We are happy to welcome three new clients to the ZRC family this quarter. It’s an honor to serve you and we look forward to many years of working together. Thank you to everyone who continues to share the work we do with friends and family.

Our hearts go out to those affected by the latest fires here in California. The following are three useful resources;

  1. Last year, law firm Morrison & Foerster produced the Summer 2018 California Wildfires Helping Handbook. The Handbook gathers in one place up-to-date, practical information on many subjects, including, housing, government benefits, insurance, FEMA assistance, replacement of lost documents, fraud prevention, and much more. To view the Handbook click here.
  2. Neighbors Together – Strong & Resilient https://neighborstogethersr.com is an informational website created by a Tubbs fire survivor for October 2017 Nor Cal fire survivors. It continues to provide independent advice for those affected by the Kincade Fire and other fires.
  3. United Policyholders (UP) www.uphelp.org – a consumer advocacy non-profit whose mission is to be a trustworthy and useful informational resource with up-to-date and location information.

3rd Quarter Market Review and Index Returns: The “New Normal” is no longer new, nor normal. Ten years ago, Bill Gross, founder of Pacific Investment Management Company (PIMCO) and frequently referred to as the “bond king” for deftly managing the PIMCO Total Return Fund for more than two decades, coined the phrase the “New Normal.” Said at the height of the financial crisis and bear market in mid-2009, the phrase was meant to warn investors of a future of “half-size economic growth induced by deleveraging, reregulation, and deglobalization.” His point, that the shedding of debts (forced by the financial meltdown) in the years to come would lead to slow economic growth and meager investment returns. Ten years later, two things are evident;

  1. Bill is no longer in the investment business. Five years ago, he had a falling out with others at PIMCO and moved to Janus where assets and good performance failed to follow. This past February, he retired from Janus.
  2. He was flat-out wrong about everything. Economies did not “de-lever” and reduce their debts, but actually “levered-up.” Fueled by numerous Fed rate cuts and years of unprecedentedly low interest rates, investors refinanced, the U.S. economy restarted, and the last decade has been one of the best for stock investors with U.S. equity asset class returns ranging from 10% to 13% a year!

And, yet, Bill may eventually be right. As the U.S. economy enters its record 11th year of expansion, the rate at which the economy is growing is beginning to slow. Earnings season is upon us and many companies are guiding expectations lower. The Fed has already cut rates twice this year. As we’ve shared with many of you, ZRC vehemently believes this is the wrong thing to do. Cutting interest rates is what you do when the economy is faltering – such as in a recession or in the middle of financial crisis. As every college student that has taken Econ 101 knows, you pass out Jell-O shots at 8:00PM to get party started . . . not at 2:00AM to keep the party going. Cutting rates now means the Fed will have less levers to pull to jump start the economy when it is needed the most. Maybe Jerome Powell and the rest of the Fed Governors attended dry campuses.

For this reason, we share Vanguard and others’ sobering assessment that investment returns over the next decade could very well be muted. Even still, with interest rates low (and likely headed lower), it fuels our conviction that over the next decade stocks will again be the highest returning investment. However, be prepared for a very bumpy ride. Vanguard predicts 10-year annualized nominal returns (i.e. before inflation), based on market conditions as of June 30, 2019 as follows;

Global equities ex-U.S.                  6.5% – 8.5%

U.S. equities                                     3.5% – 5.5%

Bonds                                                1.0% – 3.5%

Investor returns will of course vary depending on the timing of purchases and sales, cash-flows, markets at the time, and human nature in general. In any case, these things are out of our control . . . and we try not to fret too much about things that are out of our control. We try to make the most out of what the markets give us and translate that (via a comprehensive financial plan) to the lifestyle you wish to live.

By the way, how has the PIMCO Total Return Fund performed in the five years since Bill Gross left? Despite its assets shrinking from $240 billion (at the time the largest bond fund in the world) to $68 billion currently, the fund has performed superbly, outperforming the Bloomberg Barclays Aggregate Bond Index by 0.26% year and 71% of all other U.S. Intermediate Core-Plus Bond Funds (according to Morningstar, Inc.). This is a fund that is held in almost every client account (except where we invest in tax-free municipal bonds).

Following Bill’s departure, we met with representatives from PIMCO at their headquarters in Newport Beach, California and at our Walnut Creek office to conduct due-diligence and understand the changes within the portfolio management team. While others were dumping the fund, we concluded PIMCO had a well-prepared succession plan in place and a deep bench of skilled professionals (managing nearly a $1 trillion helps) to skillfully manage the fund going forward. Given the results since then, we were correct in our assessment.

