- Professional Services Companies
- Trading Companies
- Investment Companies
- Holding Companies
- Dot Com Companies
- Property Owning Companies
- Shipping Companies
- Employment Companies
- Intellectual Property & Royalty Companies
- Asset Protection Companies
Friday, 30 December 2016
When we talk about offshore financial companies, the term conjures up an image of huge, shadowy financial monoliths investing funds without any transparency. These types of companies also exist. e.g. many mutual funds and hedge funds whose investors prefer 'foreign country' investments.
But ordinary investors like us too can form offshore investing companies of relatively smaller size to fulfill our more mundane everyday needs. Or we can invest, via our offshore banker, into offshore investing companies who operate investment funds.
There are various uses:
Individuals, e.g. Consultants, IT professionals, engineers, designers, authors and entertainers operating outside their resident country can benefit significantly from using an Offshore Company. The offshore company shows the individual as a company employee and gets a fee for the services rendered by the 'employee' [owner]. This fee is received and saved tax free. The individual can then take the payment as he or she wishes to minimize their taxes.
Import/Export and general trading companies’ activities are also well suited for the structure of Offshore Companies. The Offshore Company takes orders from the supplier and has the goods delivered directly to the customer. It does the invoicing to the customer and saves the difference in a tax free country. E.g. Products from China to Kenya could be invoiced by a Seychelles offshore incorporation and the profits retained there.
Individuals use offshore investment companies to the n buy mutual funds, shares, bonds, property, jewellery and precious metals. Sometimes they will also use these companies to trade in currency, equities and or bonds either via the internet or through managed funds run by banks and financial institutions. The very rich will also have different offshore investing companies for different class of assets; for different countries or by different types of investments.
The diversification hedges the risk. But also in cases where capital gains taxes are levied, e.g in property or equity, sometimes it is cheaper to sell the company rather than the individual asset itself.
Offshore companies can also be used to own and fund operating companies in different countries. They could also be joint venture partners or the 'promoter' of publicly quoted companies. Mauritius is well suited as a country for investing companies because of its favourable double tax treaties.
The internet has made the cost of business entry very low and consequently the legal protection of the company's assets, both physical and intellectual, that much easier. Dot com companies now use this flexibility to develop different software projects in different offshore companies to invite different investors and to keep the flexibility of raising funds separately for different projects depending on the project's success. Both Mauritius and Seychelles have Protected Cell Company [PCC] structures available for just this kind of need.
As discussed earlier, owning property in an offshore company saves you the capital gains taxes that may be levied at the time of the property's sale, which are avoided by selling the company instead of the property. Other important advantages are the legal avoidance of inheritance and other transfer taxes.
The use of Offshore investing companies to own or charter merchant ships and pleasure craft is very common worldwide. Shipping companies accumulate profits in tax free offshore jurisdictions and, if each ship is placed in a separate Offshore Company, it can obtain significant asset protection by isolating liabilities of each individual ship.
Multinational companies use offshore investing companies to employ expatriate staff who are deployed in different tax jurisdictions around the world. To facilitate transfers, reduce the employee's taxes and administer benefits easily an offshore company employment is preferred. Working on assignments throughout the world.
Offshore investing companies are being seen as vehicles to own Intellectual Property and royalties received for software, technology rights, music, literature, patents, trademarks and copyrights, franchising, and brands. These companies are in the form of trusts or foundations.
It is estimated that a professional in the US can be expected to be sued every 3 years! And that more than 90% of the world’s lawsuits are filed in the US. Amazing statistics! If you have an income or assets of more than US$ 100,000, you should seriously consider offshore investing companies!
Most offshore jurisdictions require that for a law suit, a lawyer must be hired and paid up front before a suit can be filed, thus keeping frivolous law suits away. Often a substantial bank bond has to be placed with the government, to even implement a lawsuit. It can also (take years of waiting) to get into court in some offshore jurisdictions.
If you have substantial liquid assets you should consider a Trust which would own the offshore company. This will provide a greater degree of protection, at the least expense. However, we should remember that this structure is for asset protection, not for tax savings and so the focus should be maintained.
