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2018 Q1 Newsletter

“I am simply offering a not-so-subtle reminder that the high returns/low volatility environment we experienced in 2017 was an anomaly. We would be foolish not to expect volatility, corrections, and/or Bear Markets to return in 2018 and beyond. Truth be told, I am looking forward to the next healthy correction separating speculators from their shares and returning them to lifetime equity investors like us.”

– Don Davey, DEM Quarterly Newsletter dated December 31, 2017

As if on cue, the new year graced us with not just one, but two overdue and healthy market corrections during the first three months of 2018. And in predictable (albeit pathetic) response, scores of clueless, short-term, performance-driven lemmings withdrew $23.9 billion from their equity mutual funds/ETFs during the first week of February. This figure represented the largest one-week liquidation of equities since Lipper started tracking fund flows data in 1992, eclipsing even the $22.6 billion pulled during the global financial crisis in June 2008.

I am not making this up. After watching the market more than quadruple over the past eight years, the bulk of the investing public threw themselves into a full-blown panic in response to a couple of meaningless 10% market hiccups. In doing so, they turned perfectly normal temporary fluctuations into permanent losses. But not us. Having already Planned Wisely, Diversified Broadly, and Invested Intelligently, we DEM Spartans simply Ignored the Noise concerning North Korea, GDP, interest rates, and Trump’s tweets to focus on meaningful things such as work, travel, friends, and family.

While you focused on the people, places, and things most important to you, we did filter out one very important Signal from the financial media’s Noise. It turns out the recently enacted Tax Cuts and Jobs Act of 2017 is both broad and complex, so we spent much of the quarter working with our team of CPAs familiarizing ourselves with the details. Armed with this knowledge, we are now prepared to modify our Lifetime Financial Plans to minimize your tax burden in 2018 and beyond. Over the coming months, we will be reaching out to you to discuss strategies such as these:

  • Many of your businesses are structured as “pass-through” entities such as S corporations and limited liability companies. The new tax laws offer a generous 20% deduction on pass-through income for both capital-intensive and service businesses with incomes below certain thresholds. Timing capital expenditures, accelerating depreciation, and expanding retirement plans will ensure you reap the maximum benefits from this provision.
  • The doubling of the standard deduction to $12,000 (single) and $24,000 (married) means that fewer of you will benefit from itemized charitable deductions. However, combining anticipated future charitable contributions into a single tax year using a donor-advised fund may allow you to retain the ability to claim those deductions.
  • Deductions for state income taxes, property taxes, and sales taxes are now capped at $10,000 per year. The cap on mortgage interest deductions has been lowered from $1 million to $750,000. And miscellaneous itemized deductions subject to the 2% AGI limit, such as accounting expenses and investment advisory fees, have been eliminated altogether. In direct response to this last item, we have already begun deducting our advisory fees for retirement accounts using pretax dollars, preserving that deduction for you regardless of your filing status.
  • As you know, DEM is committed to providing truly comprehensive financial planning and wealth management to a select number of affluent families. Rather than wasting our time fretting over meaningless short-term market fluctuations, we invest our time wisely to ensure we are adding value to our relationships. As we approach DEM’s 20th anniversary of helping our client families achieve their goals, we cannot thank you enough for the privilege of serving as your family’s Trusted Advisor.

    Don Davey
    Senior Portfolio Manager
    Disciplined Equity Management
    Plan Appropriately, Invest Intelligently, Diversify Broadly, Ignore the Noise

    2018 Q1 Market Index Returns

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