It seems like I wonder this every year about now, but how is it almost December? Like it or not we’re almost done with 2022 and there are boxes to check when it comes to our investments. I’m going to quickly offer some notes on two of them, rebalancing and RMDs, with more topics to follow next week.

It’s obviously been a rough year for the markets, as you can see from the chart below. Through the holiday-shortened trading day last Friday the stock market as measured by the S&P 500 index (not in the chart) is down about 15%. The Vanguard High Dividend Yield ETF (ticker symbol VYM) and the Vanguard Europe ETF (VGK) are mixed, from up almost 3% to down 16% year-to-date, respectively. You can see below how this performance is better than mere weeks ago, but it still hurts. Bonds are also down year-to-date, and that hurts more in a way, with the Vanguard Total Bond Market ETF (BND) and the Metropolitan West Total Return Fund (MWTIX) down 13% and 15%, respectively.

After 11 months of gyrations you probably need to rebalance your portfolio a bit. And maybe you have an RMD to take because you’re at least age 72 or perhaps have inherited a retirement account. Or maybe you just need to generate some cash for upcoming spending needs. Either way, let’s proceed…

A lot of people wait until year-end to process their RMD. This can be preferable in some cases, but RMDs have to be taken by 12/31 to avoid a penalty. The big brokerage firms are notoriously good at gumming up paperwork for last minute transactions, so the best time to take your RMD is now.

But what should you sell to generate cash in your IRA, 401(k), SEP account, etc? The rebalancing process can help with this question.

I charted the four funds above because they are some of the investments I actually use in client accounts. Each is high quality and I’m not necessarily concerned about this year’s performance – we still want to keep them. But what I’m focused on is rebalancing clients back to their target levels after the recent runup in prices.

The chart below shows holdings in a real account and their size relative to the target weighting I set. You’ll see that VYM has a target weighting of 12% but a current weighting of almost 14%, about 15% above target. VGK is up about 14% relative to its target. Conversely, the bond fund MWTIX is down 12% relative to target while BND is pretty flat.

Ordinarily I’d let VYM and VGK float a bit longer, perhaps up to a 20% variance, before doing anything. However, this client has an upcoming RMD and there’s room to cut, so we’ll trim back stocks and send money to the client’s bank account. I’ll then add remaining sale proceeds to bonds, most likely MWTIX since it’s lowest relative to target. Of course we could sell MWTIX instead of stocks because it’s already down and there must be something wrong with it. But that would create more of an imbalance in the client’s portfolio and, as I already indicated, there’s nothing wrong with the fund – it’s just down with the market.

Rebalancing like this helps ensure the components of our portfolios are allowed to move with market conditions, but not get too out of whack along the way. I do this throughout the year for clients but if you’re only doing this once, year-end seems like a good time.

Ideally you’d follow a process where each investment in your portfolio has a target to compare to. This requires data and tech to evaluate the data, something often challenging for a retail investor. Instead, you could look at a chart similar to the one I’ve posted above and generate cash from the best performers, not the worst. This year that’s probably dividend-oriented funds such as VYM or shorter-term bond funds that are down less than typical. Or maybe it’s from funds like VGK that have runup faster lately. Do the best with what data you have and remember to ask questions.

Also, the IRS doesn’t necessarily care what you do with your RMD – just that it leaves your retirement account and becomes taxable. This means you can punt any rebalancing decisions by moving shares of one or more investments from your retirement account into a non-retirement account. This might seem like a simple solution, but I definitely wouldn’t surprise your brokerage firm with this request too late in the year.

Another also: Remember that beginning at age 70.5 (the actual month and not earlier) you can gift directly to charity from your retirement account. This age limit is a holdover from when RMDs began at 70.5 instead of the current starting age of 72. Either way, you can direct your brokerage firm (or your humble financial planner) to have checks sent directly to charities from your account, up to $100,000 per year with no minimum. You won’t get to deduct the charitable contribution, but you won’t have to declare the distribution as income either. If you’re planning to make charitable gifts anyway and are required to take an RMD, Qualified Charitable Distributions are often the better option taxwise.

Have questions? Ask me. I can help.

What a crazy year it’s been for the markets! There’s been tons of volatility and the direction most of the time has been southward. Good days have often turned sour, and weeks will go by where it feels like you couldn’t buy a positive day. So it was wild to see just about everything going up dramatically following better-than-expected inflation data coming in last week.

