Author Archives: Ashley Vaughn

Charitable Giving

Charitable Giving: Ways to Give

By Will Jackson, CFP®

We frequently receive questions about charitable giving, most related to giving from a retirement account, Qualified Charitable Donations (QCDs). Did you know that there is another attractive option?

Charitable giving is an important aspect of many clients’ annual planning. Other than cash gifts, there are two primary ways we guide clients in making strategic charitable gifts.

If retired and eligible, we recommend making Qualified Charitable Donations (QCDs) from a retirement account. If that is not an option at this time, we recommend a Donor Advised Fund (DAF) as a great way to fund your future charitable giving while receiving an attractive tax benefit.

If you have QCD questions, please let us know. For this column, we will focus on the Donor Advised Fund, and four questions we frequently receive regarding DAFs.

What is a Donor Advised Fund?

A DAF is like an investment account for the purpose of supporting charitable organizations you care about. When you contribute cash, securities or other assets to a DAF, you are generally eligible to take an immediate tax deduction. Those funds can then be invested for tax-free growth, and you can recommend grants to virtually any IRS-qualified public charity at any point in the future.

When you give, you want your charitable donations to be as effective as possible. DAFs are the fastest-growing charitable giving vehicle in the United States because they are one of the easiest and most tax-advantageous ways to give to charity.

How do you contribute to a DAF?

You can donate cash, stocks or non-publicly traded assets such as private business interests, cryptocurrency and private company stock to be eligible for an immediate tax deduction all while funding your future charitable giving. The one point to always remember is that a contribution to a donor-advised fund is an irrevocable commitment to charity; the funds cannot be returned to the donor or any other individual or used for any purpose other than grant making to charities. It is important to only select assets that you feel are appropriate.

What happens to DAF assets while deciding what charity to support?

While you’re deciding which charities to support, your DAF can potentially grow, making available even more money for charities. Most sponsoring organizations have a variety of investment options from which you can recommend an investment strategy for your charitable dollars.  For larger donations, there is the option to have your advisor manage the asset allocation of your DAF.

How long do you have to donate DAF assets?

The IRS does not have specific rules for when funds in a DAF must be used, but most DAF providers will require the account to be used at least once every two years.

You can support virtually any IRS-qualified public charity with grant recommendations from the DAF — from your local homeless shelter to your alma mater or religious institution. The public charity sponsoring your account will conduct due diligence to ensure the funds granted go to an IRS-qualified public charity and will be used for charitable purposes.

You can incorporate your DAF into estate planning by making a bequest in your will to the DAF sponsor, or by making the sponsor a beneficiary of a retirement plan, life insurance policy or charitable trust.

If you are interested in learning more about a QCD or DAF, please don’t hesitate to let us know.  We are big believers in giving back to our communities, and are enthusiastic about helping our clients do the same.

Will Jackson, CFP®, is a partner and financial advisor in the Nashville office of Cahaba Wealth Management, www.cahabawealth.com.

Cahaba Wealth Management is registered as an investment adviser with the SEC and only transacts business in states where it is properly registered, or is excluded or exempted from registration requirements. Registration as an investment adviser does not constitute an endorsement of the firm by the SEC nor does it indicate that the adviser has attained a particular level of skill or ability. Cahaba Wealth Management is not engaged in the practice of law or accounting. Always consult an attorney or tax professional regarding your specific legal or tax situation. Content should not be construed as personalized investment advice. The opinions in this materials are for general information, and not intended to provide specific investment advice or recommendations for an individual. Content should not be regarded as a complete analysis of the subjects discussed. To determine which investment(s) may be appropriate for you, consult your financial advisor.

Activity in the Bond Market: Some Context

Extraordinary Activity in the Bond Market: Some Context

By Brian O’Neill, CFP®

Happy New Year! The beginning of 2022 has seen some extraordinary activity in the bond market, with the benchmark 10-Year Treasury yield moving from the December 31, 2021 close of 1.51%, to north of 1.8% briefly in mid-day trade on January 10, 2022.

The overall numbers don’t tend to raise eyebrows, as the nominal rate of 1.8% is still very low in historical context. However, a move of almost 20% in that yield in only seven trading days is quite unusual. Moves like this generally create headlines for the 24/7 media cycle, and thus, can also create anxiety for clients. We thought we’d add some context.

