Right now many people are wondering how their home insurance would protect them in the event of a total loss.

Below is an overview for both homeowners and renters.

Homeowners Insurance

• Coverage A – Dwelling Coverage (each “coverage area” protects a different aspect of the property. They can be increased or decreased individually)

• • • Purpose. Covers the cost to rebuild your home in the event of a total loss (e.g., fire, etc.). For this reason, it is the most important part of your policy.

• • • Recommendation. 100% of your home’s replacement cost. To calculate this, multiply your home’s square footage by local, per-square-foot building costs.

• • • In the Bay Area it costs approximately $700 – $800 per square foot to build a new, mid-range home. So for a 2,500 square foot home, it would cost approximately $1,875,000 to replace (give or take quite a bit depending on how you rebuild).

• • • Additional Tips
      • Extended Replacement Cost comes into play when there is a covered, widespread disaster in your area. Recommended coverage is 20%-25% above the Coverage A amount.

• • • • • What’s typically not covered (check with your insurance to confirm):
          • • Earthquake damage (consider adding if in California)
            • Flood damage
            • Landslides
            • Sinkholes

• Coverage B – Other Structures

• • • Purpose. Insures detached structures on your property, such as sheds, fences, guest houses, swimming pools (in some cases), and detached garages.

• • • Recommendation. Many policies provide Coverage B at a percentage of the Coverage A amount, often 10 – 20%. Consider the unique setup of your home and increase or decrease accordingly.

• Coverage C – Personal Property

• • • Purpose. Covers your personal belongings, such as furniture, clothing, and other personal items.

• • • Recommendation. It of course depends on how valuable your personal belongings are, but many policies default to ~50% of your Coverage A amount. Estimate how much it would cost to fully replace everything in your home.

• • • Additional Tips
      • Your car is not considered personal property. So if your car is parked in your garage and destroyed in a natural disaster, it is not covered. Your car insurance would cover that damage.

• • • • • It’s a good idea to record a video of everything in your home about once a year. This is helpful for insurance claim purposes.

• Coverage D – Loss of Use

• • • Purpose. Covers the cost of temporary living arrangements if your home is uninhabitable.

• • • Recommendation. Consider how long it might take to rebuild your home, and how much it would cost per month to rent a home you’d be happy in. Some policies also have a time limit on how long you can receive this benefit, so that’s worth checking. The typical range is 20% – 50% of your Coverage A amount.

• Coverage E – Personal Liability

• • • Purpose. Protects you against legal liability for bodily injury or property damage that you may cause to others. This coverage kicks in when you are found legally responsible for an incident.

• • • Recommendation. $1,000,000 if you have a sizable net worth. $300,000 – $500,000 if not.
      • If you have a substantial net worth or just want extra protection, consider an umbrella policy. This provides additional liability coverage.

• Coverage F – Medical Payments to Others

• • • Purpose. Provides coverage for medical expenses incurred by guests who are injured on your property, regardless of fault. Examples include an ambulance rides and hospital stays.

• • • Recommendation. $1,000 per person, minimum.

• Personal Property

• • • Purpose. Covers your personal belongings, such as furniture, clothing, and electronics, against risks like fire, theft, vandalism, and certain natural disasters.

• • • Recommendation. Usually ranges from $10,000 to $100,000, depending on the policy and the value of your belongings. Consider the value of your belongings and increase or decrease accordingly.

• • • Additional Tip. Renters insurance can provide coverage on an “actual cash value” basis – which factors in depreciation – or a “replacement cost” basis – which covers the cost to replace items without depreciation. Replacement cost coverage is recommended, but typically has higher premiums.

• Additional Living Expenses (ALE)

• • • Purpose. Covers temporary housing. This can include costs for hotel stays, meals, and other near-term expenses following a disaster.

• • • Recommendation. Often set as a percentage of your personal property coverage limit (e.g., 20% to 30%).
      • ALE only covers temporary living expenses incurred as a result of the loss, not the cost of a new long-term rental.
      • Coverage usually applies for a limited time, often up to 12 months.

• Liability

• • • Purpose. Provides liability coverage if someone is injured in your rented home, or if you accidentally cause damage to someone else’s property.

• • • Recommendation. This is a personal preference. It often starts at $100,000 and maxes out at $500,000.

I hope you found this helpful.

As always, please reach out if you have any questions or would like to connect.

