Ask Dr. Per Cap

Ask Dr. Per Cap is a program funded by First Nations Development Institute with assistance from the FINRA Investor Education Foundation. Nimiipuu Community Development is happy to share this column as partner with Native Financial Learning Network funded by Northwest Area Foundation.

When in Doubt, Save

 Dear Dr. Per Cap:

We’re about six months into the coronavirus pandemic and times are still tough.  I’ve been furloughed from the casino and unemployment insurance only goes so far.  Any idea when the economy is going to come back?

Signed, Doubling Down

Dear Doubling

I’ll give it to you straight.  I think we’re in for a long haul with the coronavirus, at least through the end of 2020; especially in parts of Indian Country where communities have been hit hard by the pandemic.

A huge factor in how well the economy holds up depends on how quickly we’ll have a vaccine for COVID-19.  Some experts warn it could take at least a year while others are more optimistic.  At this point it’s probably anybody’s guess but fortunately we have some of the brightest minds from all over the world working round the clock on the challenge.

In the meantime folks who have been laid off or furloughed definitely need to keep hunkering down financially.  Avoid large purchases if possible, pricey vacations, and other luxuries.  I realize you might not have much choice.  Every pow wow and Native summer event I know of has been canceled and many popular vacation destinations are either closed or only open to a limited number of visitors.  I’ve always sworn by the saying “When in doubt, save your money.”   I think that holds true now more than ever.

Obviously we’ve never lived through something like COVID-19 before but let’s also not forget that many of our grandparents and great grandparents did.  We all know how small pox ravaged our ancestors but we don’t even need to go that far back.  I recently asked my aunt, who is in her eighties, if she remembered her parents ever talking about the Spanish Flu of 1918.  She told me a couple of heart wrenching stories of what life was like at the pueblos during that awful time.  We can draw strength from what those old folks had to overcome so we could be here today.

Let’s also remember to pace ourselves – financially as well as emotionally.  Back in March when the lock downs started there was a ton of information going out with resources for coping; how to access benefits, where to get tested, what to do if you’re feeling lonely or depressed, etc.  But since then I feel like there isn’t as much focus on support.  This concerns me because I think we need encouragement now more than ever.  Were almost six months in and still have a ways to go.  Like most challenges in life, this is a marathon not a sprint.  Stay well.

Ask Dr. Per Cap is a program funded by First Nations Development Institute with assistance from the FINRA Investor Education Foundation. For more information, visit www.firstnations.org. To send a question to Dr. Per Cap, email askdrpercap@firstnations.org.

Extended Warranties

Dear Dr. Per Cap:

Last week my boyfriend and I purchased a new washing machine online.  At checkout we were offered an extended warranty that my boyfriend insisted we purchase.  Was that a smart add on?

Signed, Always Amazon

Dear Always

I’m not a huge fan of extended warranties.  In my experience the benefit doesn’t usually justify the cost.  I’m also leery of how aggressively manufacturers and retailers push them on consumers.  Almost every product nowadays that costs more than $15 offers an extended warranty.  In many cases you’re better off just buying a new one if it breaks.

Most extended warranties also provide a lot of wiggle room for the seller to get out of having to warranty a product.  Looks like normal wear and tear – sorry, not covered.  You dropped it on the kitchen floor? Oops, not covered.  No receipt or you failed to register the product when you bought it – too bad.  Or the classic – we’ll fix it but you pay the shipping costs.

I think many people purchase extended warranties with a false sense of security. I also know people who look at the price of a product and think it makes sense to purchase an extended warranty for big ticket items like a used car or an appliance where repair costs could be really pricey.  But I’m still not convinced.

An extended warranty is basically a cheap insurance policy.  The company knows how good its products are and how long they will last on average.  Then it prices the warranties to more than offset the costs for any repairs and replacements.  The extended warranty is just another product they want to sell you because they’ll make more money.

The only time I think it might make sense to purchase an extended warranty is if you are more than an average user of a product.  For example, say you have a passion for woodworking and you buy a new table saw.  You plan on using the heck out of that saw as opposed to a typical weekend warrior who might only work on one or two projects a year.  In that case I can see the value in paying for an extended warranty to protect your investment, but again – buyer beware.

