KFA Blog


Senior Financial Advisor

As a CERTIFIED FINANCIAL PLANNER™ (CFP®), Mark has been helping clients achieve their financial independence for almost a decade. Prior to joining KFA, Mark pursued his career as a CFP® professional at some of the leading financial firms in the industry such as Morgan Stanley, Charles Schwab and BMO Harris Financial Advisors.



Mark joined the KFA team as a Senior Financial Advisor. He is responsible for managing all aspects of the financial planning and investment process for KFA clients. Providing holistic wealth management that motivates, encourages and guides KFA clients through every stage of life is his top priority.



Mark received his Bachelor of Science degree in civil engineering from the University of Iowa. He then went on to pursue his MBA at Colorado State University. Mark’s love for learning did not stop there. He completed extensive training, coursework and exam requirements to receive his CFP®. Mark is an active member of the Financial Planning Association.



Mark and his wife have been married for 17 years, they lived most of that time in Colorado before moving back to Illinois last year. They are the proud parents of three young children. Mark and his family love the great outdoors, they enjoy skiing, running, hiking and golf. Although if you were to ask Mark’s family, they would say that Mark spends most of his time obsessed with financial planning and researching investments - spending way to many evenings playing with his spreadsheets.

Mark can be reached at: info@kabarec.com

Is the Fear Gauge Broken?

 

Nothing in life is to be feared, it is only to be understood.

Now is the time to understand more, so that we may fear less.

-Marie Curie

 

 

If you follow the financial news daily, you are constantly bombarded with headlines predicting the best of times or the worst of times.  Case in point – The Fear Gauge!  The Fear Gauge or CBOE’s Volatility Index (ticker symbol VIX) just hit a 23-year low or three week high or maybe as some suggest the fear gauge may not be that significant after all… So which is it? 

What is the Fear Gauge?

I bet many of you are asking, so what exactly is the Fear Gauge?  The following is a definition from Investopedia:

“VIX is the ticker symbol for the Chicago Board Options Exchange (CBOE) Volatility Index, which shows the market's expectation of 30-day volatility. It is constructed using the implied volatilities of a wide range of S&P 500 index options. This volatility is meant to be forward looking. It is calculated from both calls and puts, and is a widely used measure of market risk, often referred to as the "investor fear gauge."

That was helpful… right?

Perhaps Wikipedia can help us understand how to interpret the VIX (volatility index):

“Although the VIX is often called the "fear index", a high VIX, is not necessarily bearish for stocks.  Instead, the VIX is a measure of market perceived volatility in either direction, including to the upside… Hence high VIX readings mean investors see significant risk that the market will move sharply, whether downward or upward. The highest VIX readings occur when investors anticipate that huge moves in either direction are likely. Only when investors perceive neither significant downside risk, nor significant upside potential will the VIX be low.”

If I were to read between the lines – The VIX measures how volatile investors think the market will be going forward; with a low VIX reading implying that investors don’t expect the market to move sharply in either direction.  A high VIX reading implying investors expect the market to move sharply in either direction.  This would imply that directional changes to the VIX might have some predictive correlation of the directional changes to the market.

 

The Relationship of the S&P 500 to the VIX

The chart and table below from the CBOE explores the relationship between the S&P 500 and VIX Index.  Essentially, the chart and table show that directional changes to the VIX are about 80% accurate in predicting the direction of the S&P 500.   For example, when the VIX is going down, the S&P 500 is going up 82.15% of the time.

 

Is the Fear Gauge Broken or is it the economy, stupid?

Today the VIX is hovering around all-time lows (see chart below), which has led many commentators to question the validity of the VIX or for the negative market pundits to call this the quiet before the storm – there is a “black swan” event looming that will take down the market.

The VIX doesn’t appear broken; rather like Bill Clinton once said… “It’s the economy, stupid”.  In our view, the VIX is hovering near long-term lows because the economy is actually plodding along with good corporate earnings and private sector job growth.  In addition, it is interesting to note that market fear hasn’t ticked up significantly with the technology profit taking over the past few days.  To be clear, it has hit a 3-week high, but the VIX is still hovering around long-term lows.  Investors don’t appear to be fleeing to the safety of bonds; rather we have seen a quiet rotation in the past few days, from technology stocks to financials and to dividend payers.  It is too early to consider this rotation a trend; however, in our portfolios we have slowly added to our dividend payers while taking some profits from the technology sector. 

