Five Financial Best Practices for Year-End 2022

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To say the least, there has been plenty of political, financial, and economic action this year — from rising interest rates to elevated inflation to ongoing market turmoil. 

How will all the excitement translate into annual performance in our investment portfolios? The answer remains to be seen. But, while we wait to find out, here are five action items worth tending to before 2022 is a wrap. 

  1. Revisit Your Cash Reserves

Where is your cash stashed these days? After years of offering essentially zero interest in money markets, savings accounts, and similar platforms, some banks are now offering higher interest rates to savers. 

Shop around: If you have significant cash saved up, now may be a good time to compare rates on cash accounts. We can help if you need guidance exploring the options.

  1. Put Your Money to Work

If you’re sitting on more cash than you need in your emergency reserve, you may be able to put it to even better use under current conditions. Consider the following:

Lighten your debt load: Carrying high-interest debt is a threat to your financial well-being, especially in times of rising rates. Consider paying off credit card balances or other debts. Avoid accruing new debt during the holiday season. 

Invest: Reach out to your lead advisor to determine what your opportunities are to put some cash to work in the markets.

  1. Make Some Smooth Tax-Planning Moves 

Another way to save more money is to pay less in taxes. Here are a couple of year-end ideas: 

It’s still harvest season: Market downturns often present opportunities to engage in tax-loss harvesting by selling taxable shares at a loss, and promptly reinvesting the proceeds in a similar (but not identical) fund. You can then use the losses to offset taxable gains, without significantly altering your investment mix. If you have a non-retirement brokerage account with us, we’ve already been doing this on your behalf.

Maximize tax opportunities: Make sure you are taking advantage of your 401(k) and other tax-deferred investment opportunities. With only a few paychecks left in 2022,  you’ll want to make sure your contributions are optimized.

  1. Check Up on Your Healthcare Coverage 

As year-end approaches, make sure you and your family have made the most of your healthcare coverage. Take a moment to examine all your benefits. For example, if you have a Health Savings Account (HSA), have you funded it for the year? If you have a Flexible Spending Account (FSA), have you spent any balance you cannot carry forward? If you’ve already met your annual deductible, are there additional covered expenses worth incurring before the meter resets in 2023? If you’re eligible for free annual wellness exams or other benefits, have you used them?   

  1. Get Set for 2023 

Why wait for 2023 to start anew? Year-end can be an ideal time to take stock of where you stand and consider what you’d like to achieve in the year ahead.  

Audit your household interests: What has changed, and what hasn’t? Have you shifted careers or decided to retire? Added new hobbies or encountered personal setbacks? How might these and other significant life events alter your ideal investment allocations, cash-flow requirements, insurance coverage, or estate plan?

How Can We Help?

How else can we help you wrap 2022 and position you and your loved ones for the year ahead? 

Whether it’s helping you manage your investment portfolio, optimizing your tax planning, considering your cash reserves, weighing insurance offerings, or assessing any other components that contribute to your financial well-being, we stand ready to assist — today, and through the years ahead. 

Cary Facer

Wealth Advisors, Warren Street Wealth Advisors

Investment Advisor Representative, Warren Street Wealth Advisors, LLC., a Registered Investment Advisor

The information presented here represents opinions and is not meant as personal or actionable advice to any individual, corporation, or other entity. Any investments discussed carry unique risks and should be carefully considered and reviewed by you and your financial professional. Nothing in this document is a solicitation to buy or sell any securities, or an attempt to furnish personal investment advice. Warren Street Wealth Advisors may own securities referenced in this document. Due to the static nature of content, securities held may change over time and current trades may be contrary to outdated publications. Form ADV available upon request 714-876-6200.

Essential Financial Planning for Expecting Parents

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You just learned that you are going to have a new baby or child join your family, by birth or adoption. It’s an exciting time! As you start to make preparations you will quickly discover that there is a seemingly endless list of things to do, items to buy, books to read, and classes to take. 

Despite what the targeted ads and influencers may tell you, it doesn’t matter too much if your bundle of joy has state-of-the-art nursery gear or the trendiest stroller on the market. But there are a few financial planning considerations that will make a world of difference for your family and your child’s well-being.

1. Estate Planning

As soon as you become responsible to care for a dependent, basic estate planning documents are essential. You may think you don’t currently have an estate plan if you have not drafted a will or trust, but guess what? You actually do have an estate plan! It was written for you by federal and state law and will be administered by a court (at your estate’s expense). If you pass away you can either rely on the state’s estate plan for you, or you can have the peace of mind that comes from writing your own estate plan that is specific for your wishes and your family’s best interests.

At a minimum, all parents (or anyone with financial dependents) should have (a) a will that includes guardianship designations, (b) an advanced health care directive, and (c) a durable power of attorney. Many parents or guardians will also want to establish a trust.