Simply put, any country other than the one where you live could be considered "offshore". Providing you are from outside the jurisdiction that you choose (both as a citizen or a resident) you can obtain some special financial or asset protection considerations. If you live in the US, other countries are offshore. If you live in the UK, other countries and the US are offshore.
More often than not however, "offshore" is used to describe a nation where there are either no taxes or low taxes for foreigners either personal or corporate. For anyone except Americans, the US can be an offshore haven of value. Banking, investment (trading/brokerage accounts) and financial activity are included in this. This includes real estate ownership, stocks and securities and bonds.
True, offshore havens have created a unique legal and tax climate for foreign individuals and businesses. They cater specifically to them. More than half the world's wealth resides in such asset havens. Financial privacy, a stable legal climate and realistic regulations are the hallmarks of these jurisdictions.
Learn about real asset investing, retirement security, offshore diversification, and many other topics.
Daniel Kalenov, Global Diversified Partners can help you for your retirement savings plan. Global Diversified Partners are San Diego, CA financial planners who can develop a retirement savings plan for you. We are prepared to help you in the investments you want to pursue. With our help, we can help you safely plan your retirement income. Let us get you started right, for your offshore investment plan.
To get more details, please visit here: http://www.globaldiversifiedpartners.com/global-diversified/
Tuesday, 27 December 2016
When looking at a commercial property of any type you need to spend time on the financial aspects of the property before you form an opinion about the price that you think that you can achieve. The financial aspects of the property can have a major impact on the price and or the interest of purchasers. The financial aspects of a building or a property can impact the asset for many years and for this reason must be analysed and identified.
We have detailed some of the major aspects of financial concern in a property purchase or sale scenario. Whilst these are not the only categories of activity and concern, they are the major ones in most circumstances.
We at Daniel Kalenov Global Diversified Partners recommend that you create a checklist from these items so that your property review and inspection process is suitably enhanced and professional.
The Asset Schedules: The property will contain many fixed and moveable assets. These will normally be detailed on the asset register. A well maintained commercial property will have an up to date asset register for your review. Obtaining the asset register at the early stage of sale consideration is productive as it will tell you in detail what you are selling and later become part of the due diligence process.
Bank and Personal Guarantees: An investment property comprises leases and other documents which support tenant occupancy. A normal leasing process would involve and create some form of guarantee to be provided by the tenant to the landlord for the duration of the lease. It is important that this guarantee has both strength and substance to reimburse the landlord in situations where the tenant defaults under the terms of the lease. At the time of property sale, these guarantee documents should have some form of ability to be transferred or re-issued to the incoming purchaser. This process is called an assignment of the guarantees. You should consult with the landlord's solicitor to identify the types of guarantees involved and the ease in which this can be achieved at time of sale.
Capital Expenditure: Major items of plant and equipment which are replaced in a commercial property are usually regarded as capital expenditure and are separately itemised for the purposes of taxation and depreciation over a period of time. Taxation laws in your location will stipulate the depreciation terms as they apply to different types of capital expenditure. For example, a computer that is purchased for the building control system will depreciate far quicker than the air handling unit which was purchased for the air conditioning plant. Well maintained property records will include a detailed capital expenditure register and the date at which the capital item was purchased. Purchasers to the property will be interested in the depreciation that this register provides against the cash flow in coming years.
Taxation and GST: Every country and property location has its own unique taxation laws and requirements relating to property and particularly investment property. In the sale process, it is important to understand that these matters have been correctly handled and are up to date. It is sometimes necessary to view the net returns for the property for the last few years that were applied to the taxation statements and lodgement process. You can also seek written confirmation from the owner of the property that all taxation matters are up to date.
Income and Rent Analysis: The income for the property is a reflection of the leases and occupancy licences therein. It is essential to understand that the rent has been collected in accordance with the leases or licences and that all rental matters are up to date. Part of this process will also involve the checking of the rent review profile and the expiry profile of all leases. A property with a volatile leases or leases that are soon to expire is likely to impact the price or the buyer interest. When reviewing tenant occupancy against leases, you should review the original documents and cross reference this to the tenancy schedule and any discussions or information provided by the landlord.
