Commentary

 

Written by: Michael J. Skrzypczyk, CFA

Although I may lack the life experience of many of the presumed readers of this blog, I hope I can offer some fresh perspective and advice for people in their early stages of their career. As a member of the younger range of the “Millennial” age group, I find humor in the numerous articles trying to group together the financial motivations and lifestyles of tens of millions of people with an age gap as wide as 15 years that are labeled “Millennials”. I hope to avoid any easy characterizations and try to provide some proven advice that can be relevant to a wide array of people. This article may be more useful for people early in their career (or in school and preparing for a career), but people with decades of experience of being invested in the markets can also help share their lessons with younger generations.

The values and goals of Millennials and Gen Z may have changed from their older counterparts but sound financial planning should still be part of their life. Marriage and home buying are being put off until later in life but creating a budget and saving for the future should start as soon as possible.

Investing for the future may not be a primary concern for young people given rising rent/home prices, student loans, and general day-to-day expenses. However, beginning to invest at a young age if possible is crucial to getting ahead and setting themselves up for financial success later in life. Per the chart below from JP Morgan, someone can contribute much less overall (Quitter Quincy) and still have a similar result to someone that invests a greater overall amount but that starts later in life (Late Lyla). The ideal saver (Consistent Chloe), will steadily contribute throughout their lifetime and should be in great financial shape by the time retirement comes. Furthermore, Nervous Noah demonstrates the potential pitfalls of leaving one’s savings in cash. The overall return will most likely be lower than his peers who invest in other asset classes and he will be negatively affected even further if inflation is higher than the return on cash (resulting in a negative real return).

JP Morgan - Investing Early
Source: JP Morgan’s “Guide to Retirement”, 2021

 

Compound interest may be the single most important concept to learn for financial literacy and the key to letting money do the work for you. Einstein referred to it as the eighth wonder of the world and it has an exponential benefit. The “Rule of 72” is a related concept that allows you to estimate the time it takes to double your investment given a fixed annual rate of interest. Divide 72 by the expected annual rate of return to determine the number of years until your account doubles. For example, a person that expects a 7% annual return (which is not a given according to some longer term capital markets assumptions), can expect to see their account balance double in about 10 years without any additional contributions (72/7% = 10.3 years).

Additionally, the amount of time on a young person’s side increases the ability to take risk in search of larger gains with years of earning ahead of them. While usually having lower financial capital, younger age groups have much higher human capital (ie, the present value of future earnings) typically allowing them to invest more aggressively.

There are strategic ways to invest that can make returns potentially more attractive on an after-tax basis. Retirement investment vehicles can be preferable to taxable personal accounts for younger investors in many cases. Contributing to a 401k, if offered by your employer, is a great option especially if the company offers a contribution match. Another common option is the Roth IRA which is a very powerful tool I would recommend any new investor to explore. Roth IRAs allow one to contribute after-tax dollars and the investments within can grow tax-free.

While we usually recommend you seek individual tax advice from a qualified tax professional, we understand many young investors may not always have a dedicated tax professional as a resource. We have heard the following themes from tax professionals we engage with that we think are worth considering. Although impossible to predict the exact level of taxes going forward and one’s future tax bracket, taxes will most likely increase in the future. We are in a period of historically low tax rates and government obligations should continue to rise in the future. An aging population may lead to an increase in spending on government-supported programs such as Social Security and Medicare that will need to be funded using tax revenue. In addition, most young people will expect to make more as they get closer to retirement potentially putting them in a higher tax bracket. Tax-free growth potential, tax-free withdrawals, no minimum required distributions, and the ability to hedge against future tax hikes are all impressive benefits of the Roth IRA. Roth IRAs can also provide additional flexibility compared to traditional IRAs or 401ks with some ability to withdraw your contributions before retirement without penalty.

Absent a wider adoption of financial literacy classes in high school or college, family members, financial advisors, and digital advice can help fill the gap. It is never too early to begin what should be a lifelong journey in financial education.

At Nottingham, our passion is helping people save for the future and achieve their individual goals. If you know a young investor that might have questions, we would happily be a resource.