If you do choose to buy an extended warranty read the fine print and make sure you register the product immediately after purchase.  And in the unfortunate event you have to use the warranty, keep a paper trail and don’t be surprised if you have to get a little tough with the company to honor that warranty.  Now that we’ve covered that – have fun putting the suds to your duds!

Ask Dr. Per Cap is a program funded by First Nations Development Institute with assistance from the FINRA Investor Education Foundation. For more information, visit www.firstnations.org. To send a question to Dr. Per Cap, email askdrpercap@firstnations.org.

Minor’s Trust Dip

Dear Dr. Per Cap:

My daughter is a high school senior set to receive a minor’s trust payment in a few months. I’m worried it will be a lot less than she expected since the coronavirus sent the stock market reeling. Is it fair for her to receive less than kids in previous years?

Signed, Doubting Dad

Dear Doubting Dad:

I’m afraid many beneficiaries of minor’s trusts are feeling a pinch in their account balances thanks to a one-two punch from the coronavirus. Investment losses you mention are one blow. Smaller per capita payments from shuddered tribal casinos and other lost revenues are another.

Is it fair? Anytime we invest money there is a risk we’ll lose a portion or all of it. A dose of tough love says it’s not a question of fair. It’s a fact of life. However, every minor’s trust has a trustee whose job is to manage investment risk wisely on behalf of the trust’s beneficiaries – young Native people like your daughter. But risk can never be completely eliminated. The only time investment losses aren’t fair is if a trustee really screws up and manages the trust irresponsibly.

Sadly this has happened in Indian Country, but hopefully your tribe has a good handle on financial management. Before you sound any alarms, check with your tribal finance department for the current balance in your daughter’s minor’s trust account. You might be pleasantly surprised to learn her balance hasn’t dropped as much as you think. That’s because many minor’s trusts are designed to reduce risk by dividing the trust into different categories called tranches.

Depending on a child’s age, funds representing his or her portion of the trust are placed into a one of the tranches. Generally, the younger age tranche is invested for growth. Meaning it’s heavily invested in stocks because as an asset class, stocks of publicly traded companies offer a higher potential return than fixed income investments like bonds or cash.

However, stocks are riskier than fixed income, as the coronavirus has reminded us. So the idea is that younger kids can assume the risk because they have more years to make up for any investment losses. As children get older their funds are moved into less risky tranches with portfolios that hold larger portions of fixed income investments and fewer stocks. Then when they near eighteen their money is placed into a very low risk tranche, just in case a shock like the coronavirus sends the stock market swirling.

Since the stock market was trading at record highs as recently as mid-February it’s quite possible your daughter’s minor’s trust monies were placed into a low risk tranche before the crisis hit. But we’ve seen the apprehension before. When the stock market dropped 38% in 2008 many minor’s trusts in Indian Country took a hit. But by 2009 a steady recovery began that created the longest period of growth in stock market history and many minor’s trusts increased in value by leaps and bounds. Hopefully, the economic damage from coronavirus will be short term so my advice right now to all minor’s trust beneficiaries and their families is to be patient and not panic.

Ask Dr. Per Cap is a program funded by First Nations Development Institute with assistance from the FINRA Investor Education Foundation. For more information, visit www.firstnations.org. To send a question to Dr. Per Cap, email askdrpercap@firstnations.org.

Coronavirus Relief Payments

Dear Dr. Per Cap: 

I’m sweating the COVID-19 stimulus checks that are supposed to becoming soon. What will the amount be and when will they go out? 

Signed, Needing Money 

Dear Needing,

Now that the Coronavirus Aid, Relief, and Economic Security (CARES) Act has passed both houses of congress the bill states that the Treasury secretary will send payments, either by mail or direct deposit, “as rapidly as possible.” Gotta love that official language! 

But seriously, IRS should begin issuing direct payments to households by mid-April. Hopefully they’ll come even sooner but we’re talking about the largest government rescue package in U.S. history. Some of the details will take time. 

Payments of $1,200 will go to any adult with a social security number who is not listed as a dependent on someone else’s tax return and has an adjusted gross income of less than $75,000. Married couples earning less than $150,000 will receive $2,400. For a single parent claiming head of household, a common filing status in Indian Country, the maximum income for a full $1,200 payment is $112,500. In addition to these base payments parents or guardians will receive an extra $500 for each child under 17. 