Inflation has been on everyone’s mind this year and, for investors, it’s been all about how the Fed is responding by raising interest rates. With last week’s news of slowing inflation in October following slowing in September from highs in June, the lightning-fast thinking for investors was that the Fed could slow the pace and severity of its rate increases, reducing the risk of creating a recession or making it worse if we’re already dipping our toes into one. More positive data along these lines came in this morning and markets are continuing to respond favorably, at least so far.

Everyone wins if inflation continues to slow, but much remains to be seen in the months ahead. Perhaps ironically, these inflation numbers often get revised so if we end up having seen a major market reaction based on inaccurate numbers it wouldn’t be the first time, positive or negative. But I think in this case it’s less about the specific numbers and more about the changing inflation trend.

Anyway, I just wanted to share what the market reaction looked like last week. The chart below shows four indexes: the S&P 500 in green, developed foreign stocks in blue, the NASDAQ in orange, and bonds in light blue. It’s easy to see when the news came out! Yes, even after last week stocks are still down 15+% this year and bonds are just a hair better, but it’s still great to see such a positive response to generally positive news.

Among other things, one takeaway from last week’s performance is that it’s impossible to time entry and exists into and out of investments with precision over time. Maybe you get lucky once or even twice. But extend that into investing your serious money and you’re bound to get into trouble.

I’ve picked on the brokerage firm Robinhood in the past and reading what I’m posting below brought them to mind again. The average age of Robinhood clients is 32 and roughly half of its client base are first-timers. Robinhood was/is a proponent of the so-called democratization of finance and, while laudable, is tough to implement. A lot of new investors got sucked in via gamification and faux-free access to markets and rode markets higher before getting beat up this year. According to research by Schwab, many of these younger investors feel a bit chastened and are refocusing for the long-term. If so, this is great because getting the basics right and branching out from there is essential – there are no shortcuts and day trading is perilous at best.

Along these lines, here’s a note from JPMorgan that’s geared toward younger investors but is good information for anyone.

2022 has been a year of remarkable volatility across asset classes. Stocks, bonds and cryptocurrencies have been rocked by a confluence of challenges that could be described as a “perfect storm.” This volatility stems from a number of factors: COVID-19 and its impact on growth in Asia; the war in Ukraine and its impact on global commodity prices; severe economic slowdown thanks in part to a massive fiscal drag; midterm elections, which lead to uncertainty surrounding future policy; multi-decade high inflation; and steadily rising interest rates as global central banks shift policy from accommodative to restrictive. 

Asset price volatility impacts all investors regardless of age or income levels. Still, younger investors - namely Millennials and Gen Zers - may struggle more than most. Some of this can be attributed to their relative inexperience in markets, as many had not invested through a bear market; some can be attributed to the lack of guardrails in modern investing, with online brokerage platforms allowing for low- or no-cost access to markets without corresponding advice; and some can be attributed to the composition of younger investors’ portfolios, which heavily favor single securities (like stocks and cryptocurrencies) and options. 

Given these circumstances, many younger investors may be wondering how to make sense of current conditions. Broadly speaking, there are three simple steps to better weather volatility:

• Diversify portfolios away from heavily concentrated positions in risky assets. The benefits of the “democratization” of investing in recent years are myriad and it would be imprudent to recommend that young investors liquidate volatile but long-term assets like cryptocurrency. However, it is worth building a well-diversified portfolio around these riskier holdings to mitigate volatility while still embracing risk, which is necessary for young investors given their long-term time horizon, relatively low liquidity needs and poor short-term market prospects.
• Dollar-cost average into markets to avoid market timing pitfalls. Ideally, most young investors are already dollar-cost averaging through regular contributions to 401(k)s. Moreover, these 401(k)s can be “enhanced” by increasing contribution amounts or shifting, if appropriate, into a post-tax “Roth” vehicle. If an investor has reached their contribution limit, investments into non-qualified accounts can be made in the same manner.
• Recognize that heightened volatility is structural in modern markets. Markets, and information more broadly, move faster today than ever. Given the rise of algorithmic trading, high-frequency trading and a more empowered retail investor, this trend will likely accelerate. For this reason, young investors should recognize that future markets will continue to be volatile and become comfortable with this volatility.