 

Nottingham Advisors offers both institutional and individual clients experience, sophistication, and professionalism when helping them achieve their goals. With over 40 years of serving Western New York and clients in more than 30 states, Nottingham tailors each solution to fit the specific needs of each client.

For more information about Nottingham’s offerings, visit www.nottinghamadvisors.com or call 716-633-3800.

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Nottingham Advisors, LLC (“Nottingham”) is an SEC registered investment adviser located in Amherst, New York.  Registration does not imply a certain level of skill or training.  Nottingham and its representatives are in compliance with the current registration and notice filing requirements imposed upon SEC registered investment advisers by those states in which Nottingham maintains clients. Nottingham may only transact business in those states in which it is registered, notice filed, or qualifies for an exemption or exclusion from registration or notice filing requirements. For information pertaining to the registration status of Nottingham, please contact Nottingham or refer to the Investment Advisor Public Disclosure Website (www.adviserinfo.sec.gov). Any subsequent, direct communication by Nottingham with a prospective client shall be conducted by a representative that is either registered or qualifies for an exemption or exclusion from registration in the state where the prospective client resides.
This newsletter is limited to the dissemination of general information pertaining to Nottingham’s investment advisory services.  As such nothing herein should be construed as the provision of personalized investment advice. The information contained herein is based upon certain assumptions, theories and principles that do not completely or accurately reflect your specific circumstances.  Information presented herein is subject to change without notice and should not be considered as a solicitation to buy or sell any security. Adhering to the assumptions, theories and principles serving the basis for the information contained herein should not be interpreted to provide a guarantee of future performance or a guarantee of achieving overall financial objectives. As investment returns, inflation, taxes and other economic conditions vary, your actual results may vary significantly. Furthermore, this newsletter contains certain forward-looking statements that indicate future possibilities. Due to known and unknown risks, other uncertainties and factors, actual results may differ materially from the expectations portrayed in such forward-looking statements. Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of their dates.  As such, there is no guarantee that the views and opinions expressed in this article will come to pass. This newsletter should not be construed to limit or otherwise restrict Nottingham’s investment decisions.
This newsletter contains information derived from third party sources. Although we believe these third party sources to be reliable, we make no representations as to the accuracy or completeness of any information prepared by any unaffiliated third party incorporated herein, and take no responsibility therefore. Some portions of this newsletter include the use of charts or graphs. These are intended as visual aids only, and in no way should any client or prospective client interpret these visual aids as a method by which investment decisions should be made.  We have provided performance results of certain market indices for illustrative purposes only as it is not possible to directly invest in an index. Indices are unmanaged, hypothetical vehicles that serve as market indicators and do not account for the deduction of management fees or transaction costs generally associated with investable products, which otherwise have the effect of reducing the performance of an actual investment portfolio.  It should not be assumed that your account performance or the volatility of any securities held in your account will correspond directly to any benchmark index. A description of each index is available from us upon request.
Investing in the stock market involves gains and losses and may not be suitable for all investors. Past performance is no guarantee of future results.
For additional information about Nottingham, including fees and services, send for our Disclosure Brochure, Part 2A or Wrap Brochure, Part 2A Appendix 1 of our Form ADV using the contact information herein.

Written by: Timothy D. Calkins, CFA

Earlier this year, you may have heard some brief commotion about the Estate Tax proposals that were bouncing around Washington. They made headlines when proposed, then faded away, quickly drowned out by new talking points. The Biden Administration went quiet on the proposals, but will likely revisit the Estate & Gift Tax as it looks for additional sources of revenue to fund its spending targets. It is worthwhile to consider the impact of the potential changes while tax planning opportunities are still available.

The current $23,400,000 married ($11,700,000 single) Estate & Gift Tax exemption is scheduled to decline by 50% when the current rate sunsets on January 1st, 2026, unless an extension is approved by Congress. This is currently a non-starter.