In addition to drafting these documents, we also recommend making sure that you have named non-minor primary and contingent beneficiaries on all your financial accounts and life insurances. At your death, many accounts will simply pass to the named beneficiaries on file. 

Check out our post Estate Planning: A Checklist of Essentials for more valuable guidance as you review your estate planning.  

2. Life Insurance

If you were to pass away tomorrow, your partner and/or children would most likely need additional financial support. The cost of a funeral, additional child care, extra time off work, and covering everyday expenses and bills can add up. Not to mention the desire many parents have to help with specific expenses, such as education, for a child. Life insurance can fill that gap and provide vital support and peace of mind to your family during a difficult time. 

Whatever role you serve in your household, there is a cost to your absence. If you are an income-earner for your household, the loss of your income would need to be supplemented for your family. If you are the primary caretaker of children and household manager, your labor would need to be replaced. Life insurance is for everyone with dependents, no matter their income-earning or employment status.

Term life insurance is usually inexpensive and easy to obtain. We strongly recommend term life insurance for all parents or those with dependents. 

3. Extra Cash Savings

The cost of having a baby is no small thing. There are baby essentials to buy, doctor’s appointments to attend, and the labor and delivery bill at the end. It can add up to thousands of dollars to bring a new life into the world, and that is without a single complication. Additional medical care, a NICU stay, or any other unexpected circumstances can compound the bill.

When you find out that you, or your partner, is pregnant, you should start making plans for your cash flow needs. Remember that so much of the next 9-12 months is unpredictable for your bank account, so having a larger-than-average cash reserve is a good idea. 

Medical care and baby items are the first expenses that come to mind when planning for your new child. But it is wise to also consider what other large expenses may come up during the pregnancy and postpartum period. Your savings account during this time has to do double duty as a baby preparedness fund and an ongoing emergency fund.

Consider two of the biggest culprits for emergency fund withdrawals – home repairs and car repairs. Do you have a lingering issue with a home appliance that is going to require a repair or replacement any day? Is your old car on its last leg? Is there anything in your house or car that needs to be addressed to ensure safety for your little one? Keep in mind that these non-baby expenses can and should be part of all the other preparations.

There is no hard fast rule for how much to save for a new baby, but having easily-accessible cash in a savings account is a must. If your emergency fund is slim, it may be time to pause aggressive debt repayment plans, saving for your next vacation, or excessive spending on non-essentials and put that extra cash in savings. Once you have returned to a more predictable financial situation, you can reevaluate your budget and priorities and return to your usual emergency fund and other financial goals.

4. Know Your Legal Rights and State Benefits

The state that you work in may have specific laws that require your employer to provide a certain amount of leave for pregnancy-related disability and/or bonding with a new child. Your state may also have paid leave or disability pay available for pregnancy and the postpartum leave period. You should carefully research your legal rights as a worker in your state and be familiar with all the benefits available to you.

In California, there are three laws or resources available to support you during pregnancy and postpartum and to bond with a new child: the Family and Medical Leave Act (FMLA), Paid Family Leave (PFL), and State Disability Insurance. FMLA legally protects the ability of eligible employees to take up to 12 workweeks of unpaid leave a year. PFL provides up to 8 weeks of payments for lost wages due to time off work to bond with a new child. State Disability Insurance may provide payments during pregnancy and postpartum recovery if you are unable to work.

Visit the following state websites to learn more about these California benefits:

Family and Medical Leave Act

FMLA Frequently Asked Questions

Am I Eligible for Paid Family Leave?

Disability Insurance – Pregnancy FAQs

5. Know Your Employer’s Policies and Make a Plan

On top of any legally-required paid or unpaid leave, your employer likely has their own company policies related to family leave. Ask your HR representative for all the information you can get about these policies. Start making a plan for how you (and your partner, if applicable) will take leave and how you will bridge any gaps in income during this time.

Your ability to negotiate paid or unpaid leave depends on various factors, but many employers are becoming more family friendly. Talk with a trusted supervisor or manager about your options. Don’t be afraid to negotiate and ask for what you need in terms of additional paid time off, schedule flexibility, or extended leave. 

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Are you expecting a little one? First – congratulations! If you feel like now is the time to get the support of a financial professional for your growing family, contact Warren Street for a free one hour consultation.

Kirsten C. Cadden, CFP®

Associate Advisor, Warren Street Wealth Advisors

Investment Advisor Representative, Warren Street Wealth Advisors, LLC., a Registered Investment Advisor

The information presented here represents opinions and is not meant as personal or actionable advice to any individual, corporation, or other entity. Any investments discussed carry unique risks and should be carefully considered and reviewed by you and your financial professional. Nothing in this document is a solicitation to buy or sell any securities, or an attempt to furnish personal investment advice. Warren Street Wealth Advisors may own securities referenced in this document. Due to the static nature of content, securities held may change over time and current trades may be contrary to outdated publications. Form ADV available upon request 714-876-6200.

