The Independent Investor: Diamonds Should Be at Top of Christmas List
Diamonds for most Americans evoke visions of luxury and romance and are almost always the traditional go-to precious stone for engagement rings. The good news is that no matter how strapped for cash you are, you could probably afford one right now.
Chances are, I don't have to sell you on diamonds, since most Americans are in love with this precious gem and always have been. Diamonds make men into heroes, while nothing says to a woman ‘"I am deeply loved" than a sparkling stone that required millions of years to make.
Americans account for 50 percent of all diamond sales worldwide. Sales grew 4.5 percent (to $36 billion) last year. The good news for you this holiday season is that diamond prices have consistently declined since 2011. In fact, the wholesale price of a diamond right now is close to its 2002 level. Can you say that about any other product?
But remember that not all diamonds are the same. The four Cs — color, clarity, cut and carat weight — will still determine the price you are going to pay. A dealer will tell you that there are diamonds and then there are "diamonds." The kind you see on Madison Avenue in the plate-glass windows of Bulgari or Cartier are still wildly expensive, but most of us could never afford those stones anyway. No, we shop at the discount stores or local jewelers, and there you will find great prices on most polished stones.
There are reasons for this. While demand for diamonds has been increasing, there is and has been an increasing glut of supply in the polished stones market, especially in smaller gems, worldwide. Companies, and in some cases, countries, have benefited from modern methods of production. This has made mining these stones easier, faster, and cheaper. Competition among companies in the sector for market share has also exploded. An attitude of "produce at any price" has permeated the industry, resulting in everyone getting hurt.
Companies such as De Beers, a unit of Anglo-American Corp., which is considered the premier diamond company in the world, at one time could dictate not only the price of its diamonds, but the amount of stones each of its distributors must buy. No longer.
Those distributors who cut, polish and trade the rough diamonds have been squeezed the most. They are in the middle, between the mines and the end buyers, the retail jewelry chains. These chain stores, aware that there is a mountain of these gems available, have reduced the inventory they are willing to hold at any one time. In addition, not only have they held the line on price, but have actively negotiated prices downward as the glut grows worse.
As a result, the middleman's profits have evaporated. Banks have stopped offering lines of credit to them. The situation has gotten so bad that distributors have simply refused to buy any more diamonds from the mines. And just when the industry thought it couldn't get any worse, lab-grown diamond popularity has emerged.
Ever since the movie "Blood Diamonds" dramatically revealed the downside of diamond mining (child labor, pollution, etc.), more and more millennials are opting to buy the more politically correct alternative to earth-mined diamonds. It also helps that they are cheaper than their earth-bound cousins. So far, sales account for only 2 percent of the diamond market but it is growing quickly.
The technology is such that most lab gems are on the smaller size (1.5 to 3 carats) and are in the E-F color range with VS quality. And no, you may never see them displayed in Tiffany's, but then again, as technology improves and consumer preferences continue to change, you just might. All of which just presents yet another hurdle for the people who mine, polish and sell "a girl's best friend."
And while I do not revel in an industry's misfortunes, it does present an opportunity for you, the reader. Sure, you may find that buying that diamond still sets you back a bit more than you were originally willing to spend, but take it from me, she/he is worth it. The returns on your investment are going to last you a long, long time. And Black Friday is just around the corner!
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@theMarket: Record Highs Again & Again
It has been one of those weeks where just about every day the stock market opened lower. But by the end of the day, one or more of the three main averages would rebound and close higher, usually close to, or at a minor new high. I expect it should continue.
And as stocks grind higher, more and more equity players are calling for a minor 2-3 percent pullback. Is that something that we should even care about? My answer would be no.
We are in a news-driven market. Most investors only seem to care about the latest news on a China trade deal; that said, being out of the market appears to be riskier than being in it.
Many believe we are only one tweet away from a 5 percent upside move in the markets. Of course, we could also experience a 5 percent downdraft just as quickly, if things fall apart with China at this stage. Remember, too, that Chinese officials have also learned how to play the tweet game.
The president no longer has a monopoly on fake news. For every outlandish claim coming from the White House on a China deal, the Chinese media responds with fake news of their own. As a result, I imagine those algorithmic trading shops and their headline-driven, software computer models are having a hard time keeping up.
Of course, no one seems to care that this Phase One agreement was supposed to be a done deal a month ago. Either our deal-making president, par excellence, has been hood-winked once again by the Chinese in the negotiations, or the president is deliberately manipulating the truth to suite his own purposes. Given the president's long history of self-vaunted integrity, that might be hard to believe, but readers can make up their own mind on that point.
Given that we don't know if or even when this joke of a deal will be signed, all the markets can do is hope for better news in the weeks ahead. In the meantime, investor sentiment is being supported by the central bank Chairman, Jerome Powell.
