foot home is worth roughly $500,000 after expected 6% realtor fees if we were to sell.
The net sale value of $500,000 minus our cost basis of $130,000 equals a potential net profit of $370,000. $370,000 divided by the 25 years we have lived in the home equals $14,800 in appreciation per year.
Our annual costs on the home include:
Does the appreciation change anything?
As you can see, we may have proved Mr. Kiyosaki wrong if we factor in appreciation.
However, you might have noticed that there was no mortgage interest or principal repayment costs in our home costs as our home is paid off.
What if that home was not paid off as is the case with so many homeowners? What if we had a loan for 60% of the value of the home? Further let’s assume that we have a fixed rate mortgage for the sake of simplicity at 3%, which I believe is an excellent long-term rate. Using a mortgage calculator and a 30-year mortgage term our monthly payment is as follows:
Oh no, that cash flow is now negative. Maybe Robert Kiyosaki is right!
So, what should be the take away from this?
A final comment, you must live somewhere obviously, and I am not suggesting you live in a cardboard box on the side of the road. There is a cost to any place you might live whether you own or rent. However, what I think this exercise has proven is that maybe its to your advantage to keep that cost as low as possible?
As a wealth building strategy, I may even go as far as suggesting you rent where you live, and you own where you rent. Think about it! You rent your personal residence so you can buy properties that you rent to others who cover all the costs of that home and then some and provide you a positive cash flow. If you then own enough assets, your cost of the liabilities is eventually covered by that positive cash flow.
This sounds simple doesn’t it? Let me know your thoughts in the comments.
It’s been a long summer and thank God Fall is here. Kids go back to school. Traders return from vacation and market volume and sanity returns!
Summer is just no fun anymore for investment professionals and their clients!
So, the million-dollar or maybe billion-dollar question (adjusting for inflation) is where are we in this whole mess? Is a recession on the way? Are markets going to crater? What’s up with interest rates?
Let me start by saying if I had all the answers, I would just be managing my own riches. However, I do believe I have a few cues that might help you understand what has happened and where we might be heading.
Is a Recession on the Way
Many of you might have heard on the news that the yield curve inverted. What the heck is this?
Simply this is chart where the 10-year treasury bond yield is plotted relative to the 2-year treasury bond interest rate or yield. When the 10-year yield dips below the rate of the 2-year, the markets are forecasting that longer term growth prospects are weaker than current growth prospects. This is called a yield curve inversion, as seen below.
All prior recessions have been forecast by a yield curve inversion with 100% accuracy.
Here is the rub though, it is always delayed. It is not immediate!
As you can see, the average time to the recession is 21 months. The markets still advance and gain an average of 15% according to a Credit Suisse report. So, it is not time to run for the hills and cash out of stocks as the media has led many to believe!
Yes, a recession is probably in our future, but business and market cycles do not usually last forever.
The good news is that the media and market commentators have be become so negative that there is likely nowhere for the markets to go here but up. Remember, the markets are said to “fool most of the people most of the time.” Believe me, I have been the fool many times!
Are the Markets Going to Crater?
I already discussed yield curve inversions, above, and we learned that that signal alone does not spell the end to stock markets. In fact, it can mean additional returns over the next 21 months on average.
The stock market is still trading in what we call a series of higher highs and higher lows. This is the definition of an uptrend.
In the chart below notice the pattern of green circles is primarily forming higher highs and higher lows. The only exception was the October through December correction, but that did not last long enough to change the overall trend of the market.
As much as you may hate the volatility, this market is still trending higher. In fact, just recently it broke higher from a trading range that many were forecasting was the start of a market that wanted to trend lower. They were, unfortunate for them, incorrect.
However not all is well, growth has slowed globally due partly to the trade war between the U.S. and China and partly due to normal business cycles that rise and fall. This could eventually lead to lower stock markets.
What’s Up with Interest Rates?
The slower growth has led Central Banks around the world to reduce the interest rates they charge their member banks, which then makes capital cheaper for consumers and investors.
Many of these same Central Banks have reduced rates to negative yields or even re-implemented stock or bond buy back programs (i.e. quantitative easing programs) to simulate growth.
I warned our clients in our last quarterly letter that global Central Banks will not ride off into the sunset quietly (for some unknown reason). They are primed to enter a fight to the death. A tug-a-war with the economic cycle in an attempt to prop up markets.
As an example, Central Banks have delivered 32 interest-rate cuts globally this year as a worsening U.S.-China trade war has dragged down global economic growth. Even the U.S. Federal Reserve has reduced the interest rate they charge member banks by one-quarter point and are expected to lower rates again in September by another one-quarter point when they meet in a few weeks.
So why are rates lower? The markets tend to lead and attempt to force the hand of Central Banks globally based on the economic and business data available.
Here in the U.S. the yield on the ten-year treasury bond has fallen from a high of 3.2% in October of last year to a recent low of 1.47% (see below chart) in an attempt by the markets to forecast slower growth in the future. In doing so, these lower rates stimulate economic activity and can essentially do the work that it believes the U.S. Fed should be doing.
Where Does this all End?
Great question! Here is my guess. It is just a guess as only God knows what is truly happening and he is not talking (at least not to me on this subject).
I believe interest rate and quantitative easing programs around the globe are creating a currency war of sorts. It generally benefits an economy to have a weaker currency. These programs weaken their currencies relative to other currencies and the lower rates, in theory, stimulate growth.
Here in the U.S., our Fed has been resistant to make the same kind of interest rate reductions and engage in the same types of quantitative easing programs as other countries. This has resulted in a stronger dollar, which has negatively affected our international trade.
