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Money Moxie

Why Investors Feel So Bullish

By | 2020, Money Moxie, Newsletter | No Comments

The stock market exploded higher in November along with cases of COVID-19, just as it did in April. Despite all the challenges of 2020, it seems the market is so bullish that it can only go one way. The reality is that anything could happen. The future is not predetermined, and the market does not think for itself. It is merely a compilation of investors’ views – a popularity contest, or as Warren Buffet calls it, “a voting machine.” For most of 2020, investors have viewed all good and bad news as positive. “Heads I win. Tails I win.” It is all a matter of perspectives–perspectives that I would like to explore.

Government Help
Stimulus in Spring and Summer was 6 times greater and was spent 6 times faster than that for the Great Recession of 2008/2009 (David Kelley, JP Morgan). The impact was incredible! It immediately forced stocks upward. Then it lifted spending, especially on items like homes, cars, furniture, and laptops.

Many Americans are in great need of more help and may get it. This additional stimulus may not come until February and will likely be much smaller than in May. However, with the economy already doing okay, the stimulus would be viewed as positive from the perspective of investors.

Low Rates
The Federal Reserve said it would build a financial bridge to the end of the pandemic, and it has stuck to that statement. It has lowered interest rates and promised to keep them low unless inflation averages move well beyond 2%. This has pushed investors away from low-yielding bonds and into riskier assets, pushing stock prices even higher.

These low rates have also increased the affordability of homes, which has, in turn, pushed those prices up.

One major risk is stocks could get too hot – a problem that contrasts with the uncertainty of 2020.

Improvement
The COVID-19 pandemic won’t last forever. With positive vaccine news, we can now see the light at the end of the tunnel.

With investors and consumers already feeling optimistic, there is the potential for more economic growth.

Investors have anticipated this improvement and continue to push up prices. While we are enjoying the higher market, we recognize that the more hot stocks get, the greater the chance of them being overcooked. We continue to emphasize the need for a good strategy and personalized plan.

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Year-End Tax Planning

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Harvest losses now to help your next tax return
If you have investments that have gained money this year and others that have lost, you can sell some of both in order to reduce the tax liability when you do your taxes next year. This is known as tax-loss harvesting. You can consult with Smedley Financial and/or your accountant to see how to best maximize your tax situation.

Qualified Charitable Distributions
If you are over age 70 ½ and are charitably inclined, then you still have time to do a Qualified Charitable Distribution or QCD. This year you don’t have to take a Required Minimum Distribution (RMD), so many people are considering not doing their QCD as well. However, we are still concerned the tax rates may go up in the future, so we would like to get as much money out of IRAs as possible tax-free. If you are going to make charitable donations anyway, a QCD is still a great option.

Convert your IRA to a Roth IRA
You can reduce future tax liabilities and take advantage of the current favorable tax environment by converting all or a portion of your tax-deferred retirement account to a Roth IRA. The conversion must be completed before December 31st. You can also use this strategy to maximize a low tax-bracket. For example, if you are married filing jointly, and your taxable income is $30,000, you can increase your taxable income to $40,125 and remain in the 12% tax-bracket. To get the full value of the conversion, plan to pay the taxes on the conversion from another account, such as a savings account.

Donate appreciated stock
If you have appreciated stock in your portfolio, you can donate the stock to a charity and avoid paying tax on the gain. Even better, if you itemize your taxes, you can receive a deduction for the value of the stock on the day the donation is made. One catch: you must have owned the stock for over one year before making the donation. Then you can invest the cash you would have donated to make a future donation.

Bunching deductions
The number of tax filers using the standard deduction has increased over the last couple of years. This is because the standard deduction was increased to a level that exceeds most filers’ tax deductions. However, if you are close to the standard deduction, you might consider bunching deductible items into one tax year. For example, you can make charitable donations for two years at a time or push medical expenses into one year. Then you can itemize every other year.

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Supersized Retirement Savings

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If you want to supersize your retirement savings for early retirement or help you make up for lost time, consider a mega backdoor Roth. It can allow you to stash up to another $37,500 into retirement savings, which will grow tax-free. In an environment where taxes may go up because of government debt, this can be a very worthwhile proposition. It is especially beneficial for earners that make too much to contribute to a regular Roth or have too much in IRA assets to do a regular backdoor Roth. Of course, there are hurdles and restrictions.

