Preparing For Anything

Did you know September is National Preparedness Month? This event promoted by FEMA guides Americans in ensuring their families and communities are ready in case of natural disasters or other emergencies.

But did you also know that the Financial Industry Regulatory Authority requires me to have a business continuity plan in case of emergency or significant business disruption? It’s true. I designed your financial strategy to weather everything from market turbulence to earthquakes.

My business continuity plan includes data backups, an alternate office location, and access to various means of communication if needed. You can rest easy knowing I have a game plan in place for disruptive situations of many kinds, such as what we see currently unfolding in Puerto Rico.

We’ve got your back financially, but you should prepare yourself and your household for unexpected events. Check out ready.gov to see FEMA’s suggestions.

Stay safe and be well.

Four Reasons Millennials Need an Estate Strategy

You’re young, have little in savings, and might not have anyone relying on you, financially. So, why do you need to think about estate management?¹
Here are four great reasons:

Estate Strategies: They’re Not Just for the Elderly

1. You need a will. You may ask yourself why a will is important if you don’t have much to pass on. A will is not just about transferring assets. It can be used to accomplish other tasks, such as naming who should manage your social media accounts once you’re gone or inherit items you’ve accumulated, like collectibles or your car.
2. Don’t burden others with burial expenses. Funerals can be expensive, and if you don’t have the savings to meet those costs, that burden gets shifted to others.
3. Consider a medical directive. This important document states your wishes for end-of-life care. In the case of an unfortunate accident, a medical directive provides instructions about the level of care you want, e.g., palliative care only.
4. Create a durable power of attorney for health care. In the event that you are unable to make medical decisions for yourself, this gives the individual of your choice the legal power to act as a health care proxy for you.

A medical directive and health care durable power of attorney can ensure that you are provided the level of care consistent with your wishes. They can also prevent family discord in the event of differing opinions.

Though the multiple financial goals of many young adults often require more resources than present earnings can meet, these important planning steps can be accomplished at a small cost.

The CEO’s Unofficial Q2 Buzzword

You may have heard the expression, “You can talk yourself into just about anything.” If that’s true, corporate America better watch out.

As publicly traded companies report quarterly sales and earnings, they often review critical economic conditions. Last quarter, nearly 50% of the S&P 500 companies mentioned the term “recession” during their Q2 conference calls with shareholders, according to FactSet. This breaks the previous record set in Q1 2020, at the start of the pandemic.

Unsurprisingly, America’s corporate leaders are preparing for potential economic turbulence. After all, we often see volatility in the financial markets when economic reports raise questions about recession and the Fed’s policies. Words are powerful.

This time next year, the buzzword of the quarter could be something else entirely. Here’s hoping for something like “recovery,” “rebound,” or “growth.”

A Look at Diversification

Ancient Chinese merchants were said to have developed a unique way to manage their risk. They would divide their shipments among several different vessels. That way, if one ship were to sink or be attacked by pirates, the rest stood a good chance of getting through. Thus, the majority of the shipment could be saved.

Your investment portfolio may benefit from that same logic.

Diversification is an investment principle designed to manage risk. However, diversification does not guarantee against a loss. The key to diversification is to identify investments that may perform differently under various market conditions.

On one level, a diversified portfolio should be diversified between asset classes, such as stocks, bonds, and cash alternatives. On another level, a diversified portfolio also should be diversified within asset classes, such as a diverse basket of stocks.

A Diversified Approach

For example, let’s say a stock portfolio included a computer company, a software developer, and an internet service provider. Although the portfolio has spread its risk among three companies, it may not be considered well diversified, as all the firms are connected to the technology industry. A portfolio that includes a computer company, a drug manufacturer, and an oil service firm, however, may be considered more diversified.

Similarly, a bond portfolio that invests exclusively in long-term U.S. Treasuries may have limited diversification. A bond fund that invests in short-term and long-term U.S. Treasuries, plus a variety of corporate bonds, may offer more diversification.

Mutual Funds and ETFs

The concept of diversification is one reason why mutual funds and Exchange Traded Funds (ETFs) are so popular among investors. Mutual funds accumulate a pool of money that is invested to pursue the objectives stated in the fund’s prospectus. The fund may have a narrow objective, such as the auto sector, or it may have a broader objective, such as large-cap stocks. ETFs also can have a narrow or broader investment objective. Keep in mind, though, the more narrow an investment objective, the more limited the diversification. Furthermore, a narrow investment objective may result in more volatility and additional risks associated with a particular industry or sector.