Independent Valuation: Many property owners will obtain a valuation regularly in support of their property financing package. It is not unusual for such valuations to occur annually. Importantly they are done by a qualified and registered valuer. If you view this documentation and take it into account in the pricing process for the property, it is wise to consider the true independence of the valuation when it was done and its relevance to the current market. Some valuations for financing purposes may not be in parity with the existing market conditions. It pays to sometimes seek a true independent valuation at the time of sale or in preparation for sale.
Land tax issues: Property land tax has a direct impact on the investment aspects of commercial real estate. In different locations, the recovery and payment of land tax is impacted uniquely by local legislation. In some circumstances the land tax can or cannot be recovered from the tenants within the property. This will have immediate impact on the bottom line and net return from the property; this then impacts the price. Consulting with the financial adviser for the owner of the property, or the taxation office, will achieve clarity in this taxation impact. Given that most agents and brokers are not taxation experts, you should involve other professional taxation people as appropriate.
Lease disputes: Rarely is there a property that does not have an existing lease dispute or has been impacted by a previous lease dispute. For this reason it pays to question the matters of lease dispute and resolution. If in doubt, seek a copy of correspondence and any subsequent agreement between the appropriate parties. Unresolved lease disputes can jeopardise or slow the process of property sale.
Mortgaged interests: Most commercial real estate properties will have a mortgage of some type to a financier. When a mortgage exists, it is necessary to understand how it will be handled or discharged in the process of sale. The client should consult with the mortgagee to clarify these matters for you. In a situation of distressed properties, the sale of the property may need to realise a particular price before clear title can be achieved.
Operational expenditure: The running of a commercial property will involve the operational expenditure attributed to running costs. Most of properties of particular types in the same location will have similar operational expenditure. If however a property has excessive operational expenditure which is above the averages in the area, then the property is likely to be difficult to sell. Most purchasers of properties understand the averages of property expenditure deemed to be realistic for each property. This also says that real estate agents and brokers should be well aware of the expenditure averages and analysis process that should apply in this situation. Operational expenditure is analysed on the basis of $'s per m2 or $'s per ft2 (depending on your location, monetary base, and country)
Statutory charges: These are commonly referred to as rates and taxes. These will involve matters such as water rates, land tax, council rates, and any other form of charge which is raised by the statutory bodies. Importantly the charges so raised must be analysed for parity to similar properties in the same region. Part of the rating process involves a statutory valuation of the land on which the building and property is located. Whilst some property owners like to think that their valuation is high and justifiable (and therefore gives substance to the sale price of the property), it is this valuation that is the foundation for the charging and payment of statutory charges. The astute property investor will always question this statutory valuation undertaken by rating bodies in an endeavour to restrict or lessen the amount of statutory rates and charges paid each year.
Rent reviews: A significant concern in the sale of a property is the size and stability of future rent reviews. It is the rent reviews which will underpin the cash flow and hence the attractiveness of the property to purchasers. It is essential that the real estate broker or agent read all of the leases, before any assessment of price or method of sale is given. It is quite possible that the rent reviews projected and detailed in the leases can either hinder or attract purchasers to the property.
Rent arrears: Existing rent arrears should be identified with the owner of a property. Any matters of associated legal pursuit should also be identified. It is possible that the property has had a history of rent arrears and instability. Look for these matters and question the cash flow stability. A history of financial performance from the property over the last few years is the best way to achieve this.
Current building budget: This will involve a budget of income and expenditure as it applies to the building currently in the existing financial year. A good building budget will be written and supported by sound property strategy, projections, and controls. At the time of any potential property sale, it is important to understand that the current financial performance is in line with the expected building budget. If there are any shortcomings or overflows, it is necessary to clarify the reasons for such. If you do not do this, the purchaser of the property will.
The side agreements or deeds: Property occupancy and usage can involve supplementary side agreements and deeds. This can be with tenants or neighbouring properties. Documents of this nature will have impact in the sale even though they may not be registered on the title of the property that you are to sell. Documents of this nature will usually be supported by aspects of common law. If in any such arrangements exist, you must seek further detail and clarity as to how they will be handled at the time of sale. One of the common events here is the existence of rental incentives provided to tenants at the commencement of the lease. When these situations exist, the most common method of resolve is the discharging of the arrangement by the landlord prior to settlement. This can become a term of the contract.