2024 was a great year for most investors, with the S&P 500 up 25%.

Fun Fact: Some of the worst-performing investments in 2024 were the “fancier” investments: Art (-16%), Fine Wine (-11%), and Diamonds (-20%).

But for those invested in more traditional assets – stocks, bonds, and real estate – most people are richer than ever.

In my experience, it’s during these good times when people become comfortable with risk. The US stock market just had its best consecutive years since 1997-98, and anecdotally I’m seeing a lot of “risk on” behavior.

I’m a long-term optimist for the stock market, but in the near term it’s impossible to predict. Recessions or economic shocks can occur out of left field, and we typically get in trouble when people don’t fear risk.

I recently read a memo from Howard Marks, who seems to share my cautionary stance. Below is a quote that resonated:

• “The three stages of the bull market:

1. The first stage usually comes on the heels of a market decline or crash that has left most investors licking their wounds and highly dispirited. At this point, only a few unusually insightful people are capable of imagining that there could be improvement ahead.

2. In the second stage, the economy, companies, and markets are doing well, and most people accept that improvement is actually taking place.

3. In the third stage, after a period in which the economic news has been great, companies have reported soaring earnings, and stocks have appreciated wildly, everyone concludes that things can only get better forever.“

It feels like we’re in the third stage. One example: A record-high share of investors think there is less than a 10% chance of a stock market crash. 

To be clear: I am not predicting a stock market crash, calling a top, or saying the market is in a bubble. I’m simply acknowledging that the past 2 years have been very good from a returns perspective, and I would not expect the next two years to be as good.

Michael Cembalest’s Eye on the Market from JPMorgan summarized this point well: “The S&P 500 just registered two 20%+ years in a row, something which occurred just ten times since 1871. Only during the 1990’s bull market and the Roaring Twenties [1920s, that is] did the good times continue for another two years. I expect a 10%-15% correction at some point in 2025…Plan accordingly: US equity markets should end the year higher than they began but be sure to have plenty of liquidity to take advantage of what might be a volatile year.”

In the Stock Market section below I’ll highlight a few reasons why we might see more muted returns this year or in the near future. I may be wrong (and I sort of hope I am, since it’s nicer when the stock market does well), but as the quote at the end of this newsletter says, you always need to be prepared for “horrifying short-term losses” if you invest in stocks.

Investing / Stock Market

• 📊 New President, Q1, Year 1 – “One of the worst quarters during the four-year Presidential Cycle starts tomorrow [01/01/25].”

• 📉 Lower Future Returns? – The S&P 500, which represents large stocks within the US, is highly valued. A 21.5 “forward price-to-earnings multiple” simply means that investors are willing to pay $21.50 for every $1 of expected earnings per share over the next 12 months. A high number indicates high growth expectations, which is exactly what’s happening in the AI space.

• 🔟 The Top 10 Companies are more Richly Valued – It’s important to point out that the top 10 largest stocks in the index (9 out of 10 being tech companies) are valued at much higher levels than the remaining 490 companies:

• 📉 Intra-Year Declines – While the S&P 500 has averaged a 7.9% annual return since 1928, the average intra-year decline (peak-to-trough drop) is 16%. 

• 🌎 Global Stock Returns – How many people predicted that Argentina and Israel would be the top performers in 2024?

Jobs

• 💻 California is Losing Tech Jobs – “Since the beginning of COVID, California has added a sum total of only 6k jobs in the tech industry—compared to roughly 570k across the rest of the United States.”

• 💰 For Public-Sector Workers, Increased Social Security Benefits – Great news for anyone with a pension from the public sector:

  “Police officers, firefighters, nurses, postal workers, public school teachers and government employees are among the nearly 3 million public sector workers affected by the provisions.”

  “Before Biden signed the bill, the Windfall Elimination Provision reduced Social Security for those who earned ‘non-covered’ pension income (which includes pensions from state and local governments, as well as non-U.S. employers) from their jobs, while the Government Pension Offset reduced spousal or survivor benefits when an individual’s pension is non-covered.”

Real Estate

• 🏠 Weekly Home Maintenance Email – WeeklyHomeCheck is a helpful resource that sends a once-per-week email about one simple home maintenance task. Their recommendation last week was particularly timely given the fires in Southern California:

  “Walk through your home and record everything. Having proof of all the items and details in your home would be crucial if anything were to happen, like a natural disaster.”

