Donald Cummings – Blue Haven Capital

Schwab Personal Choice Retirement Account (PCRA)

Donald Cummings — Wed, 20 Dec 2023 00:05:17 +0000

One of the frustrations that many 401k participants have is the lack of support from their employer when they have questions regarding the investment choices in their retirement accounts. Sometimes, participants can call the firm that offers the 401k plan, but even then, there seems to be no guarantee that you’ll be able to reach the same person you may have talked to previously.

Charles Schwab, like many large financial firms, offers retirement plans for small, medium, and large businesses. And, one of the choices that exists within those Schwab retirement plans is a Personal Choice Retirement Account or “PCRA”. If your company happens to offer a PCRA, we’d encourage you to take advantage of it.

The Personal Choice Retirement Plan is a self directed brokerage account and a whole lot more. Not only do you get to choose from an enormous selection of ETFs and mutual funds for your 401k, but for a very small fee (around 8/10ths of 1%, commonly referred to as “80 basis points”), you can get access to professional money management such as Blue Haven Capital.

What does a professional money manager offer? Well, often, the returns from a professional are 2% to 4% higher, after expenses, than for those who don’t use a professional. Also, if you have questions on household cash flow, taxes, social security, capital gains and losses, inheritance, divorce, or trust accounts, you have a person to call and discuss that with.

We have a number of clients who are PCRA clients, and they are across the country. If your company offers the Charles Schwab Personal Choice Retirement Account, and you are interested in low-cost access to professional investment management, give us a call. We’d welcome the opportunity to talk to you.

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Higher interest rates give us a little breathing room

Donald Cummings — Tue, 21 Nov 2023 08:24:07 +0000

As they near retirement, one of the first questions soon-to-be retirees ask is “how much of my savings can I spend each year and still maintain the principle value of my portfolios?” Handling cash flow when retired is quite different than handling cash flow when a pay check comes into your bank account twice a month and this change takes a bit of getting used to.

Years ago, most planners used a 4 1/2%, sometimes even 5% withdrawal rate as a “safe” rate. In other words, a $1mm portfolio could safely provide up to $50,000 (5%) a year in cash flow without ever really depleting the $1mm.

Then came low interest rates. Money market fell to 0.01%, bonds paid 1 3/4%, and suddenly, even if the equity side of someone’s portfolio (often only 40% of the overall portfolio) provided 8% returns, the fixed income portion now only provided 3/4 of 1% and portfolio cashflow assumptions changed dramatically.

“Safe” withdrawal rates on a $1mm portfolio went from $45k or $50k to $35k…a dramatic change. Well, as interest rates have moved up over the last 18 months or so, so has the “safe” withdrawal rate.

Retirees can now, with a 90% or so surety factor that they will not run out of money, withdraw 4+% from their portfolios for their cashflow needs. Yes, the bond market decline has been painful and yes inflation is frustrating, but the upside of higher interest rates is better cashflow. Take advantage of it!

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Bonds: Equity-like losses followed by equity-like gains?

Donald Cummings — Sat, 15 Jul 2023 14:04:31 +0000

For anyone with bonds, bond etfs, or bond funds in their portfolio in 2022, it was a year to remember. The Bloomberg US Aggregate Bond Index was down a stunning 13% for the year, a number never before seen. For those that continued to hold their bond holdings, 2023 has been more satisfying- so far the same index is up 2.3% in price and yield is approximately 2.8%…a combined total return of over 5% annualized.

For those with preferred etfs (VRP, PFXF, PFFD, etc) in their portfolios, 2023 has been even better. For example, PFXF is up slightly over 4% year to date and the dividend yield is over 6.90%, which is extremely compelling.

PIMCO put out an article last week mentioning that it is possible we will see “equity like returns with less risk” in the bond market. The Fed seems near the end of its tightening schedule and as we see with the bond market, major players are already buying longer maturity bonds in anticipation of rates going lower in the near future.

Hang in there- and remember that bonds are in the portfolio to dampen volatility and provide for cash flow when needed. Yes, prices are still down, but by reinvesting dividend income in some of the preferred etfs, you are buying in at an almost 7% yield.

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The Bond ladder provides Liquidity and yield

Donald Cummings — Tue, 18 Apr 2023 15:29:44 +0000

A common frustration with investors is how to capture both the higher yield that long term CDs and bonds usually give with the liquidity that money markets give. One answer might be the Bond Ladder.

Using the bond ladder for income

In a normal yield environment, short term (3 months for example) CDs and bonds give lower yields than longer term (1 year for example) CDs and bonds. An investor, and portfolio managers, want the extra yield a longer CD or bond provides, but they are reluctant to tie up money for too long a time period. Enter the bond ladder.