At Kabarec Financial Advisors, Ltd., we will continue to monitor the VIX for directional changes that could truly indicate volatility ahead.  In the meantime, I hope this has helped you understand more so you can fear less. 


 

 

 

 

 

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Failing to Plan!

 

"If you fail to plan, you're planning to fail!"
- Benjamin Franklin

Over the years, I have talked to hundreds of investors.  Far too often I find that investors start with the investments; specifically the greed of investment returns or the fear of investment loss, as opposed to a Financial Plan.  Greedy investors frequently take more risk than their financial plan requires; many times that risk is not rewarded when viewed through a Monte Carlo simulation – the probability of not outliving your retirement savings.  Fearful investors can be found to not take enough risk to give them a statistically significant probability to meet their long-term cash flows.  Both are examples of failing to plan.

Before investors even consider putting their hard earn savings into tit-for-tat investments, they should start with the question of “Why do I need to invest in the first place?”.  Well, as the quote above states, “if you fail to plan, you are planning to fail!”.  I’m certain you have heard that quote, probably a hundred times.  Of course you believe it and live it every day… right?  I am sure you have a budget, savings and tax strategy, financial plan, debt strategy, will and estate plan, and have insured properly for life insurance and long-term care.  I am also sure your investments are tuned tightly to all these topics… right?!  If you are like most investors, you are nearing retirement and are scratching your head as to how you got to today… some money and uncertainty about your financial future.

Today, let’s talk about the financial plan, a comprehensive financial plan; primarily because almost everything else listed above is solved for or evaluated using this tool.  Let’s not get this confused with a complimentary plan which is really nothing more than a sales tool.  On the surface, it is fine because most clients do need to know if they will outlive their investments.  Unfortunately, when clients receive a complimentary plan, often times advisors do not continue to plan for their clients to make sure their financial path is clear or look deeper than the investments and cash-flow projections.

At Kabarec Financial Advisors, Ltd. (KFA), we believe clients should receive a comprehensive financial plan.  Below is what we recommend looking for in a comprehensive financial plan:

  1. Certifications and Fiduciary Standard –You should look for a fee-only, fiduciary with a CFP®, who must put your interests before their own interests.
  2. Cash-flow analysis with ongoing monitoring –  As markets shift, expenses go up for an unforeseen reason or inflation unexpectedly rises.  The financial plan is the tool that helps clients understand what Minimum Acceptable Return (MAR) they need and are comfortable to earn in order to meet their long-term financial cash-flows (i.e. retirement, education planning, legacy planning, etc.) while considering variables like budget, savings, investment risk profile, etc. and solving for a range of statistical success through a Monte Carlo simulation.  That said, the financial plan should be routinely monitored, including the Monte Carlo simulation, to ensure the client will successfully reach their goals as life happens.
  3. Financial Manager –Financial planning should also include a financial manager (see below)– the process of routinely evaluating all areas of your financial life with you and your other key advisors (i.e. CPAs, attorneys, insurance agents).   This tool helps to ensure that you and your loved ones not only have enough money in retirement, but also have planned appropriately for such things as disposition and taxation of your estate, financial protection in case of an unexpected loss  or tax planning so that the IRS doesn’t erode your hard earned nest egg.  In addition, the financial manager should include organizing your financial life in one place so that you have the comfort of knowing that your family will be able to find all your important financial documents and have a team of advisors ready to help them when that time arrives.

If someone you care about could use an expert second opinion about his or her financial life, we’d be happy to help. Contact us at 847-934-7777 or  This email address is being protected from spambots. You need JavaScript enabled to view it.  to schedule your consultation.

 

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Filed Your Taxes, Now What?

"You must pay your taxes.  But, there's no
law that says you gotta leave a tip."

Morgan Stanley advertisement

As the relief of tax season fades into the deep corners of our memory, many taxpayers may be sitting back thinking they’re done; they’ve successfully filed their taxes so they can relax and (hopefully) wait for that refund to hit their account.  Before you start putting your legs up and planning that summer vacation, remember that if you are not careful you may inadvertently be giving away your hard earned money to the IRS by delaying in planning and preparing for next year’s return.