Senator Bernie Sander’s proposed Bill (The 99.5% Act) looks to speed up the exemption’s decline, reducing the current $11,700,000 exemption to $3,500,000 on January 1st, 2022. This 70% reduction overnight will be sure to catch many unprepared. Sander’s Bill also increases the Estate Tax Rate from a flat 40% to a progressive 45% to 65%. The lifetime Gift Tax exemption would be limited to $1,000,000 and would no longer be indexed to inflation. The Act would also limit or eliminate some of the estate planning strategies historically favored, including Grantor Retained Annuity Trusts (GRATs), Grantor Trusts, and family entity valuation discounts.

Not to be outdone, Senator Chris Van Hollen proposed the Sensible Taxation and Equity Promotion (STEP) Act. To show that he means business, this proposal would go into effect retroactively, as of January 1st, 2021. The target of this Bill is the step-up in cost basis at death, which currently eliminates the unrealized capital gains tax obligation which would otherwise be owed on appreciated assets. A current tax mitigation strategy is to avoid selling highly appreciated assets through end-of-life, which washes away the untaxed gain, passing the asset on to heirs with current market value cost basis.

Death Infographic

The STEP act would also require gains to be recognized if assets are transferred by gifting.

Gifting inforgraphic

Senator Van Hollen does allow for an exclusion on the first $1,000,000 of lifetime capital gains.

Consider a decedent with an asset valued at $3,000,000 with a basis of $0 with a 40% income rate (for easy math).

Proposed tax

President Biden’s Fiscal Year 2022 Revenue Proposals (Green Book) included some tax increases targeting similar areas to the Sanders and Van Hollen Bills. Perhaps the most news worthy was the potential to tax long-term capital gains and qualified dividend income at ordinary income tax rates for taxpayers whose income exceeds $1,000,000.

Married structure

This would likely go into effect in 2022, but there is some concern that it may be made retroactive to the date of announcement – April 28, 2021.

Any of these changes on their own would likely require a review of current estate planning, beneficiary designations, trust structures, etc. When there are this many substantial changes being proposed at one time, it becomes imperative to touch base with your trusted advisors and make sure that you are prepared for whatever may come. We are experiencing a massive reversal of the trend of the last 40 years, which was a steady and sometimes substantial progression of higher Estate Tax exemption levels and lower Estate Tax rates. Many of those now in the crosshairs of this tax were able to save, invest, or grow their business over the past decades as the Estate Tax Exemption rose along with the value of their estate. The rising exemption may have made it unnecessary to implement advanced, or even basic tax planning techniques. We appear to be on the precipice of reversing this trend, and it is time to soberly consider its potential costs.

If the proposed changes are revisited and approved suddenly, during the closing days of 2021, it will be too late to use many of the planning tools that are currently available (and may be grandfathered, if executed prior to the changes being ratified). The dramatic drop from $23,400,000 for a married couple ($11,700,000 single) down to $7,000,000 ($3,500,000 single), especially when paired with an elimination of the step-up in cost basis, will significantly expand the number of taxpayers affected by the Estate Tax. The clock is ticking. Those with an estate likely to exceed the proposed thresholds would do well to make preparations before the storm.

Nottingham Advisors offers both institutional and individual clients experience, sophistication, and professionalism when helping them achieve their goals. With over 40 years of serving Western New York and clients in more than 30 states, Nottingham tailors each solution to fit the specific needs of each client.

For more information about Nottingham’s offerings, visit www.nottingham.flywheelstaging.com or call 716-633-3800.

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This article has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.
Nottingham Advisors, Inc. (“Nottingham”) is an SEC registered investment adviser with its principal place of business in the State of New York. Registration does not imply a certain level of skill or training. For information pertaining to the registration status of Nottingham, as well as its fees and services, please refer to our disclosure statement as asset forth on Form ADV, available upon request or via the Investment Adviser Public Disclosure website (www.adviserinfo.sec.gov). The information contained herein should not be construed as personalized investment advice or a solicitation to buy or sell any security. Investing in the stock market involves the risk of loss, including loss of principal invested, and may not be suitable for all investors.
Past performance is no guarantee of future results. This material contains certain forward-looking statements which indicate future possibilities. Actual results may differ materially from the expectations portrayed in such forward-looking statements. As such, there is no guarantee that any views and opinions expressed in this material will come to pass. Additionally, this material contains information derived from third party sources. Although we believe these sources to be reliable, we make no representations as to the accuracy of any information prepared by any unaffiliated third party incorporated herein, and take no responsibility therefore.
All expressions of opinion reflect the judgment of the authors as of the date of publication and are subject to change without prior notice. Investing in the stock market involves gains and losses and may not be suitable for all investors. Past performance is no guarantee of future results.
or additional information about Nottingham, including fees and services, send for our Disclosure Brochure, Part 2A or Wrap Brochure, Part 2A Appendix 1 of our Form ADV using the contact information herein.