Sinking funds: It is not uncommon for sinking funds to exist on larger properties. The fund is essentially established to set aside money to cover the cost of major items of repairs and maintenance. This would not normally include items of a capital nature. As an example, sinking funds may be used to cover the cost of painting the exterior of a large building such as a shopping centre every five years. If a sinking fund exists, it is important to understand how it will be handled at the time of sale. Consultation with the client's solicitor and accountant is essential to the process.
Taxation depreciation schedules: The property will have a taxation depreciation schedule. When correctly maintained, these schedules have the ability to lessen the net property income in forthcoming years. This is an immediate taxation benefit to the purchaser of the property who will assume the depreciation schedule as part of the sale and settlement. As the broker or agent in the sale you should check the existence of such documentation and identify what benefits it brings to the sale process. A well constructed and detailed depreciation schedule will make the property sale more attractive.
Short term leases: Many properties have short term leases or casual occupancy active at any point in time. It is vital to know the mechanism under which this occupancy occurs and how it will be terminated. You do not want a short-term occupancy to jeopardise the stability and processes of the sale.
Un-documented lease occupancy: Some may call this a casual lease; however a casual lease can create concern and uncertainty in the process of sale. Some tenants may claim a long-term occupancy from the existence of a previous casual lease arrangement with the landlord. Claims of this type must naturally satisfy the requirements of law to be sustained or upheld by the courts; however you should be cautious in such circumstances given that it can slow down or even jeopardise the sale process.
Warranties and guarantees: When properties are constructed, the normal process of warranties and performance guarantees apply from the construction process. At the time of sale, you need to know if any such matters apply or exist. Copy of the documentation is essential. Further to this, in an existing building where recent fit out activity has created newly constructed premises, it is likely that warranties and guarantees exist for the tenancy construction. These will transfer to the new owner of the property in most circumstances however the documentation to allow this to occur must be suitably constructed. This is a matter for the solicitor acting for the client.
Utilities costs and supply: Every commercial property will be supported by the supply of water, gas, electricity, and communication systems. The process of supply needs to be understood together with the cost of the process. Obtaining copies of recent accounts for those services will help you here. It is possible that some utilities will be supplied direct to the tenants and some others will be supplied direct to the building owner. Any differences in supply should be identified and documented. The costs of supply should be compared to the averages of other properties in the area.
This brings to an end the matters relating to financial due diligence. These are the major issues that apply in the sale of commercial real estate; however you should look for any other items given that each property is unique in its performance and financial structure.
To learn about real asset investing, retirement security, offshore diversification, and many other topics to shape your future, consult Daniel Kalenov, Global Diversified Partners.
Daniel Kalenov, Global Diversified Partners has a global focus and we're opportunistic, but prudent. We help people take control of their financial well being by educating them on the benefits of investing in tangible assets and by altering their perception of what “smart investing” means.
Thursday, 22 December 2016
Retirement issues require a different finance investment strategy than was necessary in your working years, but that doesn't mean that the most conservative strategy is automatically always best. Below are listed some important steps to the best investment suggested by Daniel Kalenov a financial planner and Principal Fund Manager of Global Diversified Partners, LLC:
While a person is in the accumulation stage of their working career, personal finances are increasing and human capital potential is high, so a financial planner will assess risk tolerance, the time frame, and then usually create a static portfolio asset allocation together with a method of finance investment to rebalance finances on a periodic basis.
Also, an ongoing saving and investment plan is primed to assist a client in achieving an important financial life benchmark such as creating an inflation-adjust income stream that will continue throughout a 20-30 year retirement period.
It's normal for a financial professional, dependent upon individual circumstances, to reduce portfolio equate exposure as a retirement date nears and increase the allocation to other conservative selections like fixed income (bonds), cash and ultra-short duration bond holdings to be used as reserve for withdrawals.