However, it does draw investors to our treasury bonds as the higher relative rates attract buyers from around the globe. The strong dollar, however, is a negative from U.S. growth especially for global companies based here in the U.S.
I believe eventually the U.S. Fed will have to follow suite as growth here continues to slow. In Europe, they have negative yielding bonds where the holder pays the ECB for the right to hold that debt. Why someone would buy such bonds is beyond me, but the bet is on an assured return of capital even if a Euro is returned at something less than a Euro.
If I am right, this means interest rates here will continue to head towards zero and maybe even negative yields. The U.S. Fed has already stopped selling bonds from its portfolio (a form of quantitative tightening) and they will with time reverse course and start buying bonds and maybe equities.
This is the tug-a-war I mentioned. Poor economic data and negative market action will force action by Central Banks, this action will encourage markets and temporary stimulate ever weaker growth.
Volatility will be the result! Better get some Tums!
Ultimately, Central Banks will lose this tug-a-war. However, that could be years down the road.
In the process of losing this battle, global currencies will be debased. Sovereign nations will be even more indebted as a percentage of their GDP and there will be no way to ever repay all the debt outstanding for most nations.
The result, in my opinion, will be some kind of debt reset and the roll-out of some kind of new global currency.
The problem, I have no idea the timing!
The good news for investors is that I do believe inflation, not deflation will be back with a vengeance at some point. The only way to survive the inflation will be to have assets that go higher with inflation. Equities, commodities, real estate and precious metals should do very well.
Not necessarily a pretty picture, but that is what I see!
Let us know how we can help you achieve your goals while navigating what looks to be a very interesting time in our history!
Do you want to shave your tax bill, while also benefiting your favorite charity?
I know I get excited anytime I can knock out two or more items with a single punch (i.e. the old kill two birds with one stone analogy). I am sure many of you are like me.
In fact, this weekend is a great example as we celebrated Father’s Day for my father-in-law and combined that with my daughter’s 22nd birthday. How much more bang for the buck can you get unless maybe you were also celebrating everyone in the family’s birthdays the same weekend! I am sure my wife will not let me get away with that one!
Today, I am going to give you three strategies that can help you kill two birds with one stone. They are two-fers (i.e. two for one ideas)!
Donate Appreciated Stock
Let’s face facts, after a ten-year economic cycle, we all should have some stocks, mutual funds or ETFs that now have low cost basis. This is the perfect time to give these appreciated marketable securities to charity instead of your hard-earned cash in the form of after-tax dollars.
It seems so simple, but very few people consider it. As an example, we run a strategy called IA Equity Value whereby we buy and hold the ten highest dividend paying stocks in the Dow Jones Industrial Average, plus three additional positions that are either long or short at any point in time. (You can reach out to me if you want additional information on this strategy).
The ten highest yielding stocks in the Dow Jones Industrial Average are rebalanced annually and do not change much from year-to-year. They tend to have some pretty large built-in gains when they do change.
The strategy then is to donate that stock or stocks that will change in the annual rebalance, and then use the cash you would have used for charitable donations to buy the replacement stock positions.
The result is a full charitable deduction for the donations (subject to certain limitations), the removal of a possible source of future capital gains from portfolio and the ability to rebalance without tax consequences. Pretty neat huh?
Most charities will accept donations of marketable securities or you can use a donor advised fund to transfer the stock and then make your donations at a later time. Either way it works well.
Qualified Charitable Distributions
This second idea is only available to those taxpayers over age 70 and with large Individual Retirement Account (IRA) holdings. Although, I don’t know why Congress does not lower the age limit on this idea?
A Qualified Charitable Distribution is the ability of a taxpayer to give to charity directly from their IRA up to $100,000 per annum. This gift allows the taxpayer to avoid the ordinary income tax on the distribution and still support their favorite charity.
The taxpayer does not receive a charitable deduction, but with the new higher standard deductions under the Tax Cuts and Jobs Act of 2017, this may not be a big deal.
For more on this strategy see our past post entitled “Help Your Favorite Charity And Save Tax Dollars.”
Our final two-fer is gift sequencing. What is gift sequencing? It is timing charitable gifts as to most benefit you and your income tax situation.
Here is a simple example, let suppose you have been giving $10,000 annually to your favorite church, synagogue or temple. Unfortunately, these charitable expenses, your mortgage interest and property taxes add up to just $23,999, when the new standard deduction of $24,000 for married filing joint clients. This essentially gives you no incremental tax benefit for these cash outlays since you are $1 shy of the standard deduction amount.
In our example, let suppose it is also nearing year-end and you closed on the sale of a property or received a large bonus. Lucky you!
The solution is gift sequencing. In this example, why not make next year’s $10,000 charitable gift in the current year to essentially double up your charitable deductions in the current year. In most cases, you will not make a charitable contribution next year and will double up again the year after.
This does two things, it puts you over the standard deduction and allows you to deduct $9,999 of charitable contributions that would likely not be deductible next year given similar inputs. It puts real money back in your pocket.
Secondly, if you use a donor advised fund like Fidelity Charitable Gift or Vanguard Charitable Fund, you can still decide when to ultimately put that money in the hands of the charity based on when and how you make grant recommendations. Obviously, you need to be supporting a real 501(c)3 charity or you risk your grant recommendation being denied, but for most of you that should not be a problem.
There you have it, how to get more bang for your charitable buck while potentially reducing your income tax bill. Let me know your thoughts or ideas.
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisers before engaging in any transaction.