Written by: Matthew J. Krajna

With the reopening of the U.S. economy fully underway, pent-up demand has far outstripped COVID-related supply shortages of most major goods causing prices to surge in nearly all categories. Couple that with a labor shortage that remains stubbornly persistent and consumers are facing price increases from multiple fronts. Record low-interest rates and high levels of personal savings have created a backdrop that clearly stokes fears of an inflation problem.

Last week’s Federal Open Market Committee (FOMC) meeting press conference Fed Chair Jay Powel upgraded the Committee’s view of the economy. Gross Domestic Product (GDP) in the U.S. is now expected to rise +7.0% this year, up from +6.5% prior.

Inflation, as measured by the Personal Consumption Expenditure (PCE) Index is now set to rise 3.0% in 2021, up from 2.4% prior. Even as FOMC projections see the unemployment rate falling, it’s likely going to be impacted by an estimated 2.6 million retirements during the pandemic, which is more than one-third of the 7.6 million jobs that were lost. Put differently, as the Federal Reserve sees the unemployment rate falling to 4.5% by year-end (down from 5.8% last month) wage pressures may persist, adding fuel to the inflationary fire impacting consumers. The median dot projects that FOMC members see the benchmark interest rate to rise to 0.60% from 0.00% by the end of 2023, on the back of above-trend inflation and the economic output gap closing.

For clients and advisors looking for an inflation hedge, there are various tilts that one can make to their investment portfolio: adding commodities, inflation-protected bonds, real assets, etc. For those looking for a one-stop shop, consider the Nottingham Advisors Real Return strategy.

Nottingham’s Real Return strategy seeks to deliver positive real returns over a business cycle, targeting +300bps above the Consumer Price Index (CPI) through dedicated exposures to Equities, Commodities, Fixed Income, and Alternatives via exchange-traded funds (ETFs). This four-quadrant approach incorporates both strategic and tactical allocations to assets that may hedge inflation, provide a pass-through mechanism, or have historically performed well during bouts of rising prices. Nottingham’s Investment Policy Committee (IPC) is tasked with over or underweighting each of the four quadrants, and selecting the appropriate allocations within each.

  • Equities – From a strategic standpoint, stocks have traditionally served as an ideal inflation hedge, with companies able to pass on price increases to consumers. Companies growing dividends at a rate above inflation have historically been attractive, as have value-oriented sectors that tend to perform well when the economic backdrop is favorable and interest rates are rising. Tactically speaking, companies that are able to pass along price increases to consumers while maintaining or expanding margins may also perform well (i.e. Homebuilders), and represent a timely example of a case in which the builders themselves see costs being pushed to buyers while their profit margins expand.
  • Commodities – Intuitively, commodities tend to perform well in inflationary environments as prices are increasing due to demand and a weaker base currency. For most commodities, their base price is in U.S. Dollars, and as inflation erodes the value of the base currency, prices tend to adjust accordingly.
    • In the current boom economy, both a surge in demand and expectations for inflation to climb further have led to a surge in all types of commodities, from agriculture to energy and precious and industrial metals. Investors can gain exposure to commodities primarily in two ways: to the commodity directly (most ETFs hold futures contracts offering exposure to broad commodities) or through select equities (i.e. miners, pipelines, agribusinesses, upstream natural resource producers, etc.).
  • Fixed Income – Historically speaking, floating rate bonds with resetting coupons are the ideal type of bond to own when rates are going up (price and yield move inversely with each other) whereas an investor would otherwise be stuck with a fixed rate bond whose value may erode with rising rates. Treasury inflation-protected securities (TIPS) have also been a go-to source of purchasing power protection in lieu of their fixed-rate counterparts.
  • Alternatives – These types of investments come in many shapes and sizes, and Nottingham’s IPC primarily focuses on traditional alternatives (as opposed to alternative strategies) such as Real Estate that tends to have inflation escalators built into long-term contracts with tenants. Tactically, the IPC has favored growth REITs such as Industrial REIT companies involved in warehousing and logistics that both benefit from a secular trend towards e-commerce and a built-in inflation pass-through.