If someone has $20k allocated to fixed income, but wants to retain some liquidity, we often split that $20k up into 4 equal parts of $5k each. We’ll put $5k in a 3 month CD, $5k in a 6 month CD, $5k in a 9 month CD, and $5k in a 12 month CD. The portfolio will have $5k per quarter coming due, and each quarter when that CD or bond comes due, we’ll buy a new CD or bond that is 12 months in maturity.

The result is that the client has CDs and bonds coming due every 3 months, but absent any cash needs, the money gets reinvested at 12 month rates. This leapfrogging of 3 month maturities to one year purchases can continue as long as the portfolio needs liquidity. The ladder can be one year in length or several years in length, whichever works best for the client in the yield environment presented.

Next time you find yourself torn between yield and liquidity, consider splitting the money up in this fashion to capture the best of both worlds.

The visuals below help illustrate the mechanics of a bond ladder.

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More yield with Less Risk

Donald Cummings — Tue, 18 Oct 2022 03:19:08 +0000

Markets, as we’ve learned, are very efficient over time. Companies that make money have stocks that tend to go up, companies that do nothing tend to eventually go out of business. We also see efficiency in the bond markets- a bond with less risk tends to yield less than a bond with higher risk.

For the last few weeks, Certificates of Deposit (CDs) have been yielding LESS than equivalent maturity US Treasuries. Why is this unusual? Well technically, CDs have more risk than US Treasuries. Yes, CDs are guaranteed by the US Government up to a certain amount, but “guaranteed by” the US Government is different than direct debt issued by the US Government. If push came to shove the US would pay its debt (Treasuries) first, then pay the things it has insured (CDs).

If you have CDs coming due at a bank, consider these yield differences we are seeing right now:

3 month CD: 3.29%
3 month US Treasury: 3.60%

6 month CD: 3.80%
6 month US Treasury: 4%

1 year CD: 4.15%
1 year US Treasury: 4.45%

2 year CD: 4.40%
2 year US Treasury: 4.45%

Any time an investor can get a higher return and simultaneously take less risk, then the investor should do that. These yield differentials won’t last forever and we encourage our clients who may have bank CDs to think about US Treasuries.

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Is the fed behind the curve?

Donald Cummings — Tue, 18 Jan 2022 03:25:51 +0000

Federal Reserve Chairman Jerome Powell is accused of being “behind the curve” on inflation. Let’s take a look at what that criticism means. The Fed is tasked with keeping employment full, prices stable, and inflation low. This balancing act is often achieved through monetary policy and money supply: when interest rates are low, money is easy and people buy lots of “stuff”. As time goes by and people buy more stuff, prices might start creeping up (inflation). By raising interest rates and tightening up the supply of money, the Fed tempers the buying and inflation stays in check.

Trying to catch the runaway car

When inflation is on the move and accelerating, it is much like a runaway car. To slow or stop that car, one must accelerate ahead of it, then gradually slow down and slow that runaway car. For Powell to be behind the curve implies he is well behind the runaway car that is inflation. Critics mainly blame Powell for this. He identified the runaway car early, but thought it would slow down on its own. It hasn’t, and now those same critics believe he (the Fed) is behind the curve.

The best tool the Fed has for slowing down inflation is to raise interest rates. Jerome Powell has signaled that we will have 3 or 4 interest rate increases this year. (The market currently expects a baseline of 4 hikes in 2022). The Fed has also indicated that it will be a less aggressive bond buyer this year, effectively letting bond prices drift down and interest rates drift up.

Areas of the bond market we like

We remain fans of the 5-10 year part of the curve for bond purchases. The risk/reward seems out of whack for 25-30 year bond purchases because prices on those bonds could fall 17-20% this year if rates move up even 1%. On the other hand, a 7 year bond would be looking at perhaps a 5% fall in price on a 1% increase in yields.

In addition to traditional bonds for the fixed income portion of the portfolio, we also like preferred stocks. VRP (a variable rate preferred ETF) and PFXF (a fixed rate preferred ETF) are paying roughly 3.70% and 4.90% respectively and remain two of our favorite additions to the fixed income portfolios.

It is too early in the year to tell if Powell is truly behind the curve, but by mid year, we should have a good sense of where things are.

Stay tuned!

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Paris Restaurant Experience in an Intimate Atmosphere

Donald Cummings — Tue, 21 Sep 2021 06:59:25 +0000

I was recently in Paris visiting with expat clients and had the opportunity to attend a dinner that reminded me of the “closed door dinners” I attended years ago in Buenos Aires. If you’re ever in Paris, I highly recommend trying the Twenty Two Club located in the Palais-Royal. Currently, Twenty Two Club is open for reservations on Friday and Saturday nights for one 8pm seating. The dining room overlooks the Palais-Royal and holds roughly 15 people at one table.