Powell assured markets this week that the economy seemed to him to be in a good place, neither too hot nor too cold. Once again, he ignored remarks by the the president, who voiced continued disgust at Chairman Powell's refusal to obey his wishes and lower interest rates even further.
There are also some issues that have yet to be addressed. One that has received a reprieve is the budget negotiations. Set to expire on November 21, Congressional leaders have agreed to extend the budget negations for another month, until December 20th. The president, evidently chastened by last year's horrendous holiday government shutdown, has indicated he would sign a spending bill as long as it allowed for construction of his Wall.
The media's main event this week, the impeachment hearings, have been met with a great big yawn on Wall Street. The thinking among investors is that whatever the results, the chances that a vote to impeach would pass the Senate is just too small to calculate.
In a similar vein, the socialist rhetoric of some Democratic candidates, such as Elizabeth Warren and Bernie Sanders, is just hot air, since investors are still convinced that (barring something dreadful that happens to the economy) Donald Trump will win in 2020.
Granted, prevailing opinion can change in a heartbeat, but for now, that is how the wind is blowing. The stock market appears to be in good shape. These "tactical" calls for a pullback would suit me just fine, if it were to occur. A minor dip in the markets would be just the excuse I would need to advise adding more equity to portfolios.
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The Independent Investor: Attention Retirees!
It has been more than a year since President Trump admonished the government to strengthen retirement security in America. This week, in response, the Internal Revenue Service (IRS) released a proposal to comply with that executive order. Its suggestions were decidedly underwhelming.
Truth be told, financial planners and tax accountants have been speculating for years that, at some point, the IRS was going to have to recognize certain facts of life concerning retirement. One of which is that Americans are living longer. Why should that matter so much to you, the retiree?
Because everyone that has a tax-deferred savings account like an IRA, 401(k), 403(b), etc., is required take a Required Minimum Distribution (RMD) from those accounts once they reach 70 1/2 years old. Those distributions are then taxed at whatever the retiree's prevailing income tax rate is at the time of distribution. These RMDs are required until you die or there is no money left in the account. Simple enough, so far.
Readers may ask how the IRS determines these distributions. The taxman uses a ratio based on how much is in the subject account at year's end, plus how old the retiree is, and how long the person is estimated to live. Therein lies the rub.
Americans are living longer than they have in the past. And while that is good news, for many middle-class retirees, it presents a challenge. As readers know, I have dozens of such clients and when we go through financial planning one of the first questions they asked is "Will my savings be enough to support me through the rest of my life?"
Back in the day, that wasn't an important topic. Most people died young. A person born in 1900, for example, could only expect to live on average to age 47. By 2011, life expectancy ballooned to 76.3 years as a result of massive breakthroughs in medicine and life sustaining technology. As such, even the IRS had to acknowledge that they might have to adjust their own tables of life expectancy. Unfortunately, the last time they did so was back in 2002.
Since then, life expectancy has increased by more than 2 percent (1.6 years) on average for all Americans, but more than 8 percent for those of us who have reached 65 years of age. And those average numbers can be misinterpreted. For example, the rule of thumb is that most of us will kick the bucket by age 85 (with women living about 5 years longer than men). But that is an average number.
If you live past 65 then the numbers change big time. Chances are that someone like me (age 71, next month) could conceivably still be living (and writing) into my nineties! That means my RMD must last far longer than the calculations used by the IRS.
A look at the suggested new timetables is not encouraging. For someone with an IRA with a value of $1 million (most of us have a lot less), the new proposed first year change in your RMD would decrease it by about $2,100. Only a portion of that amount would be paid in taxes, so the overall savings would not materially extend the amount of money you would need throughout your lifetime.
Any decrease is better than nothing; however, the majority of retirees (80 percent) are taking much more than their minimum RMD each year. Unlike the millionaires, most retirees need much more than their minimum RMD to make ends meet (and thus their worry that their money is not going to last a lifetime of retirement).
The bottom-line is that the changes won't materially impact the 20 percent (the rich), who take a minimum RMD. They are no help to the rest of us and for those who are younger and face even a longer potential life span; the difference is infinitesimal.
I would think that a government and an agency that could transfer $1 trillion to corporate America in tax savings in one year could do a little better than this to help the middle class but what do I know? This is the country we are living in today.
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@theMarket: Phase One Deal Keeps Markets Bullish
It was all about the trade deal this week. Both sides seem to want a resolution to the crippling tariffs that have sent the world's economies to the brink of recession. The relief that investors feel is reflected in the new highs we are enjoying at the moment.
I say "at the moment" because anything can change with a tweet. However, given the mounting problems of the Trump presidency, I believe he needs something positive (and fairly soon) to divert the nation's attention away from the impeachment hearings next week.