Nottingham’s Real Return strategy can be thought of as an all-weather type strategy fit for a standalone portfolio allocation or as a “sleeve” in a larger allocation where the underlying assets are fixed (i.e. traditional bond portfolio). Given its unique four-quadrant approach and strategic-tactical construct, the Real Return strategy is both dynamic and flexible enough to adapt to current market conditions and prepare for any coming inflation spikes.

Nottingham Advisors offers both institutional and individual clients experience, sophistication, and professionalism when helping them achieve their goals. With over 40 years of serving Western New York and clients in more than 30 states, Nottingham tailors each solution to fit the specific needs of each client.

For more information about Nottingham’s offerings, visit www.nottinghamadvisors.com or call 716-633-3800.

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Nottingham Advisors, Inc. (“Nottingham”) is an SEC registered investment adviser with its principal place of business in the State of New York.  Registration does not imply a certain level of skill or training. For information pertaining to the registration status of Nottingham, as well as its fees and services, please refer to our disclosure statement as asset forth on Form ADV, available upon request or via the Investment Adviser Public Disclosure website (www.adviserinfo.sec.gov). The information contained herein should not be construed as personalized investment advice or a solicitation to buy or sell any security. Investing in the stock market involves the risk of loss, including loss of principal invested, and may not be suitable for all investors. Past performance is no guarantee of future results. This material contains certain forward-looking statements which indicate future possibilities. Actual results may differ materially from the expectations portrayed in such forward-looking statements. As such, there is no guarantee that any views and opinions expressed in this material will come to pass. Additionally, this material contains information derived from third party sources. Although we believe these sources to be reliable, we make no representations as to the accuracy of any information prepared by any unaffiliated third party incorporated herein, and take no responsibility therefore. All expressions of opinion reflect the judgment of the authors as of the date of publication and are subject to change without prior notice.

Nottingham News

On the heels of our latest CIO Letter, Transitory, the Federal Reserve’s Federal Open Market Committee concluded its latest policy meeting today with no change to short-term interest rates. The Fed will continue buying $120 billion of Treasury and mortgage-backed securities per month. While acknowledging the recent rise in inflation, once again the term transitory was used to describe the current rise in prices. References continue to be made to the pandemic and the risks to the economy that a resurgence would pose, clearly aligning future economic prospects with the path of the virus. Lastly, the FOMC reiterated its tolerance for above-target inflation, with the goal of realizing once again “maximum employment”.

The current Fed Dot Plots show the potential for a rate hike in late 2022, followed by one or two more in 2023. Monetary policy continues to be highly accommodative at this point, and should remain a tail-wind for risk assets for the near future. Both bonds and stocks initially sold off on the announcement, but quickly recovered some of their declines.

Please reach out to Nottingham Advisors with your questions or comments.

Read the newsletter – Transitory

Written by: Matthew J. Krajna, CFA

The state of the housing market nationwide can be best described as nothing short of robust.  Demand remains intense, and supply remains, well, in short supply.  According to the National Association of Homebuilders (NAHB), homebuilder sentiment hit 83 in May, remaining elevated at above-average levels.  Each of the past nine months has shown readings above 80, after hitting a record high of 90 back in November. Traffic also remains robust, with the Traffic sub-index hitting 73, also remaining elevated, with eight of the past nine months posting readings above 70.  Readings above 50 signal builders view conditions as favorable. Average monthly inventory stands at 2.4 months’ worth of supply according to the National Association of Realtors, not far off of the record low of 1.9 months hit in December, down from 4.2 months in March 2020.  These dynamics have led to higher prices, with existing home sales rising +19.1% year over year in April, with an average selling price of $341,600. Homes are selling at a break-neck pace, with the typical home sold last month spending barely 17 days on the market.