Chevron Employees: Avoid These Common Estate Planning Mistakes

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Estate planning is one of the most important things you can do to protect your family and your assets. It ensures that your assets and belongings go exactly where you want them and saves your family an immense amount of stress, pain, and cost. Still, estate planning often becomes an afterthought, something that’s a “long way off” or “not a top priority right now.” 

The good news is that estate planning isn’t as complicated as it sounds. You can establish the key documents you need with much less effort or investment than you might think. In my 33 years of advising Chevron employees, here are the most common mistakes I’ve seen and the steps you can take to avoid them. 

1. Underestimating probate.

Too often, people put off estate planning because they don’t realize the alternative. If you didn’t have key estate documents in place, and something were to happen to you, all of your assets would go to probate. That is basically a simple way of saying the government would decide for you — in a very long, expensive, and public way — what to do with your assets. 

I’ve seen probate negatively impact already grieving families who don’t have the bandwidth or money to deal with the probate process. It makes everything much simpler for your surviving family to have all of your documents in place, so they can focus on things that matter instead of the cost and process of dividing up your assets.

2. Believing estate plans are just for the rich.

Estate planning might sound fancy, but estate plans are not just for the wealthy. The six estate planning documents everyone should have include: 1) Will/trust, 2) Durable power of attorney, 3) Beneficiary designations, 4) Letter of intent, 5) Healthcare power of attorney, and 6) Guardianship designations. Beneficiary and guardianship designations are particularly critical for those with minor children, as they allow you to decide who would look after them. 

A will or trust should be one of the core components of every estate plan, regardless of the amount of assets. These documents ensure that your assets go exactly where you want them. A durable power of attorney sets whom you would want to make decisions for you if you were unable to (otherwise, it would be up to the courts) — and the same principle applies to the healthcare power of attorney. Your letter of intent streamlines asset distribution and can also include wishes for your funeral. Beneficiary and guardianship designations state your wishes for your children and other beneficiaries. 

3. Assuming estate plans are too expensive.

Having your assets go through probate is actually far messier and more expensive than creating an estate plan. How much more expensive? The average cost for probate and attorney fees for a $1MM estate is $46,000. The fee to set up an estate plan, on the other hand, averages just a few thousand dollars. That’s a drop in the bucket compared to probate, not to mention you also save your family time and stress by outlining everything in advance. 

Most importantly, an estate plan leaves nothing to chance or guessing. Estate documents make it exceedingly clear whom you would like to take care of your children, get ownership of your house, inherit your money, etc. You can also detail how inheritance should occur (at specific ages, in specific percentages over time, etc.).

For more detail on how to set up your estate plan, join Warren Street and Hunsberger Dunn for a “Will, Trusts, & Estate Planning Webinar” Sept. 27. We’ll break down how to know if you need a living trust, best practices for creating wills and trusts, and more! Estate planning can seem convoluted, but we’re here for you to help make it as streamlined as possible. 

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Have questions about your Chevron retirement plan? Len is an expert in Chevron benefits and would be happy to meet with you. Click here to schedule a complimentary consultation with him. 

Len Hanson

Wealth Advisor, Warren Street Wealth Advisors

Investment Advisor Representative, Warren Street Wealth Advisors, LLC., a Registered Investment Advisor

The information presented here represents opinions and is not meant as personal or actionable advice to any individual, corporation, or other entity. Any investments discussed carry unique risks and should be carefully considered and reviewed by you and your financial professional. Nothing in this document is a solicitation to buy or sell any securities, or an attempt to furnish personal investment advice. Warren Street Wealth Advisors may own securities referenced in this document. Due to the static nature of content, securities held may change over time and current trades may be contrary to outdated publications. Form ADV available upon request 714-876-6200.

Six Financial Best Practices for Year-End 2021

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Believe it or not, another year has rounded third base, and is dashing toward home plate. That said, there’s still time to make a few good plays in 2021, while positioning yourself to score more in the year ahead. Here are six financial best practices for the record books.

1. Keep Your Eye on the Ball. While there are always distracting trading temptations, it seems as if 2021 has had more than its fair share of them. Remember the January excitement over GameStop and its ilk? That frenzy was soon followed by “SPAC-Man” Chamath Palihapitiya, tweeting out “Shooters shoot” to his disciples, as SPACs started flying every which way. Tradeable memes and non-fungible tokens (NFTs) became a thing around then too, followed by the pursuit of fluffy little dogecoins.

Our Best-Practice Advice: Instead of swinging at fast fads, we encourage you to lean into the returns our resilient global markets are expected to deliver over time. As always, this means looking past the wild throws and building a low-cost, globally diversified portfolio, tailored for your personal financial goals and risk tolerances. Isn’t that your aim to begin with?

2. Revisit Your Saving and Spending. COVID changed a lot of things, including our saving and spending patterns. Stimulus and unemployment checks offered cash flow relief for many families. Business owners received generous loans. Moratoriums on paying off college debt or being penalized for dipping into retirement savings helped as well. Retirees were permitted to skip taking Required Minimum Distributions (which is NOT the case in 2021).