Client Portfolios and Bonds

We will continue to allocate part of client portfolios to bonds, dependent on each individual client’s tolerance for risk. With rates this low, we have continued to hear the screaming that, with higher rates, bond portfolios will somehow “destroy” value. To show why we disagree with this sentiment, let’s first look back at the past 18 months.

On June 1, 2020, after the realities of the pandemic were fairly clear, the 10-Year yield had dropped to .66%. Since that time, the move in yield to 1.8% amounts to a rate of change of 169%, and yet, during that same time, the core bond holding in our non-taxable accounts (iShares US Core Aggregate Bond – symbol AGG) is down only 1.25%.

The core bond holding in our non-taxable accounts (iShares US Core Aggregate Bond - symbol AGG) is down only 1.25%.

While not perfect, a significant move in interest rates has not “destroyed” value in client portfolios. What it has done is allowed our clients to maintain dry powder for rebalancing, cash withdrawals, and holding a simple lower-risk investment.

In a complimentary fashion, this also allows our clients to maintain their equity positions, and take advantage of the significant gains the market has provided during that 18 month period, while withstanding the volatility with which those gains naturally come. We always say that bonds are an emotional stabilizer, and allow you to take risk in the equity part of your portfolio.

Bond Portfolio Duration

The primary driver behind minimizing losses, even in a rising rate environment, will be keeping the duration of the bond portfolio under control. The longer the duration (a combination of maturity and potential calls and pre-refunding), the more sensitive a bond portfolio is to interest rate changes. A longer bond portfolio duration will lead to larger drops when rates rise (and conversely increases when rates fall), so we are very careful to manage duration risk in our client portfolios.

For anyone with an individual bond ladder, rate moves won’t impact returns, but for those in funds/ETFs, they will. Below is a good chart that shows the impact of this recent rate move on longer bond ETFs, and our core ETF (AGG).

The impact of this recent rate move on longer bond ETFs, and our core ETF (AGG).

The iShares 20- Year Treasury Bond ETF (symbol TLT), with a duration of 19.26 (per www.morningstar.com), has fallen 3.12% so far this year, compared with AGG (duration of 6.64) which has fallen 1.30%. These holdings pay their interest (in the form of a dividend) monthly, so these returns will be improved by that yield (1.88% yield on TLT, 1.61% on AGG – data again per Morningstar) when that dividend pays.

Portfolio Construction: Overall View

Our overall view on portfolio construction is to understand that the market will continuously throw us curveballs, and thus, we need to remain flexible. Bonds will allow for that flexibility, no matter the rate environment. We will use our clients’ tolerance for risk, the time horizon understood through our detailed view of cash flow, and create an allocation built to achieve your goals.

We are thankful for the opportunity to serve you as a client and look forward to continuing to be a resource for you and your family.  Please let us know if you have questions or would like to discuss in greater detail.

Brian O’Neill, CFP®, is president and a financial advisor in the Atlanta office of Cahaba Wealth Management, www.cahabawealth.com.

Cahaba Wealth Management is registered as an investment adviser with the SEC and only transacts business in states where it is properly registered, or is excluded or exempted from registration requirements. Registration as an investment adviser does not constitute an endorsement of the firm by the SEC nor does it indicate that the adviser has attained a particular level of skill or ability. Cahaba Wealth Management is not engaged in the practice of law or accounting. Always consult an attorney or tax professional regarding your specific legal or tax situation. Content should not be construed as personalized investment advice. The opinions in this materials are for general information, and not intended to provide specific investment advice or recommendations for an individual. Content should not be regarded as a complete analysis of the subjects discussed. To determine which investment(s) may be appropriate for you, consult your financial advisor.

Forecasts, Expectations, and Planning for Inflation

11/2021

By Josh Hegland and Will Jackson, CFP®

Inflation seems to be on the tip of everyone’s tongue, and something we are dealing with every day. Whether you’re in the market for a new or used car, considering a change in primary residence or buying groceries, pent-up demand coupled with supply chain issues have resulted in increased prices. 

Forecasts, Expectations, and Planning for Inflation
From Federal Reserve Bank of San Francisco Economic Letter, September 21, 2015

The question: Is this permanent or temporary?

“Our asset allocation strategy includes the possibility for inflation,” explains Will Jackson, CFP®, partner, Cahaba Wealth Management.

