Crypto Winter

“A recession could lead to another crypto winter, and could last for an extended period” - Brian Armstrong, Coinbase CEO

Non-zero interest rate policy affects almost every aspect of the economy and financial markets, chief among them being crypto assets and others whose potential payoff is in the distant future. This is unlikely to be the typical crypto crash followed by a quick multi-year rise, which has historically all taken place during a period of 0% interest rates.

https://www.cnbc.com/2022/06/14/coinbase-lays-off-18percent-as-execs-prepare-for-recession-crypto-winter.html

Personal Inflation - What’s In Your Basket?

While CPI measures the price changes of a generic basket of static goods, your personal experience with inflation will depend on your own expenses. The rising costs of fuel, food, and housing have driven this inflationary spike, which means anyone spending the majority of their budget in those areas is uniquely affected. This most directly hurts low income and older households.

https://www.barrons.com/articles/personal-inflation-calculator-51651691668?st=i5aluz5bmpbnwh9

Storm Clouds?

We are facing a macroeconomic environment that hasn’t really been seen before. This is where detailed planning shines as the most important part of holistic wealth management.

“...look, I'm an optimist. I said there's storm clouds, they're big storm clouds, they're -- it's a hurricane It's, we -- right now it's kind of sunny, things are doing fine, everyone thinks the Fed can handle this. That hurricane is right out there down the road coming our way. We just don't know if it's a minor one or Superstorm Sandy or -- yes, Sandy or Andrew, or something like that." - JPMorgan Chase (JPM) CEO Jamie Dimon

"So I'm going to try not to use any weather analogies, but I would say the following. I think this is among, if not the most complex dynamic environment I've ever seen in my career. We've obviously been through lots of cycles. But the confluence of the number of shocks to the system, to me, is unprecedented--we're seeing it actually relatively orderly so far. So while it's painful to watch and investors are not performing as well as they would like to perform for sure, it actually has been relatively orderly so far." - Goldman Sachs (GS) President & COO John E. Waldron

AI and the future (and history) of what you read

As I continue to evaluate AI investments, it’s increasingly important to think about their construction and eventual value/use. This is a great (long) read about where LLMs are today. Things sure have come a long way from the decision tree-based letter writer I built in high school!

https://www.nytimes.com/2022/04/15/magazine/ai-language.html?searchResultPosition=1

Financial Transparency

It’s not always this dire, but financial transparency is absolutely imperative for successful outcomes

https://www.nytimes.com/2022/04/15/business/money-secrets-cheating-retirement.html?referringSource=articleShare

2020 is Dead, Long Live 2020 (+1)

I’ll spare you the summary of what was clearly a year to forget. Frankly, it was impossible to keep up with everything that has happened in the last year given the difficulties we have faced and the magnitude of what we were are still going through. Suffice it to say that it’s been a rocky start to the decade.

But the recent Capitol riot, among other things, shows us that 2021 is not a Mr. Clean magic eraser here to eliminate the stains of 2020. Regardless of the new year, we are still living in a tumultuous time, socially and economically. Rising Covid deaths, political divisiveness, skyrocketing federal debt, and an increasing wealth gap leave us in a challenging environment to navigate, to say the least.

While 2020 was disastrous for society generally, most investment classes unexpectedly saw positive returns. Using most traditional valuation methods, prices are now quite high on the whole, a scenario that typically leads to low or even negative expected returns in the near future. It is unwise to try and game this through investment timing, but if history is any indication, a focus on risk controls will certainly be rewarded.

The Fed’s swift and strong reaction to the Covid recession (paired with an already prolonged period of low interest rates and pressure to stimulate growth) has continued to artificially inflate corporate earnings and personal balance sheets in the short term, leaving the fortunate feeling richer and the global financial climate in a more precarious position. Democratic Senate wins will likely pave the way for higher federal spending and potentially higher tax rates for corporations and wealthy families. New strains of the virus are increasingly harder to control. Trade wars with China have now turned into drastic regulatory threats from the Chinese government. The combination of excessive debt loads and future inflation might not require much else to tip the scales when the time comes…

Despite all of this, I am not recommending that you hide under the covers. Knowing the reality in which we live allows us to prioritize the things that are most important and, in our case, focus on client-specific financial plans that will endure well past the current turbulence. Knowing the dangers to come makes building the proper foundation that much more vital. I am more optimistic today on short-term economic growth than I have been in over a year, mostly due to our progress in the fight against Covid and the government’s ability insistence on providing supportive measures to corporate America (targeting and efficiency are another story). Though Q1 2021 economic indicators will surely suffer from continued lockdowns, growth in late 2021 and 2022 could surprise to the upside for the following reasons:

• Pent up demand from lockdowns and amassed savings will likely lead to large economic growth in the 2nd half of 2021, potentially lasting a full year as travel and entertainment lead in the recovery.