The third quarter was a roller-coaster ride for both domestic and emerging markets. U.S. markets outperformed non-U.S. developed and emerging markets during the third quarter. REIT indices outperformed equity market indices in both the U.S. and non-U.S. developed markets. Value stocks outperformed growth stocks in the U.S. but underperformed in non-U.S. and emerging markets. Small caps outperformed large caps in non-U.S. markets but underperformed in the U.S. and emerging markets. With two interest rate cuts by the Federal Reserve, bonds did especially well.

The U.S. has entered its longest post-war economic expansion, beating the expansion in the 1990s. This has led many economists and forecasters to suggest that it’s time for a recession. However, time alone doesn’t end an expansion. Consider that our current record-breaking expansion pales in comparison to many other countries. For example, there are seven countries who experienced expansions longer than our current one, and our expansion would have to go on for another 17 years for it to match the length of the economic expansion Australia is currently experiencing.

Do you need to take a Required Minimum Distributions from a retirement accounts before year-end? A required minimum distribution (RMD) is the minimum amount you must withdraw from your account each year. You generally have to start taking withdrawals from your IRA, SEP IRA, SIMPLE IRA, or retirement plan account by April 1st following the year you reach age 70½. Roth IRAs do not require withdrawals until after the death of the owner.

  • You can withdraw more than the minimum required amount.
  • Your withdrawals will be included in your taxable income except for any part that was taxed before (your basis) or that can be received tax-free (such as qualified distributions from designated Roth accounts).
  • You do not need to spend your RMD. The funds can be transferred into a taxable brokerage account and reinvested.
  • If your withdrawal for any given year is less than your RMD, the IRS may impose a 50% penalty on the shortfall.
  • If your balance is in a qualified plan such as a 401(k), 403(b) or 457(b), you may be allowed to defer the start of your RMD until after you retire, even if that occurs after age 70 ½.
  • If you’d rather gift your RMD, you may do so through a Qualified Charitable Distribution (QCD). Though you do not receive a tax deduction for the gift, you are not taxed on the withdrawal either.

Many exceptions and rules apply. If you have any questions or have an account that is outside our purview, feel free to contact us.

Client Survey. Approximately 30% of our clients responded – which is a terrific response rate. Thanks to those who participated!  Responses were compared against a broader survey of nearly 30,000 total respondents. Some of the key findings and feedback we received were;

How likely are you to refer your advisor to a friend or colleague? 80% of you gave us the highest Net Promotor Score of 9 or 10 (on a scale of 1 – 10). Our score was 9% higher than the average response across all 30,000 respondents. This reminds us that our client-advisor relationship goes far beyond the surface of your financial well-being – it demonstrates that our holistic approach to wealth management helps foster trust and confidence. For that we are grateful.

Do you prefer advisor meetings to have a formal agenda or to be casual and open-ended? While half of you like the structure of our meetings and having an agenda, to our surprise, an equal number of you asked if we could meet informally, without an agenda, and even in a casual, out-of-the-office setting. The answer is absolutely!

While it is generally most efficient to meet at one of our offices or by video-conference, we are happy to meet over coffee, lunch, dinner, at Santa Rosa Golf & Country Club (Barry’s a member), your club, your favorite winery or brewery, during a hike, bicycle ride, horseback ride, etc.

When would you like to hear from your advisor outside of regularly scheduled meetings? Most of you responded, “At periodic points simply to check in” and “When I reach out.” We do make a concerted effort to reach-out to clients on or shortly after birthdays, milestones, and events that we know are important. Some people are thrilled to hear from us on their birthdays . . . others not so much. A number of you responded that you wish to hear from us “During significant market movements.” During such times, we will try our best to personally reach-out to each and every one of you. That may be a call. It may be an email. It may be a post on our website. Just know that even if you don’t hear from us, we are still thinking about you and your best interests.

For example, a few weeks ago after an abrupt downturn in the market, a longtime client emailed with concerns. He knew what our response was going to be, “…. Yes, these are scary times … hang on . . . you are in it for the long-term . . .everything is going to be okay.” And his response was, “Thanks. I just needed a hug.” So that’s what we gave him (in the form of an emoji) and would have given him a real one had we could of . . .because it is scary out there and there’s a lot of noise out there, and you’ve got mouths to feed, and mortgage payments to make, and you’ve been busting your butt for your 24 years, and if the market goes down 3% and your ZRC managed accounts decline by 2%, that’s still $60,000 – which is A LOT more than you made at your first job out of college 24 years ago . . . And it’s scary and you just need a hug. That’s what you get at ZRC. We know how far you’ve come and it drives us to do our best. Just know that everything we do is with you and your loved one’s best interests in mind. Every time. All the time.