In March of last year as governments considered the best way to respond to the damaging impact of Covid-19, there was a broad consensus: the economy was in need of major stimulus to stave off another Great Depression. The U.S. Administration acted quickly providing economic stimulus payments, direct aid to businesses, and gave a broad mandate to the Fed to help stem the tide and ensure the economy continued to function.

Because of the uncertain picture on the overall impact of the pandemic, the stimulus efforts have continued with many segments of the economy seeing a swift recovery. Consumers have shown an eagerness to get back to normal, but the availability of willing workers has shown resistance.  As the saying goes, “no good deed goes unpunished.” 

We can debate to what degree, but overall, it would appear that the stimulus has worked, and resulted in improvements in the consumer’s balance sheets.  Unfortunately, this has driven demand higher and resulted in higher inflation.

We are now seeing economic growth levels that are healthier than they were pre-pandemic. Looking forward, investors are asking the question: is inflation temporary or permanent?

The simple answer: No one truly knows what long term impact the trillions of dollars of stimulus will have on the economy. Will interest rates rise, will price increases stick, can spending maintain current levels, and will long-term supply and demand levels return to historical levels?  

The impact could be different for each of these subgroups, and to date, all prognosticators have been wrong. What has continued to be true is that having a plan has never been more important. So, what should a person do in this type of environment?

Here are a two important things to keep in mind concerning the impact of your financial plan and portfolio.

1. Stocks have historically been a great hedge against inflation. Since 1928, the U.S. stock market has outpaced inflation by nearly 7%. Earnings and dividends have a real growth rate of 2.1% over the rate of inflation over the same time period. While that might not seem like much, the historical inflation rate over this time frame was 2.9%.

Our approach to asset allocation takes into consideration your risk profile, cash flow needs, and investment time-horizon. Over the long term, having the proper allocation of stocks and fixed income assets will help your portfolio not only withstand the fluctuations of inflation, but grow over time.

2. Our cash flow assumptions for clients assume 3% long-term inflation. While we may not know exactly what the near or long-term inflation rates look like, and have not seen inflation rates over 3% since the 1990’s, our conservative approach and assumptions allow us to plan for periods of high inflation. This conservative approach allows us to tailor a client’s income generation to their spending levels to ensure that we have the proper risk/return characteristic applied to their asset allocation.

For now, the Fed is keeping their long-term inflation target at 2%, and recently indicated they would consider beginning the process of reducing stimulus. Additionally, the Fed indicated that they might potentially raise interest rates prior to their previous stated target of 18 months.

Forecasts and Actual CPI Inflation 2005 to 2015 from the FRBSF Economic Letter, September 21, 2015
Forecasts and Actual CPI Inflation

But, Fed indications and the resulting predictions can be inaccurate. The San Francisco Federal Reserve recently published a research report that looked at their various inflation models and the ability to predict future inflation. The average forecast errors were all at least 1.5% across the board, and all missed the mark.

Making investment decisions on near term predictions can be ruinous to a person’s financial success. Many strategists have been recommending to short bonds and to buy gold. These are academically accurate hedging recommendations, but also proving that markets don’t read the textbooks! Recently, bond yields have increased, and gold is down 7.5% YTD. 

All of this only reinforces our cornerstone tenet – it is integral to have a long term plan, and the discipline to stick with your plan. We recognize this is difficult, and theorize that this single trait is responsible for more long term wealth creation than any other.

At Cahaba Wealth Management, we are here if you want to discuss your financial plan. Please do not hesitate to reach out with any questions. We appreciate the opportunity to be of service.

Josh Hegland is a financial planning analyst in the Atlanta office and Will Jackson, CFP®, is a partner and financial advisor in the Nashville office of Cahaba Wealth Management, www.cahabawealth.com.

Cahaba Wealth Management is registered as an investment adviser with the SEC and only transacts business in states where it is properly registered, or is excluded or exempted from registration requirements. Registration as an investment adviser does not constitute an endorsement of the firm by the SEC nor does it indicate that the adviser has attained a particular level of skill or ability. Cahaba Wealth Management is not engaged in the practice of law or accounting. Always consult an attorney or tax professional regarding your specific legal or tax situation. Content should not be construed as personalized investment advice. The opinions in this materials are for general information, and not intended to provide specific investment advice or recommendations for an individual. Content should not be regarded as a complete analysis of the subjects discussed. To determine which investment(s) may be appropriate for you, consult your financial advisor.