• The Fed’s focus on avoiding deflation (rather than fearing inflation) means that interest rates are expected to stay relatively low for another several years (supported further by the appointment of Treasury Secretary Yellen), leading to even heavier borrowing activity and a continued boost to housing and growth assets (though not without significant volatility along the way).

• The record speed of Covid vaccine development highlights the rapid growth we’re witnessing in science and technology and the power of collaboration, further strengthened by the internet and big data.

• Given the current deficiencies in infrastructure across the country (surface transportation is underfunded by ~50%), Democrats’ focus on spending could lead to significant improvements and long-lasting (investable) benefits, particularly in smaller and/or alternative energy companies.

• Inflation fears could be overhyped, as the economy does not rely on physical goods as much as it has in the past. Software and data have the ability to approach $0 marginal cost for additional users.

• Heightened spending, leading to a weaker USD, could benefit corporate earnings outside the US.

• In the longer term, technology is making us exponentially more productive, and while we have all witnessed its perils at some point in the last year, it has undoubtedly improved our lives in noticeable and investable ways. Specifically, how will education and healthcare evolve with new remote possibilities? If you don’t believe me, ask my 7-year-old nephew, who is booking zoom appointments and managing email chains seamlessly. On an unrelated note, we’ve just hired a new CTO.

A positive economic growth outlook does not necessarily lead to investment returns, however, especially when it applies to asset prices that largely already reflect this growth. Euphoria is setting in across many trendy investments (e.g. SPACs), and parabolic price increases (see Bitcoin, TSLA) have historically led to very large losses for late stage investors. How much does a tulip cost these days?

FOMO is never a reason to take undue risk, and while the timing of bursting bubbles is unpredictable, the eventual result is usually the same. These lofty valuations make it more difficult to avoid potential landmines, but also make it that much more important to stay on track with long-term goals and a stress-tested financial plan.


Wishing you and your family a happier, healthier, safer, and more stable new year. As always, let us know of any major changes in the coming year so we can adjust your unique financial plan accordingly.


Best,
Rohit

Getting Credit Where Credit Is Due

If you’ve decided to take advantage of federal loan deferral under the CARES Act during the COVID-19 crisis, be sure to check your credit score to ensure that delayed payments have not been adversely recorded on your credit history. While loan servicers have been directed not to report these events for federal loans, initial indications show otherwise, as many borrowers have noticed significant drops in their scores. And the same does not apply to private loans, mortgage/rent payments, or credit card debt, all of whose servicers will continue to report negative credit events.

Your credit is essential to your financial success, so always be on alert! Like your reputation, it’s hugely important and very difficult to rebuild once it has been tarnished.

https://www.forbes.com/sites/adamminsky/2020/05/19/student-loan-servicers-are-dinging-credit-reports-for-the-cares-act-forbearance/

Interview w/ Noel Bagwell, Honest Lawyer Podcast

Thanks for having me on the show, Noel! Improving business incentives can help shape the future of financial advice, and we hope we're at the forefront of that change for the better.

https://www.honestlawyerpodcast.com/2020/05/07/interview-rohit-padmanabhan/

It's Time to Convert

If your IRA or previous employer’s 401k portfolio has taken a hit this year, now could be a great time to consider a Roth conversion. Converting a traditional retirement account to a Roth account requires paying the deferred taxes now, which can be burdensome for cash strapped professionals early in their career. However, because major financial markets are down 25%+ since mid February, this means that your potential tax liability could be much lower than it was just a few weeks ago…and potentially the lowest it will ever be. Combine that with historically low income tax rates, and this could be a fantastic opportunity to make a smart long-term decision. As always, you should speak to a financial advisor and/or a tax specialist to discuss the implications on your specific situation before making any decisions. But don’t wait too long to have that conversation - when markets recover, you could lose the potential tax benefits of this market drop.

Set yourself up for post-COVID success

The craziness of the last few weeks has upended most of our lives. The uncertainty from the aftermath of the Nashville tornado, COVID-related company closures, and panicked financial markets are sure to cause stress and overwhelm even the best of us. Rather than let them add to your worries, here are a few tips that can help you stay focused and overcome adversity.

- Use your time at home wisely. Social distancing isn’t natural for humans and can be very difficult, but it could be a great time to focus on things you've been putting off, including:

1) Professional Development: Find ways to expand your professional skill set and make yourself the most attractive candidate in your field. Online classes & coding bootcamps could be great ways to make sure you come out of this isolation period even more prepared than ever.