All told, younger investors may find today’s volatile market environment uniquely challenging. However, it is possible to manage through these challenges and emerge on the other side with better financial health.

Asset ownership by age group

Here’s a link to JPMorgan’s website if you’d like to read the piece there.

https://am.jpmorgan.com/us/en/asset-management/adv/insights/market-insights/market-updates/on-the-minds-of-investors/how-can-millennials-ride-out-the-current-market-storm/?email_campaign=304062&email_job=353218&email_contact=003j0000018XcwiAAC&utm_source=clients&utm_medium=email&utm_campaign=ima-mi-publication-wmr-Earnings-11142022&memid=7220927&email_id=65707&decryptFlag=No&e=ZZ&t=613&f=&utm_content=Read-the-latest

Have questions? Ask me. I can help.

Good morning. Unfortunately we had a death in the family in recent days and that’s set me back a bit with work. I’m going to skip this weekly post but will be back at it next week.

Until then, consider taking ten minutes to review the ownership and beneficiary designations on your different financial accounts. These are easily changed during your lifetime but are pretty much etched in stone after death.

Here are a few basic questions to answer:

Are you married and own any accounts in your own name? Is this on purpose?

There are various reasons to keep money separate from a spouse, but accounts owned in your own name and that lack a beneficiary designation will likely go through probate. Sometimes this is a good thing, but probate is usually something to be avoided if possible. Ideally any accounts owned just by you would have beneficiaries, even bank accounts.

Are your life insurance, IRA and 401(k) beneficiary designations set up the way you want?

This is easily changed but often overlooked. Is your ex-spouse still listed on your account? Or maybe you listed “estate” as your beneficiary, ensuring your account will go through probate. Is that what you want?

Does your spouse feel comfortable (or at least moderately comfortable) with how you have the household’s finances setup?

In other words, how steep will the learning curve be after you’re gone? Is information easily accessible and understandable by your spouse (or others) if you’re not there to explain it? Have you simplified as much as possible or does your financial picture resemble a Jackson Pollock painting?

There are more questions, of course, but that’s a start. Think seriously about this because errors and other miscalculations can result in major headaches or worse for your loved ones after you’re gone. I’ve talked before about taking ten minutes each workday to focus on your finances. This simple exercise is a great way to spend that time periodically, say at least once per year.

Have questions? Ask me. I can help.

Good morning. I’m taking a brief hiatus from writing my blog this week in anticipation of Thanksgiving. I don’t know about you, but I tend to value this holiday more as I get older. It’s a time for appreciating those around me and all that my family and I have to be thankful for. Of course we can and should be thankful and appreciative all year round, but I like the focus on it that the holiday brings. Oh, and the food – we can’t forget about the food.

Anyway, I wanted to share a few articles getting into the details of the latest rapid rise and shocking fall of a cryptocurrency star. This time it’s a firm called FTX, a crypto exchange that’s looking more like a Ponzi scheme of epic proportions as more information comes out.

This sort of situation is instructive because it reminds us that it’s almost always the people behind the tech who cause the problems, rarely the tech itself. Digital assets (the industry catch-all term for crypto) are the way of the future and some structures like bitcoin will eventually revolutionize aspects of our financial system. Not yet, but it’s fashionable and profitable to pretend so. Celebs and other bigwigs have jumped on the bandwagon and this, in a sense, helps to mainstream these technologies. But along the way hubris and old-fashioned greed create cautionary tales like this and, unfortunately, lost fortunes along the way.

So if you find yourself needing something to read as you digest your Thanksgiving feast check out these articles and feel thankful you weren’t (hopefully) an FTX investor.

From my family to yours, Happy Thanksgiving!

Here’s an article from Vox that provides a good overview of the situation.

https://www.vox.com/the-goods/23451761/ftx-sam-bankman-fried-bankrupt-binance-bitcoin-alameda

Here’s one from The Wall Street Journal offering additional detail. Let me know if you run into the paywall and I can send this to you from my account.

https://www.wsj.com/articles/how-ftx-sam-bankman-fried-went-from-crypto-golden-boy-to-villain-11668199208

And here’s a longer investigative-journalist-type of article that provides a lot of detail and interesting insights into what went wrong with FTX (and it's key subsidiary, Alameda Research), the personalities, and offers some explanations as to why this happened.

https://milkyeggs.com/?p=175

Beyond that just Google “FTX collapse” and jump down the rabbit hole.