Stimulus checks and pent-up savings continue to bode well for the entire housing-related supply chain as homeowners continue to reinvest in their homes, both with added savings and stimulus, as well as for prospects of higher home values. Positive dynamics stem from more than just supply and demand imbalances.  Low-interest rates should continue to persist for some time, even if they creep up slightly.  According to Freddie Mac, the latest 30-year fixed-rate mortgage rate of 3.0% remained below the pre-pandemic high of 3.72% on January 2, 2020.  Even if rates were to rise 0.75%, they would be just getting back to their pre-COVID highs.

mortgage rates remain below the pre-pandemic high
Source: Nerdwallet, https://www.nerdwallet.com/blog/mortgages/current-interest-rates/; Data shown from 06/2020 to 03/2021

A broad measure of housing, the S&P Homebuilders Select Industry Index has been a strong performer year to date, handily outpacing the S&P 500.  As of May 19. 2021, the S&P Homebuilders Select Industry Index ETF had returned +26.22% versus +10.25% for the S&P 500 ETF. Strength in the Homebuilder Index has been broad-based, coming from all sub-industry groups.

S&P homebuilders index sub-industry weights
Source: SSGA, Nottingham Advisors, May 19, 2021

 

With quarterly earnings season nearing a close, we’ve effectively heard from the entire supply chain within the Homebuilding ecosystem.  Demand remains robust for inputs (i.e. home furnishings, appliances, materials, etc.) and outputs (i.e. new homes). Inflationary pressures are generally being passed along to consumers, through higher prices and smaller square footage of new homes. Many companies are expecting margin expansion this year due to strong demand, lesser COVID related costs, and operating leverage. As such, we’ve seen a significant amount of index constituents increase their revenue and earnings per share (EPS) guidance for 2021, which continues to bode well for the entire homebuilding related category. Couple this with relatively attractive valuations and strong secular tailwinds, and homebuilding remains a favorable tactical exposure in client portfolios, not to mention a potential inflation hedge moving forward.

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Source: Nottingham Advisors, Bloomberg, SSGA. S&P 500 ETF (ticker: SPY) and Homebuilders Select Industry ETF (ticker: XHB).
This information is included for informational purposes only and does not reflect past recommendations by Nottingham or actual trading in any individual clients’ accounts. Nottingham makes no representation as to whether investment in any security or strategy mentioned herein was profitable or would have been profitable for any person in the past.
This blog does not constitute current recommendations by Nottingham for any individual client or prospective client to buy or sell any security or engage in a particular investment strategy and Nottingham makes no representation as to whether investment in any security or strategy mentioned herein will prove profitable in the future.​
All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. ​ Nothing in this piece should be interpreted as personalized investment advice.

As the social responsibilities of corporations receive more attention, and stakeholders hold companies liable for any negative externalities borne by society, business executives have begun paying more attention to outside concerns over how their companies should be run.

Read the full article ESG Highlights- September 2019

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Nottingham’s investment philosophy is designed to deliver superior risk-adjusted returns over a business cycle when compared to a strategy’s respective benchmark. Our philosophy has been consistently implemented through a core-satellite, or strategic-tactical approach to portfolio
construction.

Read the full article Reducing Portfolio Volatility and Adding Return Using Global Minimum Volatility Strategies

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Nottingham Advisors’, Tim Calkins, Director of Fixed Income, was a panelist with S&P Dow Jones Indices regarding the positive performance in ESG strategies and more specifically, green bonds. Watch the full video below:

Going Green Without Seeing Red

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Written by Portfolio Manager Matthew Krajna, Select Managers review is issued to provide color to both strategy and individual fund performance and highlight any portfolio changes that have been made throughout the period.

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Below you will find Nottingham’s annual privacy letter for 2018.

Annual Letter 2018

Privacy Letter 2018