Our Best-Practice Advice: As these and similar relief programs wind down, now is an excellent time to recalibrate your own financial plans. If you borrowed from your future self by withdrawing from or not adding to your retirement reserves, please establish a disciplined schedule for paying yourself back. If you became accustomed to spending less on items you used to think you couldn’t live without, try directing those former expenditures to restoring your retirement and rainy-day funds. Work with a financial planner to assess other ways your budgeting may benefit from a fresh take. Every little bit counts!

3. Watch for Fund Distributions. Even as we’ve continued to weather the pandemic storm, our forward-looking, global markets have been delivering relatively strong returns year-to-date for many foreign/U.S. stock funds. That’s good news, but it also means mutual funds’ capital gain distributions may be on the high side this year. Capital gain distributions typically occur in early December, based on the fund’s underlying year-to-date trading activities through October. For funds in your tax-sheltered accounts, the distributions aren’t taxable in the year incurred, but they are for funds held in your taxable accounts.

Our Best-Practice Advice: Taxable distributions aside, staying put to earn all potential market returns is the more important determinant in our buy-and-hold approach. With that said, in your taxable accounts only, if you don’t have compelling reasons to buy into a fund just before its distribution date, you may want to wait until afterward. On the flip side, if you are planning to sell a fund anyway—or you were planning to donate a highly appreciated fund to charity—doing so prior to its distribution date might spare you some taxable gains.

4. Consider Tax Gain Harvesting. Along with relatively strong year-to-date market performance, many Americans are also benefiting from historically lower capital gain and income tax rates that may or may not last. Often, taxpayers view each tax season in isolation, seeking to minimize taxes owed that year. We prefer to view tax planning as a way to reduce your lifetime tax bill. Of course, we can’t know what your future taxes will be. But it can sometimes make good, big-picture sense to intentionally generate taxable income in years when tax rates seem favorable.

Our Best-Practice Advice: If you have “room” to take some taxable capital gains this year—and if it actually makes sense for you to take them—you may want to consider working with your tax planning team to do so. 

5. Seize the Day on Your Charitable Giving. Unlike many other pandemic-inspired tax breaks, several charitable-giving incentives still apply for 2021, but may not moving forward. This includes the ability for single/joint filers to deduct up to $300/$600 in cash contributions to qualified charities, even if they’re already taking the standard deduction on their tax return. If you’re so inclined, you also can still donate up to 100% of your AGI to qualified charities.

Our Best-Practice Advice: Charitable giving remains another timeless tactic for offsetting taxable capital gains you may want or need to report, as well as any other extra taxable income you may be incurring. And charitable organizations need our contributions as sorely as ever. So, if you’re charitably inclined, you may as well make the most of your generosity by pairing it with your 2021 tax planning.

6. Plan Ahead for Estate Planning. Holiday shoppers may not be the only ones facing supply chain shortages this year. Estate planning attorneys, CPAs, and similar planning professionals may also be in shorter supply toward year-end and beyond. In addition to the usual year-end crunch, many such service providers have been extra busy responding to a “COVID estate planning boom,” as well as to the fast-paced action in Washington.

Our Best-Practice Advice: If you’ve been thinking about revisiting your estate or tax planning activities, know that the process may take longer than usual. Especially if you’re planning for changes that are up against a hard deadline (such as year-end or April 15th), you’ll benefit yourself by giving your attorney, accountant, and others the time they need to do their best work for you. High-end estate planning in particular is best approached as a months-long, if not years-long process.

How else can we help you wrap 2021 and position yourself and your wealth for the year ahead? As always, we stand ready to assist!

Cary Facer

Founder and Wealth Advisor, Warren Street Wealth Advisors

Investment Advisor Representative, Warren Street Wealth Advisors, LLC., a Registered Investment Advisor

The information presented here represents opinions and is not meant as personal or actionable advice to any individual, corporation, or other entity. Any investments discussed carry unique risks and should be carefully considered and reviewed by you and your financial professional. Nothing in this document is a solicitation to buy or sell any securities, or an attempt to furnish personal investment advice. Warren Street Wealth Advisors may own securities referenced in this document. Due to the static nature of content, securities held may change over time and current trades may be contrary to outdated publications. Form ADV available upon request 714-876-6200.

5 Bare Essentials to Consider When Retiring from SCE

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Retirement can seem like the most exciting thing in the world — and the most overwhelming. On one hand, you finally get to spend your time on your terms. Maybe that’s traveling the world. Maybe it’s spending more time with your grandkids. Or maybe it’s just spending quiet evenings at home. 

Still, there’s that lingering question: “How does this all work?” So much goes into planning for retirement, as well as managing your money appropriately once you get to that point. It can be unnerving to consider how you’ll manage the nuances of your retirement plan, navigate Social Security benefits, and ensure you have the money you need to support your lifestyle in retirement. 