The first hurdle is maxing out your 401(k) or Roth 401(k) contributions. In 2020, the limit is $19,500, or $26,000 if over age 50. If you aren’t contributing enough to hit these thresholds, then a mega backdoor Roth doesn’t apply. If you are hitting these thresholds, then your normal contributions should probably be pre-tax, and the backdoor Roth can serve as your after-tax savings. (It may not make sense to put all of your contributions into the Roth bucket if you are taxed at 37% federally.)

If you earn less than $124,000 or $196,000 filing jointly, then you are still eligible to contribute to your normal Roth IRA. Make that contribution first, which can be $6,000 or $7,000 if over age 50. If you earn more than the limits, then a mega backdoor Roth is your only retirement savings option.

The next big hurdle is your 401(k) plan. Only 43% of companies allow for after-tax contributions. In addition, the company 401(k) plan needs to allow for in-service distributions into the Roth. If the plan checks both of these boxes, then the contributions go into the after-tax portion, and the plan administrator can convert those assets into a Roth.

If the plan doesn’t allow for in-service distributions, then you can still put money in after-tax, but the earnings will only be tax-deferred. Usually at age 59½ or at retirement, you can place the after-tax portion into a Roth IRA, and the tax-deferred portion can go into a traditional IRA. This somewhat defeats the purpose as the goal is to get as much as possible into a Roth as soon as possible to allow for tax-free growth.

If you have jumped over these hurdles, then you are ready to stash money away. In 2020, you can put a maximum of $57,000 into a retirement plan, including your contributions and the company’s match. So, if you put in $19,500, and the company matches $5,500, then you can put in up to $32,000 more in the mega backdoor Roth. Talk about supersizing your retirement savings!

The major benefit of a mega backdoor Roth over a regular backdoor Roth conversion is not having to deal with the pro-rata rule. In a normal backdoor Roth, whatever you convert is proportionate across all of your IRAs. So, if you have any sizable amount in pre-tax IRA (i.e., traditional IRA), then you have to convert and pay taxes on the proportional amount converted from the IRA. Depending on the size of your IRA, and if you are under age 59½, this can really hurt. Since the mega backdoor Roth takes place in a 401(k), that pro-rata rule doesn’t apply.

While there are hurdles and restrictions, the mega backdoor Roth can be a great way to supersize your retirement savings. If you have any questions on how this can help you reach your goals, please contact our Private Wealth Managers.

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What’s Your Estate Plan?

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I was recently reminded of the importance of having a thorough and reliable estate plan. I can tell horror stories of family feuds and legal actions taken when the passing of an individual happens without a proper plan for their estate. I can speak of heartbreak when a loved one is suddenly placed on life support, and the family is unsure of how to proceed or unauthorized to make decisions for the hospitalized party. I can assure you that an estate plan is well worth your time and money. If one is not in place, unnecessary stress and complications will ensue.

A proper estate plan will contain multiple documents that protect an individual’s assets, healthcare wishes, and beneficiaries. The following are key documents in every estate plan. Please make sure they are a part of yours.

Will/Trust – A will or trust is used to control property from the grave. This control will ensure the transfer of property to the intended beneficiaries and avoid obstacles that can significantly reduce the benefit that heirs would otherwise enjoy. We highly recommend the use of an estate-planning attorney when creating these documents.

Executor of the Estate – An executor of an estate is an individual appointed to handle the affairs of the deceased person’s estate. He/she is responsible for making sure all assets in the will are accounted for, along with transferring these assets to the correct parties. We recommend that the executor of the estate is chosen carefully.

Power of Attorney – A power of attorney (POA) is a legal document giving a person (the agent) the power to act for another person (the principal). The agent can have broad legal authority or limited authority to make legal decisions about the principal’s property, finances, or medical care. A power of attorney is frequently used in the event of a principal’s illness or disability.

Living Will – A living will is a legal document that states a person’s choices about end-of-life medical treatments. It lays out the procedures or medications one does, or does not, want to prolong life. A living will is only valid if its creator is unable to communicate.

