There are some key changes that we all need to be aware of: advertising private companies for investment, California Municipal Bond Risks, Re-Setting Return Expectations.
Jumpstart Our Business Startups (JOBS)
You may soon be pitched to invest. Under this new rule starting in the fall, accredited investors (those with income at $200,000, or $300,000 who are married, or a net worth in excess of $1,000,000 excluding their homes) will be eligible to be pitched by hedge funds, private equity firms, and private start-up companies. The theory is that if money is poured into companies, that it will create jobs. Generally, the costs will be very high for entry, and the risk much greater. One crowd-funding site indicates that it will generally take about 20 percent of the funds raised. Other funds will need to be paid to attorneys, CPAs, and marketing efforts. One risk is that start-ups are generally far less sophisticated than a traditional public company in terms of financial and management expertise. Additionally, since these companies are not followed by analysts, the investor will be left to perform proper due diligence. While there may be an exception from time to time, generally, the accredited investor is about as suited to perform due diligence as the non-accredited investor. A proper discussion of due diligence would take at least two articles. And while there may be that needle in a haystack like an Apple or Microsoft, generally the high growth companies are those that fill a niche that has been demonstrated over multiple markets. That need is adequately handled by traditional capital markets. This is definitely a buyer beware. For an article in BBC Capital featuring Financial Fridays guests Andrea Murad (author), Michael Goodman, CPA/PFS, Ted Sarenski, CPA/PFS, and myself, click here: http://www.bbc.com/capital/story/20130712-fears-about-financial-advertising
California Municipal Bonds
Many here in Nevada may maintain a residency in California, or at least have some California municipal bonds in a portfolio or two. This marketplace has changed recently in California and across the nation due to long fought for changes to the accounting standards for municipalities. Quite simply, municipalities have not had to record the underfunded portion of their pension liabilities or health care liabilities. Consequently, it was identified during the last month that 30 cities in California are on the same pathway as Detroit on just their underfunded pension liabilities. The term being used is “Technical Insolvency.” The number of cities is sure to grow with the underfunded health care liabilities. And while municipalities may be dealing with this crisis, I am not personally aware of one that is. The current trend is to give investors about 10-20 cents on the dollar (Stockton), and try to seize performing assets and write them down (North Las Vegas is considering). As always, proper planning should be followed. For more information on assessing your state of readiness, click here.
Re-Setting Return Expectations
The party of lowering of interest rates during the last 30 years has ended. Not many see interest rates much lower than 1.5 percent in the future, where they are now 2.60 percent for a 10 year treasury. What does that mean for future returns with a stock market that has many sectors that are over-valued and low interest rates? As mentioned in the prior topic, the standards developed by CPAs on recording underfunded liabilities for pension funds also deals with this issue. The reality is that if interest rates stay the same, at around 2 percent, that means a lower long term rate of return on bonds than the 5 percent that we had in the past. If interest rates rise to 5 percent, we will have a lower rate of return on bonds for that period of time as we adjust. While we can’t be certain of the future, at least the probability is greater in the upcoming decade than the last that the next decade is not conducive to 10 percent rates of return in portfolios, and that expected return will be 7 percent or lower.
These writings are the opinions and perspectives of Leonard Wright, CPA/PFS and do not represent the opinions or perspectives of the AICPA.
Leonard C. Wright, CPA/PFS, CFP, CLU, ChFC
Money Doctor, AICPA
KLAV 1230 AM Financial Fridays Radio Show Host
http://www.KLAV1230AM.com
wrightplanners@hotmail.com
213-447-1833