At Warren Street Wealth Advisors, we hear these concerns from clients often. In response, we’ve developed a specialty focus on retirement planning for Southern California Edison employees. After helping hundreds of SCE retirees navigate this crucial time, we know your retirement packages and employee benefits programs inside and out. Below are the top five bare essentials you need to know to retire from SCE.

1. Take your final distribution when you want.

It’s a common misconception that you are forced to take your final distribution at retirement, but that’s not the case. You can wait until Jan. 1, request your final distribution, and then take a direct payment to avoid penalties using the “55 Rule” if you are 55 years or older. This will also allow you to defer the income tax due until the following year’s tax return.

2. Understand that it’s possible to retire penalty-free between age 55 and 59 ½.

Here’s a scenario we see all the time: you’re 57. You want to retire. You don’t want to wait until 59 ½ to do it. But you know that there’s a 10% federal tax penalty and a 2.5% California state tax penalty if you take the money out of your IRA before 59 ½. So are you stuck? Nope.

There are a lot of moving parts to this process, but we can take advantage of IRS rules like 72(t) distributions or the previously mentioned “55 Rule” to ensure our clients do everything possible to avoid paying penalties.

3. Take advantage of your medical subsidy.

Did you know that you are eligible for a retiree medical subsidy? The most common subsidies are 50% and 85%. When you retire, Edison will pay either 50% or 85% of your current medical insurance premium as a “continuation benefit” in retirement. Simply put, what you pay today is what you’ll pay in retirement. Of course, this is as long as you reach your required benefit milestone. (Unsure what your benefit is? Call EIX Benefits at 866-693-4947 to ask what benefit you have and at what age you’ll receive it.)

4. Weigh your Social Security options.

There is all kinds of information out there about what to do with your Social Security. Let us boil it all down: you don’t have to take it at 62! When we build a financial plan for a client, we calculate all options for optimizing Social Security. It’s ultimately your decision, but we suggest weighing your options before committing to collecting the 25-30% reduced benefit at age 62.

5. Use your 401(k) efficiently.

Your 401(k) can be an immensely powerful tool if you understand how to max it out and diversify your investments. In most cases, this is the point at which you’ll want to hire a professional team to help. One tool that can help you is the Charles Schwab Personal Choice Retirement Account (PCRA) option included in your 401(k) plan. The PCRA option lets you purchase investments on your own or hire a professional advisor to do it for you. This is made available through your Tier 3 option. 

These are just a few of the tips and resources we offer SCE employees. For a deeper dive into strategies you can take to help you maximize your money in retirement, download our full SCE Retirement Handbook here.

Want to chat further? Feel free to reach out. We’ve worked with hundreds of employees with your exact plan and are glad to point you in the right direction.

Cary Facer

Founder and Wealth Advisor, Warren Street Wealth Advisors

Investment Advisor Representative, Warren Street Wealth Advisors, LLC., a Registered Investment Advisor

The information presented here represents opinions and is not meant as personal or actionable advice to any individual, corporation, or other entity. Any investments discussed carry unique risks and should be carefully considered and reviewed by you and your financial professional. Nothing in this document is a solicitation to buy or sell any securities, or an attempt to furnish personal investment advice. Warren Street Wealth Advisors may own securities referenced in this document. Due to the static nature of content, securities held may change over time and current trades may be contrary to outdated publications. Form ADV available upon request 714-876-6200.

Estate Planning: A Checklist of Essentials

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As school starts again and we are getting back to our routines, this may also be a good time to review the following list of estate planning essentials. This is a good checklist to scroll through at least once a year and upon any significant life changes. We will be there to remind you as your life events unfold.


▢ Check Your Beneficiaries: We cannot say this one often enough. Check the beneficiaries on your retirement accounts and your life insurance policies at least once a year and remember to update your beneficiaries upon births, deaths, marriages, and divorces. It is important to have both Primary and Contingent beneficiaries listed. If your retirement account is managed by Warren Street, we will review your beneficiaries during your annual review meeting.

▢ Set Up TOD/POD On Brokerage And Bank Accounts: If you do not have a Trust established yet, be sure to set up a TOD (Transfer On Death) or POD (Payable on Death) feature on all brokerage and/or bank accounts. This feature will add beneficiaries to your accounts, and will keep the accounts out of probate.

▢ Don’t Name Minors As Account Beneficiaries or Life Insurance Beneficiaries: If you do, your estate will need an appointed guardian and will potentially need to provide annual accountings to the probate court. If you want the assets to ultimately flow to a minor, the best option is to name a Trust as the beneficiary of beneficiary-driven accounts.

▢ Review Your Trust, Will, Advanced Health Care Directive, Durable Power of Attorney: If you have not yet established the four documents listed above, please contact Warren Street and we will connect you with an estate attorney. If you have gone through the process of setting up your Estate Plan, you should review these documents on a regular basis. If you would like Warren Street to review these documents with you, please contact us.