Medical Power of Attorney – A medical power of attorney gives someone else (the agent) the ability to make health care decisions for another person (the principal). The agent only has the power to act on the principal’s behalf when the principal is incapacitated, whether from loss of consciousness or mental ability.

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Market Resiliency Overcomes Biases

By | 2020, Executive Message, Money Moxie, Newsletter | No Comments

As we near the end of 2020, we can look back on what we have experienced over the last 12 months, and more importantly, what we have learned from our experiences. Good and bad, we have all been impacted by the events brought on by COVID-19.

Evaluating the past is helpful in looking forward to a new year and the seasons of life ahead. Unfortunately, it is easy for our perspective to be swayed by biases we have developed. Biases are subconscious thoughts that shape our opinions and drive our behaviors. A bias might cause us to make assumptions about the future, such as “The market has changed and will never be the same again,” or, “Life as we know it has changed forever.” These are examples of Recency Bias. Our brain takes a recent experience and uses it as an atlas for all future decisions. It is almost like tunnel vision; we can only see one outcome.

Over the past 26 years, I have learned that every experience is different. Each is driven by a new set of circumstances – always changing. Our personal situations, the economy, and financial markets are fluid, ever-shifting. No one can predict what will happen in the future, positive or negative.

The market has faced many headwinds in the past – the dot com bubble, the Great Recession, Brexit – and has recovered from each. The economy has ebbed and flowed through market cycles while dealing with inflation pressures, political change, unemployment, and many other factors.

When I think of these hurdles, which seemed insurmountable at the time, I cannot help but be awed by the resiliency that followed the hard times. It is that perspective that gives me hope and a positive outlook for what lies ahead.

While the next six months may look fuzzy and hard to predict, the longer-term picture appears more defined, clear, and encouraging.

I am grateful for you, our clients, and the opportunity to help shape your financial future. I wish you and your family health, happiness, and prosperity in the years to come.

Wishing you a safe and happy holiday season.

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Markets Might Predict Elections, But Elections Don’t Predict Markets

By | 2020, Money Moxie, Newsletter | No Comments

Election years are usually positive for stocks, and despite all that has happened in 2020, stocks could end this year positive again. It’s been so good that many have been conditioned to join the hottest trades. They are throwing caution to the wind as they mistake an irrational market for genius. This will not last forever.

An increase in risk impacts votes. Of course, 2020 could continue to surprise.

The Market May Predict the
Next President of the United States

(1) Has there been a decline of 20% anytime in the election year? If so, the incumbent party loses.

(2) Are stocks lower on Election Day than the end of the incumbent’s party convention (Aug 27th)? If so, the incumbent party has never won.

Don’t let what you think about politics change how you feel about investing. As Election Day gets closer, many investors will consider moving their money to the sidelines until the uncertainty is over. This is a mistake.

Markets typically rise prior to the end of uncertainty, and they also have risen regardless of the party in the White House. So, while elections have winners and losers, investors who stay the course should be winners.

*Investing involves risk, including the potential loss of principal. The S&P 500 index is used to represent the overall stock market. One cannot invest directly in an index. Diversification does not guarantee positive results. Past performance does not guarantee future results. The opinions and forecasts expressed are those of the author and may not actually come to pass.

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The Emotional Cycle of Investing

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Emotions are a dominating force that impacts every aspect of our lives. The decisions we make, the interpretation of our experience, even our very personalities are all primarily influenced by our emotions. We are neurobiologically wired to create, feel, and think by emotion. In so many ways, our perceived realities are governed not by facts, but by feelings.

Psychologists believe that emotions drive 80% of the choices we make, while practicality and objectivity only represent 20% of our decision-making. This is because our brain has two sides, the thinking side, and the feeling side. The thinking brain is slow, rational, and objective. It deliberately, methodically, and logically reasons through information. The feeling brain is much faster. It is impulsive, emotional, and unconscious. It is also our default decision-making system.

How often do we describe the reason for a decision by saying, “It feels right?” Yet strangely, the mechanism we rely on most when making decisions is so fickle that it can be greatly altered even by what we ate (or did not eat).