2) Get your finances in order: Drill down on your expenses, figure out how much you've been saving (or should be) and how you can move toward your goals of:

A) Emergency Savings (3-6 months essential expenses) in a HY savings acct

B) Additional savings for large upcoming expenses (taxes, car, house, kids)

C) Max out retirement contributions (employer Roth 401k or self-directed Roth IRA)

D) Start/add to non-retirement investments

With markets down ~25% from their recent peak just over a month ago, now could be a great time to use your increased savings to begin investing toward long-term savings goals.

- Don't let boredom lead to unnecessary expenses! Extra free time can subconsciously cause an increase in online shopping; instead, use the potential extra savings to build toward something meaningful and intentional.

- If you're left in the position of having an uncertain future professionally, now is the time to get back to basics. Living in isolation highlights your essential expenses: the bare minimum of what you need to live and be happy. Everything that you're not able to do right now (gym membership, restaurants, bars, travel) is considered discretionary spending and should take a back seat until you regain your footing. Instead, find a new park to run in, a new dish to cook at home, and an old friend to reconnect with over video chat. And make sure not to make any short term borrowing or spending decisions that could hurt your credit score. That means using potential govt relief money to pay off debt and necessary expenses.

By using this time to get organized, when we eventually emerge from the insanity of 2020, you'll come out better than you entered and ready to hit all your financial goals!

Portfolios & Pandemics - It's All About Risk Management

Now a global pandemic, COVID-19 and its spread over the last few weeks have highlighted the importance of preparation and loss mitigation. Weighing temporary lifestyle disruptions (and their effects on economic activity) versus the continued exponential growth of the virus is a decision that individuals and governments must make, oftentimes earlier than is comfortable. But making stark, loss-mitigating decisions prior to when they seem necessary is exactly what risk management is about. Canceling travel plans, crowded public events/transportation, and other similar activities seems like an overreaction…until you understand that taking these actions early on is absolutely crucial to preventing a worst-case scenario (in this case, overwhelming the healthcare system, thereby increasing mortality rates).

After a decade of almost uninterrupted prosperity, the last 3 weeks in financial markets have proven the exact same thing: long-term investing is all about risk management, providing opportunities for upside while minimizing the repercussions of a worst-case scenario. Risk management in investing comes in many forms, the most traditional being fixed income (bonds), portfolio insurance (hedging through insurance, options, etc.), and perhaps most importantly for younger investors, consistent contributions to the portfolio. This requires a bit of foresight and planning ahead, but the rewards are significant!

Crypto Reporting Requirements

The IRS has always been fairly vague regarding its treatment of cryptocurrencies, though one thing is now certain - they want (you) to track your activity. On the recently published Schedule 1 tax form, the IRS asks, “At any time during 2019, did you receive, sell, send, exchange, or otherwise acquire any financial interest in any virtual currency” Earlier in the year, it also sent letters to large virtual currency holders requesting payment for prior years' back taxes on unreported activity.

All of this is to say that the crypto world is no longer completely unregulated, and you should keep detailed records of all transactions so that you aren’t surprised by a tax bill down the road.

SECURE Act Signed Into Law

President Trump just signed a spending bill that included the Setting Every Community Up for Retirement Enhancement Act (SECURE), making major changes to current regulations around retirement accounts. While some of these changes are potentially positive for investors, others will have a significant impact on long term financial plans and estate planning. Below are the most important changes (not comprehensive):

Removal of “Stretch” Inherited IRA Provisions

The SECURE Act will make significant changes to inherited retirement plans like 401(k)s, traditional IRAs and Roth IRAs. In the past, beneficiaries of these accounts could typically take distributions from these accounts over their own life expectancy.

However, the new bill includes what tax-generating provision that would require most beneficiaries to take distributions from an account within a 10-year period, with no stated schedule other than the required depletion by the end of this term. This will not apply to existing inherited IRA accounts, which will be grandfathered under prior regulations.

Roth contributions and conversions, either immediate or spaced over time, will become an increasingly important discussion in the next few years, especially before the existing tax bill expires in 2025. This is a major change for estate planning (may affect your parents as well as you), and should be heavily considered in your future financial planning discussions.

Increasing the Required Minimum Distribution (RMD) Age - from 70.5 to 72

The current law requires that most individuals take out required minimum distributions (RMDs) from their retirement accounts once they reach the age of 70.5. The SECURE Act would delay this requirement to age 72. This will help to mitigate increasing life expectancy and most Americans’ severely underfunded retirements.

Removal of 70.5 Age Limitation on IRA Contributions

Currently, after age 70.5, you can no longer contribute to an IRA (though you can still contribute to a Roth IRA). The SECURE Act removes this savings limitation by repealing the age limitation for traditional IRA contributions.

Early Distributions for Birth of Child or Adoption, Without a Penalty

A new exemption will allow up to $5,000 to be distributed early from a retirement plan (without the 10 percent penalty) in the event of a qualified birth or adoption. The distribution would need to occur within one year of the adoption becoming final or the child being born.