What makes Twenty Two Club unique

We all know how restaurants work: a business location, you pay for your food, you probably don’t know most of the diners in the room, and the room has multiple tables. And, we all know dinner parties: a private location, your food is provided by the host, you know some or most of the diners, and the room has one table. A closed door dinner takes some of the characteristics of a restaurant and some of the characteristics of a dinner party and melds them into a unique experience that is popular in Buenos Aires, Rome, Paris, etc.

We arrived at Twenty Two Club on Saturday night, got a quick introduction to the other guests, and began mingling. Paris Fashion Week starts this week, and we met one model with her Louis Vuitton designer boyfriend, a gal from South Africa and her friend, a retired Disney exec and her husband, an expat couple from central California who had moved to Paris only a month ago, a Bay area couple who “keep a home in Paris”, and a few other people.

An experience you won’t forget

Dinner was several courses of wonderful, locally sourced food from the restaurant owners Laura Adrian and Braden Perkins’ farm, which is an hour or so outside of Paris. Between courses, Laura and Braden provided ongoing, informative banter about the vegetables, meats, wine, honey, sauces, etc. that we were eating. The room was candlelit, and the 12ft windows overlooking the interior of Palais Royal were open, letting the night air in. The conversation, ambiance, and intimacy were nothing like you’d find at a restaurant, and the topics were at times similar to what I’d imagine the expat authors of the 1920s discussed over coffee at Les Deux Magots.

If you are socially adventurous and want an excellent meal with interesting people while in Paris, I’d highly recommend you try to get a reservation at Twenty Two Club. It is a unique venue with wonderful food, captivating hosts, and lively conversation that will make your Paris stay memorable.

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Accessing Liquidity Without Generating Capital Gains – Pledged Asset Accounts

Donald Cummings — Wed, 26 May 2021 14:10:44 +0000

In many parts of the country, the real estate market is red hot. People are moving from large urban areas to areas that were once considered “vacation destinations” now that work-from-home (WFH) is so acceptable. Also, more than 10,000 baby boomers a day are retiring and looking to downsize their home. One question we get fairly often is “how do I buy a home with cash when a large part of my assets are tied up in investments and my current home?”

Today’s real estate market moves fast and many sellers won’t entertain a bid that comes in with a mortgage contingency. How do you make yourself a more attractive candidate to a seller? The answer may be by creating a Pledged Asset Account.

What is a Pledged Asset Account

A Pledged Asset Account is an account that offers collateral to the lender in exchange for a loan. For example, perhaps you have an $800,000 investment account that contains large capital gains. You have a home that you own free and clear that is worth $700,000, and you have found a home that you’d like to buy for $500,000 but you know the seller will most likely entertain only cash bids.

In this case, you could open a Pledged Asset Account with your $800,000 investment account, put those investments up as collateral, and borrow as much as 70% of the value of your account ($560,000). The $500,000 home you found could be purchased without a mortgage contingency by writing a check to the seller. Your investments don’t have to be sold, you don’t generate capital gains, and you can take your time selling your current home.

Pledged Asset Account Versus Margin Account

Brokerage companies have offered margin accounts for years: accounts that let you borrow up to 50% of the account value. However, margin account interest rates are significantly higher than Pledged Asset Account interest rates. For example, Charles Schwab currently offers margin accounts at 6.575% for $500k, but offers Pledged Asset Account rates at 3.35%. That’s a difference of more than $16,000 a year on a $500,000 loan. Also, margin accounts are often limited to 50% of account value, while Pledged Asset Accounts are limited to approximately 70% of account value.

Pledged Asset Account Example

Martha has an $800,000 investment account that has grown over the years and has $400,000 in gains. She owns a $700,000 home that may take 6 months or more to sell. She has found a $500,000 home she’d like to buy, but she doesn’t want to sell $500,000 in securities because it would generate $250,000 in capital gains and $37,500 in capital gains taxes.

Martha opens a Pledged Asset Account, she writes a check for $500,000 for her new home, she puts her current home on the market, and 6 months later her current home sells. She takes the $700,000 in proceeds, pays off her Pledged Asset Account Loan of $500,000, and has zero capital gains because she didn’t sell any securities to raise money. She paid approximately $8400 in interest over the 6 month period she had the loan.

Leveraged Accounts Are Not for Everyone

Loans, whether margin or Pledged Asset, are not for everyone. However, like any other tool out there, they can be highly useful and save time and money in the right situations. We welcome your questions or comments on Pledged Asset Accounts.

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Tax Equivalent Yield in Municipal Bonds

Donald Cummings — Tue, 16 Feb 2021 13:06:42 +0000

Municipal bonds are bonds issued by municipal entities such as cities, states, library districts, school districts, etc. For decades, most municipal bond interest has been federally tax exempt, ie, an individual pays no Federal tax on the interest they receive from owning a municipal bond. State tax on municipal bond interest varies according to the state. These types of bonds are readily available in liquid ETF or CEF wrappers like MUB, HYD, and MUI.

