After the financial crisis, many Americans re-examined how
and why they were investing. It was clear to many investors that having all of
their wealth tied to the stock market proved to be more destructive than having
alternative investments not correlated to stock market performance. This period
was unfortunate if an investor needed to liquidate their investments during a
low-valuation period and were only invested in intangible investments in the
public markets. However, there were investors, the High Net worth (HNW) investors,
which fared better than the others.
After 2008, investors started seeking opportunities in
alternative investments to protect their wealth from loss. The desire for
wealth protection is revitalized today due to the volatility in equities and
commodities investments.
There isn’t any secret that only HNW investors know to guarantee
a high return, but there are common avoidances they generally adhere to. When
they invest, they look for alternative investments that don’t fluctuate during
market instability and invest to preserve their wealth for the next generations
that follow. What investments do they make in addition to investing in the
public markets? Tangible investments;
for example:
Valuable precious metals,
in addition to Gold. Precious metals such as Titanium and Platinum are used
in the electronics industry for multiple items, making them desirable to
manufacturers and government entities. The investment may be in the mining
opportunity, distribution of the asset, or some other aspect of the purchasing
or development and liquidation of the metal.
Real Estate. When
it comes to real estate, HNW investors think bigger, globally, and look for
real estate that doesn’t come on the market often. Private residences/estates,
commercial property and property (both developed and undeveloped) outside of
their geographic area allows for steady appreciation over time. They look at
real estate for long-term investing with monthly income and liquidation
opportunities, potentially years later.
Art, Coins, and
Collectibles. Investors in this asset area know the value of what they own
and understand that ‘limited supply’ can make them money. Owning art and
collectibles the public is aware of can potentially create a larger the return.
Alternative investments may be exclusive to the threshold
amount of the investment and may not be appropriate for all investors. Furthermore,
investors choosing to invest in alternative investments must educated on its
risks before investing. Lastly, all investors, including HNW investors and
those seeking alternative investments, should avoid the following mistakes:
Mistake #1- Investing 100% into alternative investments.
Mistake #2- Not seeking investment advice from a qualified
financial advisor.
Mistake #3- Overspending and not having a spending and a
savings plan within their financial plan.
Mistake #4- Failing to rebalance their portfolio.
Mistake #5- Investing only in the U.S. Markets and
allocating all of their wealth to the public markets.
In light of recent media reports on stock market
performance, political issues, scandals, and other ‘news-worthy stories,’
keeping yourself removed from media as much as possible may be right for you
and your investments. Every day the
American public is exposed to media stories that can negatively impact them and
their investment decisions. During the last recession, the media’s reporting
caused widespread panic as millions of Americans chose to liquidate their
accounts out of fear of ‘losing their money.’
As we approach a possible secondary recession, remember that
liquidating shares in a downward market can cause financial harm you may not
fully recover over. It is up to you to investigate the validity of the news
story and source and consider how expensive market information is if you react prematurely
to it. Together, we can determine an overall plan for your investments,
re-examine your goals and plan accordingly.
The relationship between percentage changes and basis points
(BPS) determines a change in a financial instrument, such as the stock market
and bond yields. The Basis Point (BPS), is used to calculate changes in
interest rates, equity indexes, and the return of fixed income securities.
Regardless of daily BPS movements, a recession is when the economy declines
significantly for six or more consecutive months in five key economic areas:
Real Gross Domestic Product (GDP), income, employment, manufacturing, and
retail sales. According to some economists, we are entering into a recessionary
period as indicated by an inverted yield curve. The question is, how long will
it last and are we truly entering a recession?
When it comes to money and investing, be diligent on how you choose to react. Many media reports are non-biased, while many others are biased. If you’re concerned about financial implications related to what’s being reported, have a conversation with me regarding your portfolio. Consistent investing in a down market can yield rewards later when purchasing shares at a reduced price. The only caveat is if you need to liquidate shares during a down market and recessionary period.
With real estate prices recovering to where they were
pre-2008 in most of the U.S; many people are buying U.S. vacation homes, and
homes abroad for various reasons. The appeal of international vacation homes
are at an all-time high as property overseas continues to cost less than near
home, even in high-destination areas. A growing trend among younger Americans (Generation
X and Millennials) is Co-Ownership of vacation homes versus vacation timeshares.