Annuities in Retirement Plans

In short, SECURE will result in more retirement plans including annuities as an investment option. Though annuities can be appropriate for some participants, we believe this to be a highly contentious addition, as it lessens the liability on the plan sponsor for a product that has historically been highly abused by providers. We urge clients to consider any new investment options carefully before opting in.

More Retirement Plans Access for Small Employers

SECURE expands the ability to run multiple employer plans and make the process easier overall. It essentially allows small employers to come together to set up and offer 401(k) plans with less fiduciary liability concern and less cost than exists today. In theory, this should lead to more small employers offering a 401(k) plan.

Tax Credit for Automatic Enrollment

In order to increase retirement plan participation, there is a new tax credit of $500 to help smaller employers encourage automatic enrollment. This credit may help offset some of the operating costs , and automatic enrollment has seen great success in increasing plan participation by employees.

Lifetime Income Disclosure for Defined Contribution Plans

The law requires that defined contributions plans deliver a lifetime income disclosure to participants at least once every 12 months. This lifetime income disclosure would essentially show how much income the total account value could theoretically generate. While potentially helpful, the calculation methodology is still unclear.

Increased 401(k) Access for Part-Time Employees

Some part-time workers can now receive 401(k) benefits if they work at least 500 hours for three years, rather than the current requirement of 1,000 hours.

Toxic Spending

While it’s true that your ability to save can be seriously undermined by that daily tall vanilla triple shot latte w/ oat milk, there are some bigger trends that are really preventing you from maximizing your savings potential.

1. Hiding your head in the sand: Not wanting to acknowledge overspending or not wanting to have a discussion about it often compounds the problem. Have a solid financial plan and speak honestly about it with yourself and/or your partner. While the plan doesn’t have to be inflexible, it should always serve as a guide to keep you on track.

2. Mindless or wasteful spending: Think about your purchases with intent in order to prevent immediate buyer’s remorse from impulse purchases. The easier it is to purchase things, i.e. Amazon & subscription services, the more cognizant you’ll need to be to stick to your plan.

3. Keeping up with the Kardashians: The Kardashians aren’t real, so stop trying to keep up with them. Following the habits of those around you is one of the major contributors to spending beyond one’s means. Shopping, eating, and entertainment have all become social activities, but your finances aren’t. Build your budget around what really makes you happy, not what you perceive others around you to be doing. What you see externally might not be real, feasible, or what you actually want. Social media is an obvious culprit, where friends post about their fabulous vacations and meals while omitting any acknowledgement of their financial stresses. Be your own person!

74¢ < 61¢?

A known gender pay gap has been hugely detrimental to women’s finances, starting with lower lifetime income and longer life expectancy, which lead to a greater difficulty getting out of debt, and result in having fewer investment opportunities than their male counterparts. But what is almost as important, and sadly less recognized, is the gender investing gap. Women have historically been excluded from family finance discussions & education at a young age, putting them at an early disadvantage, and this lack of engagement has left women far less likely to invest, widening the income gap even further. Already starting with a smaller amount of savings, women tend to keep $0.74 of every dollar in cash compared to men who keep about $0.61, thereby growing their savings less substantially over time. How do we close the investment gap? Acknowledgement and education are a great start!

Let's Roth & Roll!

With current income tax rates near historic lows and a rapidly-growing national debt, many analysts believe tax rates will need to be significantly higher in the future. If so, this could be a great time to perform a Roth conversion, converting your traditional IRA to a Roth IRA under your current tax bracket and avoiding potentially higher tax rates down the road.

https://www.forbes.com/sites/impactpartners/2019/08/28/tick-tick-roth--why-theres-potentially-no-better-time-to-convert-your-ira-to-a-roth-ira/#508650d37847

Interview with Meredith Smith

A fun interview with Meredith Smith, discussing Lotus AM and our goal of bringing top-tier wealth management exclusively to a new audience in young professionals. Thanks for having me on @meredithsellstn!

Uploaded by Meredith Smith- Nashville Realtor on 2019-07-26.

Your Parents Were Wrong

Communication and Financial Transparency are Key to Emotional & Financial Success

When it comes to managing finances, every partnership has its own formula to walk the tightrope and maintain happiness (or ignorance) in the relationship. While the norm is to combine finances, more and more partners are choosing to delay or even forego this financial union. While managing finances separately doesn’t necessarily guarantee failure, the one consistent theme that leads to long term emotional & financial success is good and consistent communication around finances. It turns out that your parents were wrong when they told you that it was impolite to talk about money; that mentality has stunted relationships and financial growth for years. Conversations about finances shouldn’t be awkward or embarrassing; rather, they should be honest, thoughtful, and empowering. Talk about your finances early and often!

https://www.policygenius.com/blog/couples-mange-money/