This is why Dave Ramsey said that personal finance is not a math problem, but a behavior problem. Investors are emotional. Thus, they judge investment decisions mainly by emotion. This can have expensive consequences.

Most investors go through a recurring cycle that follows the market. This emotional cycle often leads an investor to make the wrong decision at the wrong time. You have heard the saying, “Buy low and sell high.” Logically, this means buying when everyone is feeling despondent (selling) and selling when everyone is feeling euphoric (buying). This is so much easier said than done.

One of many examples: In 2018, when the S&P 500 lost 4.38%, the financial analytics firm found that the average investor lost more than double that, at 9.42%. Investors lost money because they acted on emotion when markets declined. A study that same year published in the Journal of Financial Planning found that investors who implemented strategies to remove emotion saw returns up to 23% higher over a 10-year period.

As accredited Behavior Financial Advisors and Certified Financial Planners, we can help remove emotion from the equation and make wise financial decisions. Whether it is investments, estate planning, or a large purchase, we can provide the expertise that can make a positive difference in your financial future.

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The Pendulum Swings

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There is a giant pendulum that swings ever so slowly. When it gets to one extreme, the gravitational force pulls it back the other direction. Because of the Great Depression and World War II, the pendulum of national debt rose to an astounding 106% of GDP* in 1946.1 The pendulum took until 1974, or 28 years, to swing the other direction and get down to 23% of GDP.

With the back-to-back economic crises of the Great Recession in 2008 and COVID-19 in 2020, the debt to GDP ratio has swung dramatically back in the wrong direction. We now sit at 100% debt to GDP with a projection to get to 106% of GDP by 2023.2

What will be the long-term impact? Undoubtedly, taxes will go up. I recently heard it said, “The politicians that are telling you they can cut taxes are just bad at math.” If you look at history, tax rates shot up to 94% in 1944 for the highest tax bracket.3 That’s right, 94%! This was done with more marginal tax brackets. There were 24 brackets back then compared to just 7 today.

In 1965, the highest rate declined to 70%. It stayed around there until 1982 when the highest rate became 50%. Currently, our highest tax bracket is 37%.

I’m not a doomsday predictor. I don’t believe a new tax bracket will send rates up to 94%. However, I do worry about taxes going up for almost everyone. You can’t tax the “rich” enough to cover the current deficit and make the pendulum swing the other direction.

Thankfully, I believe there are prudent tools we can use to help protect you against future taxes. If you aren’t retired, you can contribute to a Roth IRA or Roth 401(k), depending on your income. If your income is below $139,000 (single) or $206,000 (married), consider a Roth conversion from your IRA or 401(k). If you are over age 70½, you can make tax free donations to a charity from your IRA.

These are just a few options to help protect against future taxes. For our clients, we will continue to review your personal financial plan to make sure you are prepared for the future regardless of what may come. If you want to schedule a review appointment, please contact us.

*GDP or Gross Domestic Product is the total output of the economy for one year. SFS and its representatives do not provide tax advice; it is important to coordinate with your tax advisor regarding your specific situation.
(1) https://www.washingtonpost.com/opinions/2020/05/27/this-is-not-your-grandfathers-debt-problem/
(2) https://www.bloomberg.com/graphics/2020-debt-and-deficit-projections-hit-records/
(3) https://fred.stlouisfed.org/series/IITTRHB

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The Danger of Retiring Into Uncertainty

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Your decision to retire may be one of the hardest you will make. A lifetime of preparation comes down to a single day when you leave the familiar day-to-day routine – not to mention the regular paycheck – and embark on a new adventure.

That nest egg you have been accumulating will need to provide a large portion of your monthly income along with Social Security and your pension, assuming you have one.

Imagine that you planned to retire in 2020. Should you retire in a year when markets are experiencing extreme volatility, and there seems to be an abundance of uncertainty when looking at the economic picture? What will happen to your retirement income if your nest egg balance drops?

Your fear is based on sequence risk. You are concerned that the market will continue to drop right at the point when you are hoping it will increase. Sequence-of-returns risk, or sequence risk, is the risk that an investor will experience negative portfolio returns very late in their working years, or early in the retirement years. The fear of losing money can cause an investor to become risk-averse in the short-term, discounting future opportunities for growth.