Co-ownership is appealing to those who understand the equity benefits of owning
versus renting a vacation timeshare.
The 2017 Tax Cuts and Jobs Act (The Tax Act) is helping the
fuel the appeal of buying a vacation property by assisting owners in taking advantage of tax breaks. Whether investing for the equity potential or buying to enjoy the property’s benefits
now, vacation properties are becoming common. But before you spend, make sure
you understand the tax advantages (or disadvantages) a vacation home investment
can bring:
A Vacation Home as
a Rental Business: If you intend to rent out the property part of the
year collecting income, you will be limited to 14 nights being tax-free income.
Any additional rental days per year will need to be claimed as income, even if
the property is considered a personal residence. If you have a mortgage on the
property, consult your tax professional regarding what you can deduct as a
rental business. Once you collect income, the IRS may determine that the
property is for business use and not personal, and you may lose the second-home
rules.
Your Personal
Vacation Property: You can deduct mortgage interest and property taxes just
as you would for personal residential property in the U.S. under the IRS’
second-home rules. Under the Tax Act, you can deduct 100% of the interest you
pay up to $1.1 million of combined
debt secured on your first and second home. If you use the property for income,
exclusions apply.
What about selling one property and buying a vacation
property? Understanding IRS code 1031 exchanges can make the difference between paying
thousands of dollars in taxes when you sell one piece of property to buy
another one, such as a vacation home.
The property must be of ‘like-kind,' in other words a business or
investment property exchanged for another business or investment property. Because this can be complicated, you consult
a tax professional if you are considering a 1031 exchange transaction.
A sale and purchase of this type is a business transaction
requiring different Tax ID numbers assigned to each property. A qualifying exchange allows you to defer
capital gains from one property if you buy a comparable property within the
federal prescribed time limit.
Additionally, the property sold and the property purchased must be in
one of the 50 U.S. states, with territories of the U.S. and foreign lands not
included in this provision. If you’re considering a vacation property in the
U.S. or a foreign country, consult a tax professional regarding taxes
domestically and abroad.
At some point, a successful business faces
liquidation for all the right reasons. The business owner has built an asset
that is now positioned to sell to another individual, a group of investors, or
be acquired by a large corporation. Perhaps as the business has grown, planning
has revolved around liquidating; however, often the liquidation plan hasn’t
been put in place.
Whether it is a succession or a liquidation, neither are an overnight event and involve many moving parts and due diligence in order to be successful. Business liquidation planning should help to transition you emotionally, as well away from the business.
Therefore, business
liquidation and succession should be tackled sooner than later since the sale is likely to
be a large part of your family’s wealth and can impact you financially for
years to come.
As your business is about to be sold, factors pertaining to income control need be addressed. During the building of your business you were in full control of decision making and ‘income making.’ Now, business decisions may stop, as well as your ability to make income from the business. Without proper planning overspending can result, since you may receive a windfall of money for years of hard work. Tax planning needs to be considered even if your sale proceeds will be paid out over multiple years through an annuity or a life insurance contract. No longer will you be able to offset income with business deductions and your personal income may increase resulting in a higher personal income tax bracket.
Other factors to consider are defining your role and other key employee’s roles during and after the sale and if you will be paid during the transition period. Will you maintain control of day to day operations during the transition? All variables of the transaction from start to finish need to be clearly planned out. There should be a lot of planning that goes into what happens after the sale, too. It is possible that you will maintain control of the business, even if you no longer own it after the liquidation happens.
Family dynamics, mortality, and money are all topics that need to be considered as part of business succession planning. Is the business transferring to family members or will the sale affect others in your family? Are the profits from selling your business intended to provide financially for you for the rest of your life? Will you receive enough profit to maintain a certain lifestyle?
Because there are many types of business succession plans, yours should reflect what is best for YOU. Business succession planning should involve legal and tax professionals, a financial advisor, and an insurance specialist if you plan to use life insurance or an annuity as another vehicle for distribution of the profits from the sale. If you are an entrepreneur that has borrowed money from investors to start or grow your business, I recommend to start planning your exit strategy now, even if you don’t see business liquidation in your immediate future.