• 🔍 Homeowner’s Insurance Cost – Given the fires in Los Angeles, many are taking a second look at their homeowner’s insurance policy.

• 🚚 Moving Patterns – The states that had the biggest inflows last year:

Quote of the Month

“In order to capture the potentially higher returns that stocks can offer, you have to reconcile yourself to the certainty of horrifying short-term losses. If you can’t do that, you shouldn’t be in stocks—and shouldn’t feel any shame about it, either.”

– Jason Zweig

As always, please reach out if you have any questions or would like to connect.

Onto the investment world, below are some interesting personal finance stories and themes from November, plus a few year-end tax-saving tips.

• Tax-Loss Harvesting – If you have any investments that you’re not attached to, and are sitting on a loss, selling those is worth considering. That loss can offset gains from other stocks. And if your total losses exceed your total gains, you can deduct up to $3,000 of the losses against your income, which reduces your taxes. Any excess losses are carried forward to future years.

• Max Out 401(k)’s – If it’s part of your financial plan to max out your 401(k), make sure you do so by year end. Also, consider after-tax 401(k)’s if your company offers them and you don’t need as much cash from your paycheck.

• Maximize HSA Contributions – For clients with high-deductible health plans, contribute the maximum allowed to your HSA before year-end ($4,150 for an individual, or $8,300 for a family). Contributions are tax deductible, grow tax free, and can be withdrawn tax free if used for qualified medical expenses.

• 🤕 Underperformance – The vast majority of funds underperform their benchmark. Over a 10-year time horizon, 87% of funds focused on the US market fail to beat their benchmark.

• 📊 S&P 500 Year-to-Date Return Breakdown – Nvidia has driven ~25% of the S&P 500’s return this year. Meta, Amazon, Apple, and Google have also been big contributors.

• 🐂 Bullishness – The largest share of Americans on record believe the stock market will continue to do well over the next year.

🤔 Maybe They’re Right? – The S&P 500 is on course to be up more than 20% in 2023 and 2024.

Those types of back-to-back gains have occurred before. In those instances, the average gain in the third year is about 12%:

• ⚖️ On the Other Hand… – Many followers of Warren Buffett are wondering if he’s turning bearish (i.e., cautious).

• 💸 Venture Capital – 2023 was venture’s worst year of profits since 2011. Initial public offerings, private equity buyouts, and mergers are all down:

• 🇺🇸 US = More Productive – A great stat from Joseph Politano: “Since late 2019, the US has seen more than double the productivity growth of the next-fastest major comparable economy, building on an already significant lead it built up in the years before COVID.”

• 🏠 First Timer Buyers are Rare – 24% of homes purchased are bought by first-time homebuyers, a record low. This largely relates to interest rates and high housing prices, which makes buying difficult.

Life

• ☑️ Estate Planning Checklist – If you’re thinking about estate planning, the checklist below might be of interest:

“It is not that we have a short time to live, but that we waste a lot of it. Life is long enough, and a sufficiently generous amount has been given to us for the highest achievements if it were all well invested.”

– Seneca

As always, please reach out if you have any questions or would like to connect.

• 📈 The Best 6 Months – November through April has historically been the best six-month stretch for the US stock market, rising 77% of the time for an average gain of +7.1%.

• 📉 If You’re Worried About a Stock Market Decline – This article covers 5 questions to think through.

• 🇨🇳 China Rally – From Charlie Bilello, “In the span of a few weeks, China went from being one of the worst performing stock markets in 2024 to #1.”

Economy & Jobs

• 💵 American Exceptionalism – Some good data points from an excellent piece in The Washington Post, This is a great economy. Why can’t we celebrate it?

• 🏡 The Poor Get Richer – In more good news, the poorest half of Americans have basically doubled their wealth since 2019:

• 🇺🇸 America’s Economy is Doing Great (But Most People Don’t Feel That Way) – For more great stats about how well the American economy is doing, I suggest this article from Ben Carlson, The New Normal of Negativity.

• 🏥 Healthcare Costs – Some unfortunate news about healthcare inflation: “The cost of employer health insurance rose 7% for a second straight year.”

• 🤔 App to Help You Choose a Healthcare Plan – Speaking of healthcare, it’s open enrollment season. If you have questions about which healthcare plan is the right fit, Sheer Health will help you analyze and select a health insurance plan.