In August we held Women and Wealth Workshops at our Santa Rosa and Walnut Creek offices. Clients (and a few guests) discussed retirement, caring for children and aging parents, financial goals, and approaching wealth from a female’s point of view. It was a wonderful afternoon of learning and sharing with clients across the spectrum of life stages. There was an especially lively discussion on the topic of, “What does wealth mean to you?”

The real power of the event came from sharing each other’s perspectives on how they handle money and finances. Openly talking about difficult financial transitions in life (some planned for, others not) was also moving and helpful. The feedback we received on the luncheons was the highest of any event we’ve hosted. We plan to schedule them again after the first of the year – probably in the afternoon with beverages and hors d’oeuvres. Please email Kelly@zrcmw.com if you like to attend the next workshop.

Why it makes sense to put solar on your home before the end of the 2019. What if I told you about an investment that was expected to earn you a rate of return of 15%, 16%, 17% a year or higher? Got your interest? That’s the expected return on investment of purchasing solar panels for your home before the end of the year. Why the urgency to do it in 2019? Because 2019 is the last year of the 30% Federal Tax Credit. In 2020 it drops to 26%, in 2021 to 22%, and then it is set to expire after that.

In April, Barry and Kristin put solar on their home in Walnut Creek. They got bids from three reputable companies; Michael & Sun Solar out of Graton, Petersen Dean, and West Coast Solar. Each company came highly recommended and bids were within a few thousand dollars of each other. Ultimately, Barry and Kristin went with Michael & Sun Solar because of a personal connection with one of their engineers (Matt Fritzinger). They purchased a 12.35 kilowatt roof-mounted system that is expected to generate 95% or their electricity needs. Prior to having solar, the Mendelson’s monthly electric bill averaged more than $300/month and since adding solar it has dropped to $0/month! That may or may not change during the winter months when less electricity is generated from the solar panels (due to fewer daylight hours and more clouds), but less electricity is also used from the A/C and pool pump. Based on this simple scenario (assuming no rate increases by PG&E), the system pays for itself in less than seven years.

What are the Pros?

  • Once your capital costs are recouped, your electricity can be nearly free.
  • Provides insurance against rising power prices. If the price of electricity continues to rise (as many expect), then your years to break-even could be sooner and your return on investment much higher.
  • You produce your own renewable, environmentally friendly energy.
  • Having solar on your home actually increases its value. Most people think it’s the opposite, but a recent study by Zillow showed that homes with solar panels sell for 4.1% more.
  • Federal tax credit through 2021.
  • Drive an electric car (all electric or plug-in hybrid) and your energy savings could be even more. Barry drives an all-electric car and loves that he is fueling it with electricity generated from atop their home.
  • A back-up battery system can provide electricity to your home in times of power outages.

What are the Cons & Risks?

  • Significant upfront investment. This is the #1 reason people don’t purchase solar. Many homeowners finance solar with a home equity line of credit (HELOC).
  • PG&E or your local utility could reduce the rate at which it buys electricity from you. Or they could stop buying electricity from you all together. This could extend your breakeven point by many years and lower your return on investment.

We are happy to help you evaluate whether purchasing a home solar system makes sense. Barry and Kristin are delighted to share their positive experience with Michael & Sun Solar www.michaelandsunsolar.com and life with solar thus far.

Sincerely,

Sources: Morningstar, Inc., Dimensional Fund Advisors, Loring Ward & BAM Advisor Services, LLC.

All investing is subject to risk, including the possible loss of the money you invest. Past performance is no guarantee of future returns. Diversification does not ensure a profit or protect against a loss in a declining market. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income. The performance of an index is not an exact representation of any particular investment, as you cannot invest directly in an index.

S&P data is provided by Standard & Poor’s Index Services Group. Frank Russell Company is the source and owner of the trademarks, service marks, and copyrights related to the Russell Indexes. MSCI data © MSCI 2019, all rights reserved. Dow Jones data © 2019 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. S&P data © 2019 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. Bloomberg Barclays data provided by Bloomberg. Treasury bills © Stocks, Bonds, Bills, and Inflation Yearbook™, Ibbotson Associates, Chicago (annually updated work by Roger G. Ibbotson and Rex A. Sinquefield).