Trump appears willing to drop, or at least roll back, some (or all) of the tariffs he put in place, but he can't be seen as too "soft" in the negotiations. That's why it was no surprise that on Friday Trump tweeted that he still has not agreed to grant tariff relief to the China, a sticking point in the negotiations. That took some wind out of the market's sails, but I see it as just more of the same Trump tactics that have become increasingly obvious and predictable.
And if I see it, so does China. From their point of view, why not sign a deal? They expect to get everything they want and nothing they don't want. China will allow more financial services companies to set up there, but they were already planning on that before the tariff war. They also get to import all the agricultural products they need, but U.S. farmers will only increase exports back to the level they were before the trade war. At the same time, the Chinese remain steadfast in not giving in to anything more despite Trump's demands and threats over the last two years.
What, you may ask, was the purpose of all this bravado, these tariffs, and such? The administration will say that this is "only" Phase One. The real substantive issues will be tackled "later." No one has issued a timetable on Phase 2 or, if there is one, a Phase 3. China is not giving any indication that they are ready to do more than they have already agreed upon.
If it were any other politician but Donald Trump, I would say that further progress on a comprehensive trade deal (that would truly benefit the U.S.) would be tied to the 2020 election results. In the meantime, the president can stump the country, claiming a trade deal victory.
Only the fake news could possibly see this Phase One for what it might be — simply a way to keep the suffering farmers and ranchers within the president's base from flying the coop come next November. But, as we all know, our president is not a politician. Our president is an honest, truthful man that is simply misunderstood by the majority of Americans.
And China is not the only country that may see some relief from American tariff threats. The president has until Nov. 13 (his self-imposed deadline) to decide whether he will levy additional tariffs on European autos. You see, the president believes that EU auto imports to the U.S. pose a serious security threat. But I'm betting that won't happen. I would expect a surprise announcement to coincide with the televised impeachment hearings next week. As for the security threat, well, that was then, and this is now, right?
Where do the markets go from here? I remain bullish, possibly through the end of the year. Saying that, however, I believe we are overdue for a minor pullback of 3-5 percent or so, but it would be a dip to buy, not to sell.
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The Independent Investor: Fringe Benefits Important as Paycheck
Most of us know to the penny how much we made last paycheck, but how many of us know the details of our fringe benefits? Not many, I suspect, and that is a big mistake.
Retirement benefits are available to 77 percent of private industry workers and 91 percent of state and local government employees as of March 2019, according to the Bureau of Labor Statistics. Back in the day, offering perks to workers was a way to stand-out from your competition, but today they are essential tools of recruitment. And countless studies have shown that these benefits are a means to engage employees and increase productivity. That all sounds good on paper but in real life things may be different.
In my line of work, I often ask prospective clients to run through their employment compensation. Salary and bonus, as you might imagine, are right at the top, followed by paid vacation days. After that, things get a bit hazy.
With some initial prompting, most clients do know they have some kind of tax-deferred retirement plan, but exactly how it works and even how much they are contributing is usually answered with a "I'll get back to you."
In similar fashion, most employees will answer "yes" to medical coverage, but when I burrow down to the details, such as "what are your co-payments, deductibles, and do you have dental or vision coverage," the answers are not forthcoming. In many cases, questions concerning life insurance, paid sick and leave time, disability insurance, educational assistance, flexible schedules and more might be offered, but most confess to not knowing or understanding most of what they are offered.
This seems to be the case with most, although not all, of company employees I talk to. At the same time, I know many companies task their human resources person or department to explain in detail all the benefits that an employee can obtain. And yet many employees continue to be either dissatisfied with their benefits or claim that they are too complex and difficult to understand.
As someone who reviews fringe benefits plans, I can understand their point. Many plans I have seen are written in financial or medical gobbly gook. Explanations and directions are communicated through company directives (usually via computer programs) or big fat books that confuse more than they help employees. It is not that the employee is stupid, or doesn't care about the benefits, they simply do not have the background and experience to make rational decisions.
I have found that once each benefit is explained and applied to their particular life situation, most employees not only "get it" but appreciate it. Zack Marcotte, our resident Certified Financial Planner, recommends a few key points:
- If your company offers a Flex Spending account, sign up for it
- Both vision and dental coverage makes economic sense
- Critical Illness Coverage should be avoided in most cases
- Accident Coverage should also be avoided
- Voluntary life and insurance coverage — group coverage is a better way to go
- Short-term disability coverage — avoid (assumes you have an emergency fund)
- Long-term disability — critical to have, which should cover 60 percent of your income
- All and any free coverage should always be accepted
For any readers that may have specific questions along these lines, just send me an email. I will either respond to your question directly, or I may use it as a topic for another column.
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