▢ Transfer Your House To Your Trust: Once your Trust is established, you will be instructed by your estate attorney to transfer your primary residence to your Trust. If you do not have a Trust yet, and you live in CA, you can add a Transfer-On-Death Deed to your property to name beneficiaries and to keep the property out of the probate process.

▢ Simplify Your Balance Sheet: We are often in the position of helping clients when a family member has passed away. When individuals have several different retirement accounts and several different bank accounts, it can create unnecessary complexity for their beneficiaries. It is often a good idea to consolidate accounts to the extent possible at a minimal number of institutions — this will not only make your life easier, it will also make life easier for your beneficiaries when you pass away.

▢ Guardianship Designations: If you have minor children, it is important to name your chosen Guardians should something happen to you. This will normally be taken care of with your estate attorney during the estate planning process, and these Guardians will be named in your Will. Review these designations on a regular basis.

▢ Review Your Life Insurance Coverage — Is It Enough?: At Warren Street, we typically recommend Term Life Insurance policies with level premiums (policies for a set number of years with a set premium) for clients who have dependents. If you would like us to review your current coverage, please contact us.

▢ Business Owners Should Consider a Buy-Sell Agreement: A Buy-Sell Agreement provides a mechanism for business succession if an Owner should retire or pass away. It is best to establish these agreements long before any transition process. We recommend you work with an experienced attorney to establish your agreement and we recommend that every co-owned business go through this process.

This is just a starting point, and there are certainly more complex issues to address if your estate might be facing an estate tax bill when you pass away. If you have any questions about the specifics of your estate plan, please feel free to reach out to us — it is what we are here for!

Emily Balmages, CFP®, CRTP

Wealth Advisor, Warren Street Wealth Advisors

Investment Advisor Representative, Warren Street Wealth Advisors, LLC., a Registered Investment Advisor

The information presented here represents opinions and is not meant as personal or actionable advice to any individual, corporation, or other entity. Any investments discussed carry unique risks and should be carefully considered and reviewed by you and your financial professional. Nothing in this document is a solicitation to buy or sell any securities, or an attempt to furnish personal investment advice. Warren Street Wealth Advisors may own securities referenced in this document. Due to the static nature of content, securities held may change over time and current trades may be contrary to outdated publications. Form ADV available upon request 714-876-6200.

March Market Madness

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During this time last year, the NCAA canceled March Madness. With college basketball off the table, we were given a different type of madness: Market Madness. The S&P 500 drew down a total of 34% from peak to trough as COVID-19 wreaked havoc across global markets. This week marked the one year anniversary of that drawdown’s market bottom.

In September 2020, we wrote about the astounding fiscal and monetary policy action delivered by both the Federal Reserve and congressional lawmakers in response to the coronavirus. Although we complimented both the central bank and congress, the 2020 Most Valuable Player award quite honestly belongs to Jerome Powell and the Fed.

Today, after fending off last March’s Market Madness, the ball is no longer in the Fed’s court. Instead, The Fed is embodying a more reactive approach, awaiting signs of inflation to cross their 2% target before considering rate hikes or tools such as yield-curve control. Now, it’s our congressional leaders’ turn to play offense using fiscal policy. Their most recent time-out play is the $1.9 trillion stimulus package with embedded $1,400 stimulus payments expected to boost inflation.

Is Inflation Bad?

Let’s take a step back and consider why the Fed is setting a target with inflation. It’s important to distinguish that inflation isn’t as daunting as what’s ingrained in our history books. Sure, the inflationary tales of Zimbabwe and the Weimar Republic might seem scary, but the truth is such situations are rare and due to mismanaged policy in less-developed nations. Typically, mild inflation is a sign of rising consumption and increased demand. Today, this type of inflation can be recognized as reflation1; and in our case, reflation would signify that a return to normalcy is en route. 

Market expectations for inflation are no laughing matter. A re-opening is expected to usher in increased spending in the form of pent-up demand. Input prices such as lumber and copper are already soaring. The five year breakeven treasury rate, which measures investor expectations for inflation, rose to its highest over point ever since 2014. Bonds, whose kryptonite is inflation, witnessed a sell-off that trickled into tech stocks.

But are markets correct to expect this much inflation? Or are markets overshooting their expectations by falling for this inflation pump fake? Perhaps our stay-at-home habits will prevail in the long-run and spending will not stay elevated, resulting in lower inflationary pressures. If so, we could see a rebound in bond prices and tech names. Nevertheless, this is the hotly debated topic among investors at the moment. 

Run The Play

This brings us back to the analogy with our administration’s most recent time-out-play. The $1.9 trillion relief bill is bringing hope to the workers, businesses, institutions, and communities that have struggled throughout this pandemic. As you can see in the chart below, the $1,400 stimulus payments represent a large percent of the package totalling $422 billion. It makes sense for investors to expect increased inflation as consumers now have higher disposable incomes and propensity to consume – but there is a catch.