At first glance, the assets management strategy seems to be effective; it's correct to shield a retiree from future (or current) unfavorable stock market conditions and the resulting time needed to recover from an unfavorable sequence of market returns, most especially in the case of systematic portfolio withdrawals.
Just be aware that the common tendency for planners to maintain a reduced exposure to equities as the retiree ages can turn out to be an error per the analysis.
Reducing Equity Exposure
Financial planners do lean toward decreasing equity exposure in retirement portfolios as life expectancies and time frames become shorter. This strategy of employing a declining equity glide path can generate worse results than maintaining a static, reduced allocation to stocks.
Planners don't expect retirees to have to cope with the upset and loss of money which can occur with an aggressive allocation to stocks so they choose this route instead. Retirees feel vulnerable because they need to rely on the portfolio to maintain living expenses.
What should be happening instead?
1. Decrease stock exposure the first year in retirement.
Instead of focusing on the stock market, concentrate on the retiree's emotional state which can change as they move from an accumulation to portfolio distribution frame of mind. Special attention should be paid to the issues that create uncertainty, paying special notice to household basics.
2. As confidence grows, increase equities.
Naturally it depends on a person's circumstances, coverage of household expenses and how the portfolio has progressed, but as assets management helps the portfolio grow, equities should be increased during year three of retirement.
3. Learn how to maximize Social Security.
Remember that Social Security can be considered part of a fixed income strategy, thus letting the individual expand their allocation to stocks throughout retirement.
4. Life expectancy.
Individuals in good health and with long life expectancies in their families have additional time to weather out stock market volatility.
5. Stay aware of portfolio withdrawal rate.
Keep in mind that an unfortunate series of portfolio losses during the first half of retirement might not seem so bad, but can lead to a fast, unrecoverable depletion of money in the second half. So do a portfolio withdrawal rate checkup every two years.
Daniel Kalenov, Global Diversified Partners offer information on retirement planning including tips on setting retirement goals, and professional retirement planning services to help you make the best of your financial planning for retirement. Let us get you started right, for your retirement money at Retirement savings plan.
Learn more about real asset investing, retirement security, offshore diversification, and many other topics you can use to shape your future, please visit here: https://danielkalenovglobaldiversified.wordpress.com
Monday, 19 December 2016
A key step to finding project financing is being able to present your idea in a way that it attracts the interest of investors.
Your first step is to write in detail what your project is about. By doing this, you will save yourself money and time. Project financing is only possible when the investors have a clear picture of what your project is about. Evaluate your ideas thoroughly and objectively. Additionally, estimate how the funds will be investment and make return predictions. You will be able to attract project financing only when you have your priorities clear.
The issue of the duration of the project financing is another concern. We at Global Diversified Partners always recommend our clients the creation of a business plan that has detailed projections for income, returns and expenses. It is important to distinguish investment needs from operation needs.
Some long term project financing needs are (7 years or more): Purchase of land or buildings, construction, extension, renovation of existing buildings, offices, specific installations like roads, networks, distribution, etc.
Project funding may also be used for investments intended for less than 7 years. In this category we do not include the purchase of long term assets. We are talking about small modification to existing property like heating or air condition systems. Also the purchase of vehicles, patents, stocks or partnerships
Examples of investments with durations shorter than one year are: Inventory of materials or finished goods, cost of software acquisition, costs of research and development, costs of training, publishing catalogs, etc.
Depending on your project and your business plan, your project funding will be long term, medium term or short term.
Depending on the financial needs of your project, you can choose to use your own funds to reduce the amount of project funding needed from external sources. You can also choose use to request funding from your friends and family. If your business is already running, you can choose to use the net income from last year to fund next year's operations.
Long term and medium term investments may be up to 20 years. Under this category we at Daniel Kalenov Global Diversified Partners can find you investments like the acquisition of long term assets or payment to have rights over them.
Short term investments are generally for less than 1 year. They are related to the acquisition of short term assets, or services like factoring, or financial commitments like loans or bank guarantees.
Daniel Kalenov, Global Diversified Partners help people take control of their financial well being by educating them on the benefits of investing in tangible assets and by altering their perception of what “smart investing” means. For the best consultation call 619-500-4235 today!