The concept of diversification is critical to understand when you are evaluating a portfolio. If you want more information on diversification or have questions about how your money is invested, please call us to review your situation.

What is Happening with CPI and Inflation?

Believe me, everyone on Wall Street wants inflation to go away, or at least shrink back to below 2%, a level we enjoyed not so long ago.

But Tuesday’s Consumer Price Index report showed it might be some time before we see 2% again. Consumer prices ticked slightly lower in August, but not as much as what Wall Street wanted. Economists, pointing out that gasoline prices dropped in the past month, made bold predictions for August inflation. Too bold, as it turned out.

Stocks got clobbered, and bonds didn’t fare much better. The inflation report showed that higher food, shelter, and medical services costs were to blame. Higher costs in those areas indicate inflation could be more persistent and entrenched than we thought.¹

So now the question is, “What will the Fed do at its upcoming meeting?” In the chart below, the green highlights show the most likely outcomes for the next several Fed meetings, according to the CME Group. Keep in mind that in early September, the CME’s indicator said smaller increases were possible. But no more.

All too often this year, I haven’t had great news to pass along about the markets. But I want to assure you that I’m committed to staying on top of the news in good times, bad times, and in-between times.

If Tuesday’s drop raised some new concerns, please give me a call. Thanks for your trust.

Systematic Withdrawals in Retirement

Many of us grew up with the concept that making regular, periodic contributions to our retirement account was a sound investment strategy. The idea was that, in a fluctuating market, regularly investing a set amount would enable an individual to buy more shares when prices were low and fewer shares when prices were high.¹

Does this mean that taking regular, periodic withdrawals during retirement makes similar good sense?

Actually, it can be quite problematic.

Systematic withdrawals do the precise opposite of systematic investments by selling fewer shares when the price is high and more shares when the price is low. This, in effect, reduces the number of shares that may be able to participate in any subsequent market recovery.

Here’s an example.

In the accumulation phase, if a portfolio falls by 25%, it will require approximately a 33% return to get back to its pre-decline value.²

In the distribution phase, if you withdraw 5% of your portfolio for income and suffer the same 25% market decline, you would need to see a 43% market rebound to get back to pre-decline value.²

Sequence of Returns

In the accumulation phase, investors tend to focus on average annual rates of return and less on the sequence of the returns. If you’re a buy-and-hold investor, ignoring short-term fluctuations may be a sound long-term approach.

If you are in retirement, however, you absolutely care about the sequence of the annual returns.

For instance, comparable portfolios might deliver the same average annual return over a 20- or 30-year period, but they could have radically different outcomes in terms of account balance and income production. Generally speaking, negative returns in the early years of your retirement can potentially reduce how long your assets can be expected to last.

American writer H.L. Mencken once remarked that “For every complex problem, there is an answer that is clear, simple, and wrong.”

Anticipating a lifetime of withdrawals from a defined asset pool over an indefinite period of time is a complex challenge for which there is no simple solution. Pursuing this challenge can require creative approaches and persistent vigilance.

1% Moves in S&P 500

If you’ve felt like stock prices were a little more volatile in 2022 than in recent years, your “spidey senses” are right on the money.

The S&P 500 has posted 81 daily moves of at least 1% through August. Of those moves, 39 have been to the upside and 42 to the downside.

In the chart below, I highlighted 2022 to show how it compares to other years since 2000. Since the daily report was compiled, stocks have seen a few more 1% swings. With more than 70 trading days left in the year, my hunch is we could see more.

What’s fueling the volatility? The Fed, largely. Its monetary policy of raising interest rates to slow inflation without triggering a recession has created a lot of uncertainty.

Price swings are unnerving, but as the chart shows, they are nothing new. What’s most important is focusing on your goals and not paying too much attention to Wall Street’s daily ups and downs.