Source: Committee For a Responsible Federal Budget (CRFB)

What will happen to actual inflation if these stimulus payments don’t make it back into the economy, but instead find their way into the stock market? A survey by Deutsche Bank revealed that individuals between the ages of 25 to 34 intend on placing 50% of the received payment into the stock market. Ultimately, the survey found that younger and high income earners eyed the stock market as the targeted destination for this income.

Source: Deutsche Bank Asset Allocation, dgDIG, RealVisionFinance
Data presented on 3/08/2021

The Deutsche Bank survey, like any other, is going to be scrutinized for sampling error, but we don’t see something like the above being too far-fetched. The recent retail frenzy with “meme stocks2” like GameStop, Blackberry, and AMC has given rise to retail investing. Popular communities like r/WallStreetBets on Reddit have become a breeding ground for investors to commingle. Even more likely are your neighbors, who watched people get rich on the market’s 2020 rally, itching to pummel some of their stimulus money into the S&P 500.

These $1,400 payments are intended to increase demand for goods and prompt businesses to hire more workers, eventually raising wages. If these payments seek risk-assets instead, we could see a halt in the reflation narrative and a prolonged unemployment recovery.

Another risk to consider is the risk of financial stability. We’re seeing speculative behavior, especially from retail investors piling into stocks with less regard for the underlying fundamentals. At the end of the day, it’s quite possible to see a lack of wage growth in the economy while management teams of inefficient and highly-indebted companies get rewarded for little to no profitability.

The Bottom Line

We aren’t here to debate whether or not you should save or spend the money, let’s leave that to Reddit and Twitter. However, should a substantial portion of stimulus payments see capital markets as a more attractive destination than the underlying economy, the risks to reflation and financial stability must not be overlooked.     

We’ll see whether or not the $1.9 trillion time-out play will win the economic recovery game and prevent further Market Madness… if not, let’s hope it at least takes us into overtime.

Footnotes:

  1. Reflation represents increased price levels as a result of monetary or fiscal policy as a means to combat deflation.  
  2. “Meme stocks” are stocks that have gained traction from retail audiences such as Reddit or investment communities. GameStop and AMC are just a few of the many names with this retail comradery, earning these stocks the nickname “meme stocks” and causing a surge in prices throughout early 2021.

Sources: 

Committee For a Responsible Congressional Budget 

Deustche Bank Survey

YCharts

Phillip Law, Portfolio Analyst

Wealth Advisor, Warren Street Wealth Advisors

Investment Advisor Representative, Warren Street Wealth Advisors, LLC., a Registered Investment Advisor

The information presented here represents opinions and is not meant as personal or actionable advice to any individual, corporation, or other entity. Any investments discussed carry unique risks and should be carefully considered and reviewed by you and your financial professional. Nothing in this document is a solicitation to buy or sell any securities, or an attempt to furnish personal investment advice. Warren Street Wealth Advisors may own securities referenced in this document. Due to the static nature of content, securities held may change over time and current trades may be contrary to outdated publications. Form ADV available upon request 714-876-6200.

Is Tesla Flying Too Close to the Sun?

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743%. That’s how much Tesla stock (Ticker: TSLA) returned in 20201. Most of us are aware of the bifurcation between the market’s seemingly invisible ceiling and the economy’s continued disarray, but nobody could have foreseen that Elon Musk and his army of “musketeers” would be amongst those most rewarded for owning increased allocations of TSLA stock.

In fact, 2020 was an eventful year for the electric vehicle company. Among a series of roller coaster weeks, a stock split announcement, and raging debate over analyst price targets, perhaps TSLA’s most noteworthy 2020 phenomenon was its inclusion in the S&P 500 Index – a profound move that has us concerned over the stock’s perceived immortality at the forefront.

On December 21, 2020, the S&P 500 Index committee formally added the “profitable” carmaker to the index after denying TSLA index entry earlier in the year. The circumstances around this inclusion eerily resembles something we’ve seen before. Does “You’ve Got Mail” ring a bell? That’s right – we see multiple uncanny parallels between the TSLA and former net stock giant: American Online (AOL).

Echoes of The Past

On December 23, 1998, Standard & Poor’s announced it would make American Online the first “net” stock featured in the S&P 500 Index. Leading up to the announcement, AOL rallied 510% year-to-date2, before ending the year with a return of 585%. Compare this to TSLA, which had run-up 388%3 by the time the committee made its announcement on November 16, 2020. As mentioned previously, TSLA’s 2020 return was 743%. Notice here that a large proportion of TSLA’s 2020 return came in the last month and a half in the year…talk about upward volatility.