Have questions? Ask me. I can help.

Inflation has been working it’s dark magic in a variety of ways for the last year or so. We’re all painfully aware of it’s impact on gasoline prices, food, housing, and just about everything else under the sun that costs money. It’s not all bad news, however. Most government limits on retirement savings are tied to inflation and have recently been increased for 2023, allowing us to save more for our future. Of course this only helps if we can afford it, but more opportunity is better than less, right?

Here’s a rundown of some of the updates to keep in mind for next year if you’re still saving for retirement.

Individuals younger than 50 can contribute $22,500, up from $20,500 this year, to their 401(k), 403(b), and 457 plans. The “catch-up” contribution for those 50 or older goes up to $7,500 from $6,500 for a potential total contribution of $30,000 from the employee in 2023 for those 50 or older. Company matching doesn’t impact these limits.

The maximum IRA contribution increases to $6,500 from $6,000. The catch-up works the same way as above but is still $1,000 like this year because, for whatever reason, that provision isn’t tied to inflation.

The phase-out ranges impacting deductibility of IRA contributions are tied to inflation, so those are rising too and allow savers to earn from $5,000 to $7,000 more of income and still deduct contributions on their taxes. For example, a single person could earn up to $83,000 next year and deduct some of their IRA contribution. Married couples can go up to $136,000 of income. (That’s a simplified way to look at the phase-outs, but a tax advisor can help determine if they impact you.) The phase-out ranges are even higher for Roth IRA contributions.

The personal and family limits for HSA contributions will go up to $3,850 and $7,750, respectively. HSAs also have a catch-up provision that starts at age 55 but, as with IRAs, is still $1,000.

Here’s a link to an IRS document for more minutia and inflation adjustments to other provisions.

https://www.irs.gov/pub/irs-drop/n-22-55.pdf

This extra room to save into tax deferred accounts comes at a good time given the tumult in stock and bond markets. Through last Friday, the S&P 500 is down 20% this year while Big Tech and other sectors are down 30+%. Medium-term bonds are down maybe 12% - 20%, depending on type. This means that long-term money can be saved today at a discount. These next several months tend to be some of the best of the year for the markets, so planning to front-load your accounts early in the new year (and topping off your accounts for this year as well) may make sense, again assuming you can afford it.

A risk here is getting too carried away with retirement savings and neglecting your emergency fund. Generally speaking, withdrawing from a retirement account before age 59 ½ comes with taxes and a penalty, so avoid overextending yourself. Always, always, always, keep a clear line between what of your savings is investible for the long-term and what needs to be kept at the bank for short-term liquidity.

A quick note on interest rates…

By now you’ve heard that the Fed raised it’s short-term benchmark interest rate by 0.75% again last week. As I’ve mentioned in other posts, each change reverberates throughout the US and global economies, and we’ve now had six increases since March. That’s a lot in a short time and more increases are expected. In fact, much of the market’s gyrations this year and again last week were based on rapidly (literally as Fed Chair Jerome Powell was giving his press conference on Wednesday) evolving thoughts on where the Fed’s collective head is at with rates – what’s their target? We began the year with short-term rates at essentially 0% and now we’re at 4%. A variety of folks are expecting we need to get to 5% or 6% before the Fed stops raising for a while to let things settle, but that outlook changes often. Inflation, at least according to the Fed, is expected to wane into next summer but Fed officials say they want to see that happen “decisively” before changing their stance on rates.

I mention all this again because the common thread from most market prognosticators is to expect that rates will remain high for some time, perhaps a couple of years or longer. This has likely already impacted your personal balance sheet by increasing the cost of any variable rate debt, say on a home equity line, while also potentially reducing your home’s value: a double whammy. If you still have variable debt tied to PRIME (now at 7%, up from 3.25% in January) or perhaps a LIBOR index (at 4.6%, up from maybe 0.2% in January, depending on which LIBOR term we’re looking at), call the lender to see about transitioning to a fixed rate. That may not be an option, or it may not make the best sense for you based on your loan terms, but I can help evaluate if there’s any way to refi out of rising-rate debt or perhaps pay it off with other assets.

Have questions? Ask me. I can help.