Learn more about real asset investing, retirement security, offshore diversification, and many other topics, please visit here: http://globaldiversifiedpartners.strikingly.com/
Saturday, 26 November 2016
Options trading sometimes seem cloudy in secrecy, when really it is a straightforward method of investment, being employed by big expenditure companies and by individuals. Sometimes, the world media takes pleasure in growing the fear because a wayward worker has made secret and stupid investments utilizing derivatives such as options, and thereby dropped a massive amount of cash.
This kind of press exposure has resulted in trading options having a poor status. The reality is that most honest buyers use options as a means of relieving risk, not increasing it.
How does this work? A good investment company, say, may have purchased a big number of stocks in a particular business for its clients.
If the market crashes for some reason or any other, this will have an effect on the prices of this company's stocks, even if the company is fundamentally sound. Most purchasers will attempt to sell the shares as soon as possible, but often cannot find a purchaser to stop the carnage.
Nevertheless, if the investment firm buys a 'put' contract on the shares that it holds, this gives it a solid guarantee that they'll be able to sell the shares at a certain fixed cost, even if those shares are investing much lower at the time. In effect, the firm is purchasing a kind of short term insurance to ensure that its investment is protected to a particular amount. In this way, it protects its customers from heavy losses, and at one time guarantees its status.
On the other hand, say a major company plans on creating a new widget in the future. The anticipations can make quite a lot of interest in the stock, and stock prices develop as a result.
In this case, an investment firm may want to purchase up large blocks of stock for its purchasers, but at the greatest achievable price. So, before the madness starts, the company may purchase the right to purchase the stock in the future at a set cost (this is called a 'Call Option' contract).
This then is a guaranteed cost that it can pass on to their clients. Normally, if the stock has increased in cost over that period, the clients will gain from the foresight of the expenditure company, and will make an immediate income.
We at Global Diversified Partners, partner with your to re-claim your decision making, and ultimately your future.
Our goal is to be the investment firm of choice for individuals seeking to diversify their portfolios into tangible assets, not just paper ones. Daniel Kalenov, Global Diversified Partners has a global focus and we're opportunistic, but prudent. We help people take control of their financial well being by educating them on the benefits of investing in tangible assets and by altering their perception of what “smart investing” means.
To know more please visit: http://globaldiversified.wixsite.com/blog/about
Monday, 21 November 2016
Ever wonder how to become a financial advisor? A key part in advisor training is to complete a mutual fund education which provides a clear understanding of the thought processes of fund managers. Since the relationship between advisors and managers is very important, understanding this psychological maneuvering helps advisors to accurately plan their connections with managers. Investors dealing with fund managers must be aware that some funds come with incentive fees, which are offered to the manager of a mutual fund based upon performance.
In theory, incentive fees for active fund managers should result in better fund returns. While some studies reflect this belief, others indicate that such incentives lead to additional risk. For those learning how to become a financial advisor, an incentive fee might encourage the manager to take more risks than he or she otherwise would in pursuit of maximum return. The backward-looking nature of performance fees is one reason many investors object to them, as they are unsure of how daring the manager will be in his or her choices.
A second advantage of a mutual fund education is that advisors are informed on the specifics of various fund categories. One popular type is managed-payout funds, where the main objective is to provide a steady income stream without incurring the costs of variable annuities with living benefits. Some managed-payout funds tie their distributions to market interest rates, while others determine payouts based on historical returns. A large number of these funds make distributions from income and principal. Managed-payout funds generally invest in a sampling of the sponsoring firm's mutual funds. Some advisors view a managed-payout fund as just one of several building blocks that make up a client's retirement income (i.e., annuities, pensions, Social Security, etc.).
In addition to managed-payout funds, funds known as "go-anywhere" are also popular among advisors. These funds contain investments that can be spread throughout the world among various asset classes. One concern surrounding "go-anywhere" funds is that investors have no idea how the portfolio will change if the market suddenly changes, which means advisors do not know if such a fund will complement other investments in the client's portfolio. Some of these flexible funds focus on stocks; others shift between stocks, bonds, and cash, and some invest in assets ranging from private transactions and commodities to real estate, emerging markets and derivatives.