• 🏢 Return to Office Rates – About two-thirds of office workers work from home on Friday’s. Tuesday is the most popular in-office day.

• 🛫 Inflation by Decade – The 2010s (in blue) had extremely low inflation.

Housing

• 💡 Thinking About Energy-Efficient House Improvements? – Check out this link to see what you qualify for.

• 🏠 Save on Property Taxes! – File this simple form, the Homeowner’s Exemption, to reduce your homes assessed value by $7,000. This should save you about $75 per year for only a few minutes of work:

• San Mateo County
• San Francisco County
• Santa Clara County
• If your county isn’t listed, just search “(county name) + homeowner’s exemption”

• Homeowner’s Insurance Tips – With Hurricane Helene ruining many homes and lives, there’s renewed interest in home insurance. Here are some helpful tips from The Wall Street Journal:

• “If your policy won’t pay enough to rebuild your home from the ground up—at today’s costs—as well as to replace your personal property, such as furniture and clothing, then you are underinsured.”
• “While most homeowner insurance policies include replacement-cost coverage for personal property, that may not apply to the home itself.”
• “For condos: Be sure to review the governing documents of the association to determine the extent of your responsibility to rebuild if there is a casualty loss. Typically, unit owners are responsible for rebuilding the interior of their units, while the condominium association will rebuild the structure of the building.”

• Rent vs. Buy – I’ve noticed the same math across California:

• 🔑 Few Home Sales – The number of existing-home sales dropped 1.0% from August to September, to a seasonally adjusted annual rate of 3.84 million:

Life

• 💳 The Buying Power of Your Credit-Card Points Is Tanking – From The Wall Street Journal, “A point redeemed in a portal has long been worth about 1 cent, according to the credit-card issuers, and a penny has lost about 20% of its purchasing power since 2018….Practically, this means that if you accumulated 50,000 Capital One points in 2020 and still haven’t spent them, they are now worth about 41,300 points within the bank’s portal.”

• 🔋 Used Electric Cars are Cheaper than Used Gasoline Cars – There are great deals on both new and used electric cars.

• 💵 How Assets are Distributed Across Wealth Levels – Wealthy people have the majority of their assets in (usually their own) business.

Quote of the Month

“Get out of ‘save a nickel’ mode. Get into ‘make a buck’ mode.”

– Adam Carolla

As always, please reach out if you have any questions or would like to connect.

• Stock markets finished the quarter strong, as the S&P 500 returned 5.9% and set its 43rd all-time high for the year.

• The Federal Open Market Committee (FOMC) cut interest rates for the first time since the rate increases began in March of 2022. The lending rate was reduced by 0.50%, to a range of 4.75% – 5.00%.

• Investors welcomed the FOMC’s larger-than-anticipated cut, and “risk-on sentiment” took hold in the final weeks of September. However, the upcoming U.S. election in November may add uncertainty and volatility to the markets as investors weigh the outcomes of differing policy positions.

• Market Cap Diversification is key when it comes to balancing risk and opportunity. The mega-cap tech stocks have done a lot of the heavy lifting in recent years, but leaning too heavily on them comes with its own risks. The third quarter reminded us of that, with a rotation into small- and mid-cap stocks, along with value sectors. This is why keeping a diversified portfolio across different market caps and styles is so important—it helps you capture opportunities when the market shifts.

• Global Diversification is crucial for investors looking to reduce concentration risk and tap into different economic cycles around the world. While the U.S. has been a growth leader, Europe and Asia have their own opportunities that can help balance out a portfolio. As monetary policies and economic conditions shift globally, these regions can offer potential gains and a more well-rounded approach to investing. It’s all about capturing those international opportunities while keeping your risk in check.

• Bonds are a crucial piece of the puzzle in balanced portfolios, especially when markets get shaky. With central banks starting to cut rates, bonds stand to gain from falling yields, making them an attractive option for generating income. Plus, their lower correlation to equities means they can help smooth out the bumps in your overall portfolio. In uncertain times, having that stability from fixed income can make all the difference.
  

1. 1. Data from Morningstar. Returns over one year are annualized
   2. Data from Morningstar.
   3. Data from Morningstar.
   4. Data from Morningstar.
   5. FactSet, Goldman Sachs, GIR
   6. Russell Investments