Trust is fundamental to our relationship with others – with other people, private and public institutions, and especially our elected representatives in government and those they appoint. In fact, our entire financial system and much of our economy is based on trust. So it hurts when those in power, those with special or “insider” knowledge, seem to use their position to enrich themselves. One might suggest that this is nothing new and that taking advantage of one’s position is as old as time. But perhaps what’s different now is that we learn about it faster and more thoroughly. It’s just too hard to hide these days.

Take recent findings by The Wall Street Journal and others that shine a bright light on stock and bond trades made by a host of government officials during the worst of the covid market crisis. A lot of this was news last year, but current reporting shows how widespread the issue was. As markets were only starting to rage into February 2020, officials at HHS and the NIH, for example, left their closed-door meetings about the looming pandemic and sold stocks. Going into the worst of the market lows a month later, officials at the Fed and even within Congress, bought stocks as both bodies were set to announce lowering short-term rates to zero and passing truly massive stimulus programs.

These trades could all have been honest coincidences, but how likely is that? An official might suggest that the trades were just normal rebalancing or were made by others such as spouses or the family financial advisor. They might also suggest that the closed-door meetings they were part of didn’t provide actionable investment-related information. Really? The timing of the trades by officials profiled in the articles below leaves little to the imagination.

The various federal agencies have their own ethics rules governing the trading of stocks and bonds by elected and appointed officials. I know from professional experience that these issues can get muddy pretty quick. Some officials simply own broad stock and bond market portfolios and buy, hold, and rebalance like the rest of us, pretty standard. Some officials trade stock in individual companies they regulate or have special knowledge of, which is an obvious ethical breach. But other officials timed their transactions in broad market funds based on special timely knowledge gleaned from their work. If those officials knew that government actions would very soon be shuttering the economy, or providing massive amounts of cash to stimulate it, well before the general public knew, and then bought and sold based on that information, doesn’t that seem just as wrong as someone engaging in insider trading? Maybe these officials could throw up technicalities in defense and skate past clear ethics violations, but the optics are horrible and further degrade our trust in the people who make up incredibly important institutions.

My understanding is that government ethics rules in this area are mostly based on disclosure, which happens maybe a month or two after trades take place, and sometimes annually. These disclosures are public but not always readily available. For example, the president of a regional Federal Reserve Bank posts their disclosures on the bank’s website, while the disclosures from other officials have to be sought out via submitting a government form. That’s what The Journal and other organizations dug into, and the results of their work aren’t flattering for a host of officials and the norms at many agencies.

Lots of people talk about things being rigged. Our political system is rigged. Our economy is rigged. And our markets are rigged to rake the “little guy” over the coals while “the man” fills his pockets past the point of spilling over. Personally and professionally, I think much of the rhetoric around stuff like this is overblown. By and large our systems work as intended while not being perfect; you just have to know how to navigate them. And that’s a big part of what I do within my own little corner of the world every day for clients. But unfortunately, news like this reenforces the public’s cynical views. How can it not?

My point with bringing all this up is to remind of us of the obvious: even officials in a position of power and trust can, and presumably often do, take advantage of their position for personal gain. They know they’ll probably be caught and, if so, they just apologize and move on. And their apologies in these cases have ranged from the half-sincere to, shall we say, stretching the concept of plausible deniability. I’m not naïve enough to be surprised by this behavior, but perhaps I’m still naïve enough to be saddened by it. I choose to believe in the fundamental good in us all, but there’s a little Gordon Gekko in there too and some have more than others. I hope the days of selfless acts for the betterment of society aren’t gone for good.

That said, check out these articles to learn more about this issue. Or just Google it. There’s plenty of news to go round.

The Wall Street Journal has a paywall. Let me know if you hit it and I can send the article to you from my own account.

https://www.wsj.com/articles/covid-washington-officials-stocks-trading-markets-stimulus-11666192404?mod=hp_lead_pos5

And here’s an interesting timeline from earlier this year by Yahoo! News focusing on Fed members and their pandemic trading. In some cases the officials were forced to sell their stocks and, presumably, incur the tax burden. But what about the ill-gotten gains? I haven’t read anything about sizeable donations to charity…

https://news.yahoo.com/a-timeline-of-the-federal-reserves-trading-scandal-104415556.html

Have questions? Ask me. I can help.