At  Kabarec Financial Advisors, Ltd. (KFA), we are routinely tax planning for our clients to generate tax alpha - the value-add that an advisor provides by implementing “proactive tax strategies that generate tax savings, particularly in a portfolio (where the larger the portfolio, the larger the potential tax benefits).1  As reputable sources like Vanguard, Morningstar and Envestnet point out, strategic tax planning is worth 0.70% to 3%in annual tax alpha, and that estimate does not include the potential benefits of income tax planning, such as tax bracket management - the process of strategically managing your controllable income in conjunction with marginal tax rates to improve overall tax efficiency.  We consider the following high level strategies for all of our clients:

Asset Location– Vanguard research shows that asset location can provide clients with up to 0.75% of additional annual return2.  Asset location is a tax minimization strategy that locates investments based on two primary factors: an investments tax-efficiency and its expected returns.  For example, placing traditionally high growth and high turnover assets, such as emerging markets and sector rotation fund in the tax-free Roth, or sheltering investments that generate high ordinary income, such as taxable bonds in a tax-deferred IRA.  A good asset location reference is Chart 1, “the full asset location smile and the asset location priority list” from The Kitces Report, “Advanced Concepts & Strategies in Asset Location”.  In addition, asset location is most effective when the strategy is implemented at the “household level” versus at the account level.  Therefore, when considering an asset location strategy for your investments look for firms (like KFA) that can diversify your investments at the “household” level.

Chart 1

Source: Michael Kitces, The Kitces Report

Municipal bonds– One of the principal assumptions of an effective asset location strategy is to use taxable bonds in tax-deferred accounts. However, in certain situations where the tax-deferred accounts are not large enough to properly diversify a client’s investments between stocks and bonds, tax-exempt municipal bonds are a good option.   In addition, when considering municipal bonds in a taxable account, investors should review their tax bracket to determine if tax-exempt municipal bond yields are comparable to U.S. Treasuries.  For example, 10-year AAA municipal are currently at 1.32 relative 10-year U.S. Treasury bonds, and the tax equivalent yield for a 15%, 28% and 35% tax brackets are 2.03, 1.83 and 1.18 relative to 10-year U.S. Treasury bonds.  Table 1 shows the comparison of the U.S Treasury Yield Curve to the AAA Municipal Yield Curve.

Tax loss harvesting– Tax loss harvesting is the strategy of selling securities at a loss to offset a capital gains tax liability, without permanently changing the underlying investment/portfolio.  Evestnet’s “Capital Sigma: The Return on Advice” shows that a properly tax managed portfolio may be worth 0.60% annually over a buy-and-hold portfolio.3 Investors should be aware that Congress has passed a 30 day “wash sale” to limit potential abuses.  The wash sale rule requires that a tax loss can only be claimed by investor’s if the replacement investment is not “sustainably identical”.  In addition, investors should note that tax loss harvesting may trigger a future gain, and thus the value of tax loss harvesting is really in the tax deferral of the loss from time originally claimed until the recovered loss is triggered.  For example, an investor buys a stock for $10,000 and its value declines to $6,000.  The investor can harvest a $4,000 tax loss, but in doing so, the investment will now have a cost basis of $6,000.  When the client sells the stock for $10,000 (the original purchase price), the investor’s gain will be $6,000 (so the net gain is $0). 1   

Income Tax Planning– The 3rd and 4th quarter of every year, KFA helps clients’ tax plan going into the end of the year.  This includes running illustrations to help minimize a client’s tax burden.  We use various strategies, including harvesting gains, tax bracket maximization strategies such as Roth conversions or retirement withdrawal ordering optimization, charitable giving and gifting strategies, and the classic tax deferral strategies (e.g. IRA’s).  As Michael Kitces points out, “the tax bracket arbitrage opportunity… is often the biggest tax planning opportunity available”, but it is difficult to quantify.1

Kabarec Financial Advisors, Ltd. welcomes the opportunity to speak to you further about these tax planning strategies.  Give KFA a call today to start improving your results for next year or email us at This email address is being protected from spambots. You need JavaScript enabled to view it. .

References:

  1. Kitces, “Evaluating Financial Planning Strategies and Quantifying Their Economic Impact” The Kitces Report, Volume 3, 2015.

  2. Kinniry Jr, Jaconetti, DiJoseph, Zilbering, Bennyhoff, “Putting a value on your value: Quantifying Vanguard Advisor’s Alpha”, September 2016.

  3. Envest PMC’s Quantitative Research Group, “Capital Sigma: The Return of Advice”, 2016.

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