Relations between investors, advisors, and managers can be tricky. As of February 2011, new rules for money market funds had been put into effect. This means that the SEC releases monthly snapshots of money market funds' "shadow" prices that reflect the actual market value of fund holdings as opposed to the $1 NAV at which investors buy and sell shares. It is always a good idea for financial advisors to complete a mutual fund education in order to retain strong relationships with both investors and fund managers.
Daniel Kalenov, Global Diversified Partners has a global focus and we're opportunistic, but prudent. Each of our investors is a partner in the project and the key to a successful partnership is great communication. Global Diversified Partners investor outreach program is second to none. We saw a need in the marketplace for a down-to-earth, smart, accessible investment firm that finds great deals, treats clients like family, and puts the investor first. It’s that simple.
Wednesday, 16 November 2016
I'm not allergic to paper assets. To my mind there is nothing inherently evil about them - they serve a purpose, and when bought at the right price for the long term can provide very decent (even excellent) returns on investment. Ask Warren Buffet.
The rub, of course, is buying them at the right price. This has become incredibly difficult in recent years as the aftershock of post 2008 quantitative easing and near zero interest rate policies has seeped into equity and bond markets, inflating prices to levels that if not unsustainable are certainly unattractive.
Bill Gross, known as the "Bond King" and former manager of the PIMCO total return bond fund, the largest of its kind in the world, has voiced his opinion on the matter following a recent solid consumer spending report:
“Individual investors have little choice but look at real estate and gold given current bond yields, he said. “Bonds are not an asset, they’re a liability in a negative interest rate environment. Why would someone want to own them?”
The immediate thought is that it does not bode well when the guy who’s managed more money in the bond market than anyone alive publicly asserts that he thinks both bond and equity markets are overpriced.
For those unfamiliar with Gross however, it is worth noting that despite his outstanding long term record, he’s been touting that bonds are over-priced consistently for five years now.
The adage that "the market can stay irrational longer than you can stay solvent" proved accurate, as he was shown the door from PIMCO in 2014 to join the much smaller Janus group.
Whether or not Gross is right this time around, the reality is that if you're heavily invested in paper assets, particularly fixed income, you're potentially in a lot of trouble either way.
If he's right (which he will be eventually) then you stand to suffer considerable losses on your capital when the tide goes out.
If he's wrong (which is actually possible - Japan has wallowed with sub 1% bond yields for nearly 20 years), then you've actually got an even bigger problem, and it's a problem that could decimate the retirement planning of an entire generation.
Specifically, the problem is that retirement plans are almost universally modeled on an average future compounded return of approximately 7%. Gross, and countless other financial advisors argue that we now live in an age where we can't take that for granted.
There were nearly $25 trillion dollars in combined US retirement funds as of 2015, with the bulk (over 60%) in equity funds. The majority of the remainder is allocated to bond and money market funds, and other conservative options.
The issue is that as people age it is standard practice to shift the weighting from majority equities toward a more even allocation with bonds.
Although logical at the individual level (capital preservation and income take precedence over long term returns as we age), this screws everyone collectively when you've got an entire demographic bulge moving in the same direction.
Equities begin to slump as capital gets sucked away into less volatile, "safer" bond funds, while at the same time the money pouring into bonds forces yields down even lower than they already are.
It is difficult to see returns averaging 7% per year in this environment - equities cannot go up forever in the absence of earnings growth, and bond returns to date have been driven by the book value of longer term bonds rising as yields are bid down. These bonds will eventually mature, forcing funds to reinvest the principal at current, much lower market rates.
If, as Gross expects, we now live in a world where 4% is the new 7%, the compounding effect makes for an extraordinary gap between the already insufficient levels of retirement savings and what we can expect in the future.
A quick calculation tells us that $500,000 compounded at 7% for 20 years becomes $1,934,842. At 4% it becomes a meager $1,095,561 - little over half. These are nominal, non-inflation adjusted figures. Factoring inflation obviously makes things far worse.