For folks earning more than the amounts listed above, payments will be reduced by $5 for every additional $100 of income. Here’s an example. A single person with no children earning $80,000 will receive a check for $950 ($1,200 minus $250). For single persons earning $99,000 or more and married couples earning $198,000 the base payment will phase out completely. 

An earlier version of the bill stipulated smaller $600 payments for low income social security recipients but fortunately, that was dumped in favor of the larger $1,200 payments. 

So how will IRS determine income? The plan is to use 2019 tax returns. But if you haven’t yet filed for 2019 they’ll use your 2018 return. But remember that the amount of benefits will ultimately be based on this year’s 2020 income. Meaning that when you file your 2020 tax return next year IRS will make a final determination on the amount of your relief payment. That’s good news for people who might suffer a steep drop in income this year from a layoff or furlough. Here’s an example. Say you’re single and earned over $100,000 in 2019 but in 2020 you’re income drops below $70,000? Well, since you don’t qualify for a relief payment now you’ll be able to claim one next year in the form of a larger refund or smaller tax payment. 

And here’s an interesting twist. If by chance you earn more in 2020 and exceed the stimulus income threshold, meaning you ultimately qualify for less relief money than you receive, IRS won’t require you to pay it back. 

If you don’t file a tax return the IRS plans to access social security records to determine your eligibility for a relief payment. So don’t sweat it if you earn less than the minimum income required to file. Moreover, payments are not taxable and even people who owe back taxes won’t have their relief payments blocked or garnished. 

I realize $1,200 only goes so far but hopefully it’s enough to cover some necessities until the economy gets rolling again. Until then good luck and stay healthy!

Stock Market Correction

Dear Dr. Per Cap:

2019 was another great year for the stock market.  I’m thrilled that my 401k balance is up but I keep hearing that the market is due for a “correction”.  What exactly does that mean?

Signed, Hoping to Retire Soon


Dear Hoping

Yep, 2019 was another banner year for Wall Street.  The S&P 500, a leading stock index that many investors use to gauge the overall market, finished the year up nearly 30%.  That extends the current bull market, a prolonged period in which stocks continue to rise, to more than ten years – making it the longest bull market in modern stock market history.

So the big question that’s been on every investor’s mind for the last few years is – how long will it last?  That’s where the term correction comes in.  A stock market correction is a drop of at least 10% from the market’s most recent peak.  Here’s an example.  On January 16th, 2020 the S&P 500 closed at a record high of 3,329 points.  That means a correction occurs if the index drops 10% or about 332 points.  However, should the S&P 500 peak again, in fact it already has, then it will need to lose more than 332 points to trigger a correctionBecause the actual number of points required for a stock market correction is always relative to its peak.

We actually saw a correction in February 2018 when the market dropped more than 340 points or roughly 12% from a then record of 2,870 points set the previous month.  And while 2018 ended up being a down year for stocks, the trend over the past decade has been so overwhelmingly positive that most investors didn’t fret much.

The real concern is what happens if a correction is prolonged – say six months or more before it bounces back.  Moreover, what happens if it drops a lot more than 10%?  Well if the market drops low enough for a long enough period it will go from being called a bull market to a bear market.  And that’s the major fear.  The last bear market occurred after the financial crisis of 2008 when the S&P 500 closed the year down 37%.  Ouch!

I’d need a crystal ball to tell you if a big stock market correction is coming in 2020 or when the bull market will finally end.  In fact no one knows -not even the big shot investing pros on Wall Street.  But if you’re concerned, and every wise investor should be, now is a good time to review the holdings in your 401k plan to make sure they are properly diversified to suit your needs.  This means, as I’ve stated before in this column, maintaining a healthy balance of stocks and bonds.  Remember that if you want to play it safe you should increase your bonds or fixed income investments while lowering your exposure to stocks or equities.

One strategy is to subtract your age from 100 and place that percentage of your total investments in stocks and the rest in bonds.  So a sixty-five-year-old person would invest 65% of her holdings in bonds and 35% in stocks.  Keep rocking toward retirement!