This chart illustrates the impact market returns can have on an investment portfolio. One illustrates negative returns early in retirement and the other positive returns early in retirement. Consequently, the average return in both cases is 4%.

Sequence risk is a real threat but can be managed in a retirement portfolio. Our Lifetime Income Plan diminishes sequence risk without locking investors into illiquid products with high fees and minimal flexibility.

The key is managing risk throughout retirement. Determining how much money you will need at different intervals is the backbone of the Lifetime Income Plan. Knowing these key points helps us to ascertain how much risk should be taken with an investment.

Let’s say you need $42,000 each year to supplement Social Security and other income. We would invest enough money to cover the income for five years in a very conservative investment. In this case, we are more interested in the security of the money than potential return.

This continues in segments through retirement, generally in 5-year increments. With each segment, we determine how much money will be needed and increase risk accordingly. The assets that will be used ten or more years out typically have a greater amount of risk.

The Lifetime Income Plan helps diminish the impact of volatility on your income and emotions. This helps you stay invested and gives you a greater opportunity to participate in market growth over time.

One thing is certain; risk is inherent to investing. If managed correctly, it can help you outpace inflation and maintain your lifestyle in retirement. For more information on how a Lifetime Income Plan can benefit you, contact an SFS Wealth Management consultant.

Graphic from RetireOne: hypothetical illustration does not represent the results of an actual investment. It does not reflect any investment fees, expenses, or taxes associated with investments. An average annual return of 4% is reflected for both investors. Annual withdrawals of $5,000 are taken at the end of each year.

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Will Real Estate Stay Red-Hot?

By | 2020, Money Moxie, Newsletter | No Comments

Red-hot housing prices have impacted anyone looking to buy a home recently. Many people have wondered if they should buy now or wait. The answer depends a lot on the national real estate market, the local market, and your personal needs.

Real estate ebbs and flows, just like the stock market.1 Some national trends are making homes hotter in 2020:

(1) The pandemic: “More than half of the nation’s 100 largest metropolitan areas are seeing increased interest in the suburbs.”2 For example, in Manhattan, the contracts on apartments plunged 80% in May, but the interest in the surrounding suburbs skyrocketed. This flight is partly to people working from home that would rather work in a roomy house with a private yard.

(2) Shortage of homes: The U.S. supply of homes has never been lower in the last 50 years. This factor seems likely to persist.

housing supply
Housing supply

(3) Interest rates: The Federal Reserve has worked to lower rates for the entire economy and wants to keep them low. Those who can are “rushing to take advantage of record-low mortgage rates and possibly even purchase larger homes.”3 If or when rates do rise significantly, it could be devastating to prices.

There are also other hidden risks in housing. Unemployment is still above 8%, and many struggle to make rent and mortgage payments. The federal eviction moratorium ends on December 31, 2020.4 This does not help everyone, and if nothing more is done, “Up to 40 million Americans could be at risk of eviction by the end of the year.”5 Evictions could spill over into lower prices in the short term.

Residential real estate in Utah is doing well. The economy has not shut down and has only 5% unemployment. Many tech and construction companies are hiring. This drives up demand and housing prices. However, if the pandemic’s economic impact spills over, there could still be a slowdown. If that happens, this sellers’ market could turn into a buyers’ market.

If you can wait to buy a home, you have some flexibility. You could build up your cash and use that for a larger down payment in a year or two. You could also use the time to watch for the house that you really want. As you look, it’s best to think of a home as a place to live and not as an investment.

What you should do depends on your future plans and finances. We would love to help you; give us a call.

(1) Investing involves risk, including the potential loss of principal.
(2) https://www.cnbc.com/2020/06/18/coronavirus-update-people-flee-cities-to-live-in-suburbs.html
(3) https://magazine.realtor/daily-news/2020/09/08/a-tale-of-two-markets-dream-homes-and-looming-evictions
(4) https://www.federalregister.gov/documents/2020/09/04/2020-19654/temporary-halt-in-residential-evictions-to-prevent-the-further-spread-of-covid-19
(5) https://magazine.realtor/daily-news/2020/09/08/a-tale-of-two-markets-dream-homes-and-looming-evictions

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