Gross goes on to specifically suggest, almost surprisingly, that he favors real estate as a haven from this barren wasteland of low yields. It’s surprising because he has little to gain from talking up the real estate market and plenty to lose via redemptions out of his own Fund by talking down bonds.
Wall Street has not been asleep to the real estate idea, and large, class-A properties suitable for large REITs have already been bid down to absurd cap rates as low as 2.5% in some markets. Strip out the REIT's management fee (usually 2%), and you're again left with virtually no yield.
As smaller investors however, we have an advantage over the bloated institutions that currently subsist on cheap money and have little utility beyond extracting fees and commissions. We are agile. We are not liable to appease our boards. We are not slaves to quarterly earnings reports, and we need not worry about being fired by our superiors (unlike Gross).
Smaller investors are able to act independently and intelligently, moving into areas of opportunity and distress that larger actors cannot - or dare not - consider. We can attack smaller opportunities with greater yields, unconcerned about the need to seek assets and markets that can absorb billions of dollars. In short, against the big boys we may have less money individually, but we can make it work much, much harder.
If your financial planning has been based on an assumed 7% average compounded rate, as almost everyone's has, then the cold hard truth is that such returns must now be earned, not collected as a birthright. The market has for 8 years stubbornly refused to provide returns without prodigious quantities of cheap finance to fuel them.
Further, the returns on offer are almost entirely driven by capital growth, and achieving actual regular income without selling to capture it is near impossible. When money is cheap, the market doesn't care that you have it, and won't pay you to hold it.
Should such forced selling occur en masse, it creates a self reinforcing downward spiral that would ultimately restore value to asset prices and restore yields, but not before crushing the air from retirement portfolios. Catch 22.
What the market cares about now is finding new productive ways to deploy capital - and high yielding real estate is one area where the little guy has the upper hand. Real estate investors with specific market expertise are among the few that can reliably generate the returns they have planned for and are relying on.
If your portfolio has become bloated with paper and light on real assets (like real estate and gold), be sure to speak with your financial advisory team for some ideas to get back in balance.
Monday, 14 November 2016
Every investor worth their salt knows to protect their assets with a Limited Liability Company (LLC). Chances are, you’ve got one or more LLCs and are leveraging their accompanying tax advantages. You’re also well aware of the liability protection that an LLC provides. Like I said, you’re a smart investor.
But here’s something you may not know: LLCs come with Charging Order Protection. Even in an LLC, members’ assets are still potentially at risk from creditors and judgments. And let’s face it, successful businesses are claim magnets, especially if you have outstanding debts or judgments elsewhere.
The key point of Charging Order Protection is to protect your business and its assets from the debt of any of the LLC members. With it, a creditor of a member of an LLC cannot put a claim against the assets of the LLC, but can only obtain a charging order against distributions made to the member under judgment. This protects the assets of the LLC itself as well as its members.
However, a creditor cannot force the LLC to make a distribution to its members. This may leave the creditor with nothing from the LLC and gives the member under judgment a strong negotiating position to settle with the creditor for less than the whole debt. This last point, however, depends upon the situations of both the creditor and the member.
Say, for example, that the creditor is another individual that needs the proceeds of the settlement. She will likely be willing to settle the debt at a discount. On the other hand, if the creditor is a bank, the bank will likely not need to have the money in hand at any specific time and so may be less inclined to settle.
But what about the halt in distributions to the member(s) of the LLC? It’s true that a creditor can’t compel a distribution, but the member(s) may be reliant upon distribution for financial viability. In that instance, the possibility of discounting the debt will depend on who needs the money more.
Also, different states enforce the Charging Order with varying levels of vigor, so be sure to speak with your legal team about domiciling your LLC in the proper jurisdiction. Either way, the Charging Order is an essential component to protecting your assets and a key benefit to any properly structured LLC.
Daniel Kalenov, Global Diversified Partners goal is to be the investment firm of choice for individuals seeking to diversify their portfolios into tangible assets, not just paper ones. When it comes to your finances, if you don't know where you're going, any road will get your there.
Check out some of the other blogs at www.globaldiversifiedpartners.com/blog