Understanding tax-equivalent yield

Because the interest earned from municipal bonds is federally tax exempt, that interest is worth more to investors than interest earned from corporate or government bonds. For example, if a person in the 30% tax bracket earns 4% interest on $100,000 of municipal bonds, and pays no tax on that interest, they keep all $4,000. If that same person earns 4% interest on corporate bonds, and pays 30% in taxes, that person is left with only $2800 ($4,000 – (30% * $4000) = $2800. So the tax-free paid bond 4% ($4,000/$100,000 = 4%) and the taxable bond paid 2.80% ($2,800/$100,000 = 2.80%).

A quick measurement used in the bond industry is Tax Equivalent Yield. This is defined as the bond interest one would need on a taxable bond just to end up with the same amount of money one would get from a municipal bond.

Let’s take Sam. Sam is in the 30% tax bracket and sees two bonds available in the market: a AA rated municipal bond due in 10 years at 4% and a AA corporate bond due in 10 years at 5%. One method of comparing the net yields on the bonds is Taxable Equivalent Yield (TEY). TEY is the yield one would need on a taxable bond in order to match the tax exempt municipal bond yield. That equation looks like this:

Municipal Bond yield/(100 – tax bracket) = taxable equivalent yield

In Sam’s case, she took 4 / (100 – 30) and got 5.71. So, Sam would need at least 5.71% on a taxable bond just to equal the 4% tax free yield she could get on a municipal bond. In her case, the corporate bond at 5% actually nets her LESS MONEY after taxes than the municipal bond at 4%.

From a tax standpoint, sometimes municipal bonds make sense to buy, and sometimes they don’t make any sense at all. Anyone managing a bond portfolio should keep a close watch on tax equivalent yields and what taxable bonds are yielding for the same maturity as the municipal bonds.

We’d welcome any questions you might have on your bond portfolio.

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Where Will You Travel?

Donald Cummings — Tue, 19 Jan 2021 02:51:14 +0000

Rather than an article about interest rates (they’ve risen a bit), the stock market (up overall with small caps outperforming large caps), or taxes (we’ll examine that outlook next month), I thought I’d write a bit about travel. Recently, several clients have remarked to me that they miss travel. Perhaps even more interestingly, they all mentioned that they think they’ll appreciate travel now more than ever because they will feel even more fortunate after having gone through a period when travel was severely curtailed.

Many are looking forward to cruises, but admit that we may be looking at another 12 months before the cruise lines begin again. I like cruises, but I feel the same- it won’t be until at least 2022, perhaps 2023, that I feel comfortable cruising again, even if the ships are running. Here are two places I’ll be headed when countries and flights open up again.

Saas Fee tops the list

Saas Fee Switzerland: I’ve been going to Saas Fee once or twice a year for at least the last 10 years. Saas Fee is a small town at 6000 feet in the southern Swiss Alps. It is 3 hours from Zurich and about 90 minutes from Milan. Saas Fee is one of a handful of car-free towns in Switzerland, meaning you park on the periphery and walk or take a small electric vehicle to your hotel. It is quaint, family oriented, has excellent Alpine food and lifestyle, and has great skiing/snowboarding in the winter along with magnificent walking and hiking and climbing in the summer. Internet is strong and it is a great location for working remotely. Dole is the wine of the region and it is similar to a Rhone- light, easy, perfect for picnics and lighter fare.

Anyone who skis Colorado, Wyoming, Utah, or Montana should take a look at skiing the Swiss Alps. Airfare to Zurich is similar in price to airfare out west, but the lift tickets in Switzerland are perhaps $50/day and the hotels range from $150/day for the middle end to $600/day for a five star hotel. There is even a nice Hostel for those who prefer that. My guess is that you’d spend less on a ski vacation in Switzerland than you would at Aspen or Jackson Hole. German is spoken in this part of Switzerland, but French, Spanish, Italian, English, and Russian are commonly heard in town.

Plans to visit Puglia, Italy

Puglia Italy: I’ve never been here, but it is on my short list. It is in far southern Italy, in the “heel of the boot” when you picture a map of Italy. It is on the coast, directly across the water from Albania and Montenegro. There are several Unesco World Heritage sites in the region, and the weather is warm and Mediterranean. I’ve found that the farther south I go in Italy, the more uncommon English is, so that could be a small stumbling block. But, if you have some Italian, or even Spanish, my guess is that the vacation would be worth it.

Where are you planning on going when countries open up again? The US? Europe? Asia? We’d love to hear your travel plans and we’ll follow up in our February newsletter with some of your favorites.

And, if any of our readers have been to Puglia, I’d welcome your recommendations!

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