Four Steps to Valuing an Estate

Determining the value of an estate is a fundamental first step in estate management and a critical requirement for settling a decedent’s estate.¹

How to Assess the Value of an Estate

1. Select the date of calculation. Because values move up and down, you need to set a specific date for a valuation. For a living person, you are free to pick any date. If you’re assessing the value of a decedent’s estate, you may choose either the date of death or the date six months after their death (the “Alternate Valuation Date”). If you use the Alternate Valuation Date, any asset sold or distributed during the first six months following the death must be valued as of the date of sale or distribution.²
2. Determine the assets comprising the estate. This asset list should include everything an individual owns or has ownership interests in.
3. Gather all financial statements as of the date of calculation. If an account is owned individually, the entire value should be calculated in the estate. If owned jointly with a spouse who has rights of survivorship, then 50 percent of the value should be included.
   Remember to:
   -Deduct any outstanding mortgage balance.³
   -Include life insurance when the policy owner is the deceased individual or the beneficiary is the decedent’s estate.³
4. Calculate deductions. Subtract any debts from the total value of assets. For the decedent, this may also include any regular bills that may be due (e.g., utilities, medical expenses, etc.), charitable gifts, and state tax obligations.

Assessing the precise value of an estate can be complicated, especially when settling an estate. Please consult a professional with estate expertise regarding your individual situation.

Retirement Seen Through Your Eyes

How do you picture your future? Some see retirement as a time to start a new career. Others see it as a time to travel. Still others plan to spend more time with family and friends. With that in mind, here are some things to consider.

What do you absolutely need to accomplish? If you could only get four or five things done in retirement, what would they be? Answering this question might lead you to compile a “short list” of life goals, and while they may have nothing to do with money, the financial decisions you make may be integral to pursuing them.

What would revitalize you? Some people retire with no particular goals at all. After weeks or months of respite, ambition may return. They start to think about what pursuits or adventures they could embark on to make these years special. Others have known for decades what dreams they will follow … and yet, when the time to follow them arrives, those dreams may unfold differently than anticipated and may even be supplanted by new ones.

In retirement, time is really your most valuable asset. With more free time and opportunity for reflection, you might find your old dreams giving way to new ones.

Who should you share your time with? Here is another profound choice you get to make in retirement. The quick answer to this question for many retirees would be “family.” Today, we have nuclear families, blended families, extended families; some people think of their friends or their employees as family.

How much do you anticipate spending? We can’t control all retirement expenses, but we can manage some of them. The thought of downsizing your home may have crossed your mind. One benefit of downsizing is that it can potentially lead to no mortgage or a more manageable mortgage payment.

Could you leave a legacy? Many of us would like to give our kids or grandkids a good start in life, but leaving an inheritance can be trickier than many realize. Tax laws are constantly changing, and the strategies that worked years ago may have more limited benefits today.

Keep in mind this article is for informational purposes only and is not a replacement for real-life advice, so make sure to consult your tax or legal professional before modifying any part of your overall estate strategy.

How are you preparing for retirement? This is the most important question of all. If you feel you need to prepare more for the future or reexamine your existing strategy in light of recent changes in your life, conferring with a financial professional experienced in retirement approaches may offer some guidance.

A Taxing Story: Capital Gains and Losses

Chris Rock once remarked, “You don’t pay taxes – they take taxes.” That applies not only to income but also to capital gains.

Capital gains result when an individual sells an investment for an amount greater than their purchase price. Capital gains are categorized as short-term gains (a gain realized on an asset held one year or less) or as long-term gains (a gain realized on an asset held longer than one year).

Keep in mind that the information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation.

Long-Term vs. Short-Term Gains

Short-term capital gains are taxed at ordinary income tax rates. Long-term capital gains are taxed according to different ranges (shown below).¹

Long Term Capital Gains Tax Brackets (for 2022)

It should also be noted that taxpayers whose adjusted gross income is in excess of $200,000 (single filers or heads of household) or $250,000 (joint filers) may be subject to an additional 3.8% tax as a net investment income tax.¹

Also, keep in mind that the long-term capital gains rate for collectibles and precious metals remains at a maximum 28%.²

Rules for Capital Losses

Capital losses may be used to offset capital gains. If the losses exceed the gains, up to $3,000 of those losses may be used to offset the taxes on other kinds of income. Should you have more than $3,000 in such capital losses, you may be able to carry the losses forward. You can continue to carry forward these losses until such time that future realized gains exhaust them. Under current law, the ability to carry these losses forward is lost only on death.³

Finally, for some assets, the calculation of a capital gain or loss may not be as simple and straightforward as it sounds. As with any matter dealing with taxes, individuals are encouraged to seek the counsel of a tax professional before making any tax-related decisions.