Arguably, the most intriguing similarity between these two stocks is the amount of price action driven by momentum and fear of missing out (FOMO). Investors overlooked red flags related to both AOL’s fundamentals and underlying profitability of tech stocks. AOL eventually lost 91%4 of its market value after a failed merger with Time-Warner cable. Meanwhile, valuations of tech stocks (represented by the Nasdaq Index) peaked in early 2000 before seeing 78%5 of its value disintegrate. Fast forward to the end of 2020, you have Tesla, a company whose “profitability” is primarily tied to energy credits, octupling (8x) its stock price to levels many investors deem uncomfortable.

Will TSLA suffer the same fate as AOL and other dotcom counterparts? Obviously 2021 is a different year. The carmaker makes electric-powered cars, not an instant messaging platform. We do acknowledge that historical performance is not indicative of future performance; and that correlation does not equal causation. However, it’s important to remember that those who don’t learn from history are doomed to repeat it.

How Much TSLA Do You REALLY Own?

TSLA’s inclusion in the S&P 500 Index raises a new challenge for investors: hidden concentration risk. With TSLA now a part of the NASDAQ, Russell 1000, and widely regarded S&P 500, owning index funds inherently carries TSLA exposure. Borrowing from our friends over at WisdomTree, imagine a scenario where Portfolio A holds broad index funds in addition to a few well-known names.

What investors thought was a 2.50% allocation to TSLA is at 4.00%6. I know, I know. 4% doesn’t seem like a big deal. Besides, what investor puts 90% of their equity allocation into only broad U.S. ETFs? (You’d be surprised). The more important point though, is that volatile price action with TSLA can hide how much of the stock you really own.

At the end of 2019, TSLA shares were at $83.67. As of Friday, January 15, 2021 – the stock sits at $824.91 – almost ten times over its stock price just a year ago. Let’s say you owned Portfolio A on December 31, 2019. As of January 15 this year, TSLA would comprise 19% of Portfolio A’s exposure (see Appendix A). Obviously, price appreciation and concentration risk create their own problems (e.g., skewed returns, tax consequences), but when the underlying rationale for that price appreciation is in question by the investment community at large, you could have an even bigger problem on your hands.

 Will TSLA Fall Back Down to Earth?

Today, it seems as if TSLA has really shot over the moon, multiplying its stock price ten times in a little over a year. Will the carmaker continue to defy odds throughout 2021? Or, is Tesla a ticking-time bomb waiting to explode?

We at Warren Street Wealth Advisors aren’t equity research moguls here to publish a Buy, Sell, or Hold on this highly debated stock. However, we do acknowledge that no company is immune from idiosyncratic risk. Whether Tesla can stay above the influx of foreign competition (e.g., NIO, Volkswagen), or whether or not valuations are outstretched represent just a few of many risks to the company’s stock price.

One observation fueling TSLA’s controversy is that despite having a much larger market cap relative to other established vehicle manufacturers (see above), the company only generated $28.2 billion in sales7. Compare this to a combined $1.1 trillion in sales7 for all its auto competitors listed above. How can a company, which does a fraction of its competitors’ sales, be worth more than all of them combined? Again, TSLA isn’t just a car company – it’s thought to be a generational leader driving the next revolution in clean energy; but nevertheless, some food for thought while you’re on the road.

Tesla’s ride sure was wild in 2020, and nobody can guarantee what will happen in 2021. However, as prudent investors, it’s important to not overlook the implications that a high-flying stock can have on client portfolios. We’re not here to argue whether Tesla’s run has just begun or if the stock’s price is dangerously inflated. But if the latter of those two ideas rings true, the world could be shocked when it sees electricity and a bubble come together.

Footnotes:

  1. YTD total return as of 12/31/2020 sourced to YCharts.
  2. YTD total return for 12/23/1998 and 12/31/1998 sourced to historicalstockprice.com.
  3. YTD total return as of 11/16/2020.
  4. AOL’s market cap plummeted from $226 billion to roughly $20 billion in 2003, sourced to Bezinga.
  5. NASDAQ percent off high spanning 12/31/1997 to 12/31/2003.
  6. 4.04% is the summation of multiplying TSLA weight in index by index weight in portfolio.
  7. Trailing twelve-month figures.

Appendix A

For any questions regarding international investments, emerging markets, or wealth management, please call 714-876-6200 or email phillip@warrenstreetwealth.com. 

Phillip Law, Portfolio Analyst

Wealth Advisor, Warren Street Wealth Advisors

Investment Advisor Representative, Warren Street Wealth Advisors, LLC., a Registered Investment Advisor

The information presented here represents opinions and is not meant as personal or actionable advice to any individual, corporation, or other entity. Any investments discussed carry unique risks and should be carefully considered and reviewed by you and your financial professional. Nothing in this document is a solicitation to buy or sell any securities, or an attempt to furnish personal investment advice. Warren Street Wealth Advisors may own securities referenced in this document. Due to the static nature of content, securities held may change over time and current trades may be contrary to outdated publications. Form ADV available upon request 714-876-6200.