Month: May 2022

It was the best of times, it was the worst of times. This is what the past several years have felt like. Markets reached the Covid bottom on March 23, 2020. For two straight years we experienced nothing but market bliss while simultaneously having daily life turned upside down. Today, it feels as though stocks and bonds have nowhere to go but further down. 

At the start of 2022, some markets were at an all time high. That was a very short time ago. Let’s stop to think about what that means. It means that markets have recovered from every single negative US and world event in history. I can list, and I am sure you can too, many historical events that were far worse than the Federal Reserve raising interest rates to fight inflation. 

To start this year, a reality check has reminded us what risk looks like on the way down. Speculative (or risky) assets have become extremely popular over the last two years, which is typical in extremely bullish periods. Unprofitable companies, Non Fungible Tokens (NFTs), SPACs, and speculative money managers were all soaring. However, investing money into companies or ideas that only have a nice story can produce devastating results. One example is the investment ETF (exchange traded fund) ARKK. It has reached notoriety across financial media and gained substantial popularity. According to its prospectus, it invests in companies with an investment theme of “disruptive innovation.”  The fund performed unbelievably through the pandemic…until it didn’t. Here is a look at the fund over the past five years relative to the S&P500. It is an example of what high risk looks like and has given up all outperformance to the S&P 500 over a five-year period.

Here is what the comparison looks like if you happened to jump on the bandwagon too late, after the investment soared. It is down 60% in the last six months as of May 23, 2022. 

As advisers, we continuously discuss our investment strategies with clients to understand how we are invested, and work to align those strategies with financial goals. We believe businesses with quality cashflows and earnings, and bonds with interest payments backed by strong credit ratings create a high likelihood of long-term success. 

As markets reach fresh lows and volatility remains high, take a step back to revisit your long-term plan with your advisor. Understand that asset drawdowns are a normal part of a long-term successful course. The Warren Buffet wisdom of being greedy while others are fearful is easier said than done, because fear rises during uncertainty and troubling time periods. As we work through this challenging time, never hesitate to reach out to your advisor, as we are here to serve the clients of SBC.

 

The information provided in this post is being provided for educational and informational purposes only and should not be considered an individualized recommendation or personalized investment advice.  Those seeking information regarding their individual financial needs should consult a financial professional.  Opinions expressed are current as of the day of posting but are subject to change without notice based upon changing market, economic, political, or social conditions.  All information is from sources deemed to be reliable, but no warranty is made as to its accuracy or completeness.  SBC, our employees, or our clients, may or may not be invested in any individual securities or market segments discussed in this material.  Past performance is no guarantee of future results and any opinions presented can not be viewed as an indicator of future performance.  Investing involves risk, including loss of principal.

Have you thought about selling your home recently? Or perhaps selling your vacation home or rental home to capitalize on this buying frenzy?

Real estate, specifically the purchase and sale of homes, has been a hot topic in recent years. Home prices have increased exponentially creating huge opportunities for sellers. But have you thought about the tax consequences of that sale? Or what options you may have to defer taxes or possibly avoid taxes altogether? 

Your tax liability depends on the purpose of the home and how long you have held the property. When you sell a home or property for more than you paid for it, you may owe capital gains tax. If you held the home for more than a year, you could owe long-term capital gains tax on the difference between the purchase price and selling price. Long-term capital gains tax rates are either 0%, 15% or 20%, depending upon your income. If you sold the home less than a year after purchasing, you could be subject to short-term capital gains tax. Short term capital gains are taxed at ordinary income tax rates, which could be much more than long-term cap gains rates depending on your income and profit from the sale.

However, there are some exceptions and exclusions to consider before you prepare to pay your dreaded tax bill…

  • Primary Residence Exclusion

If you are selling your primary residence, the IRS allows you an exclusion for capital gains tax called the “Primary Residence Exclusion.” You may exclude up to $250k of profits if single, or $500k if married filing jointly. To qualify, you must have lived in the home for at least two out of the previous five years.

Note: The IRS says you’re not eligible for the exclusion if you excluded the gain from the sale of another home during the two-year period prior to the sale. There are some exceptions to this rule, and you may still qualify or partially qualify if you had a change in employment, change in your health, or experienced other unforeseen circumstances.

*A common strategy for rental home owners is to use the property as their primary residence for at least 2 years so they can qualify for this exclusion.

  • 1031 Exchange

A 1031 exchange, also known as “like kind exchange,” allows you to defer taxes by selling your property and then buying a similar property. To do this correctly, the properties must be “like-kind” and you should use a qualified intermediary (in other words, do not take control of the cash before the exchange is complete or the entire transaction could be disqualified.) You must report this to the IRS on Form 8824.

  • Opportunity Zone Funds

Opportunity zones were created under the Tax Cuts and Jobs Act of 2017. The idea was to spur economic growth in low income communities and offer a tax benefit to those investing in these areas. Within 180 days of the sale, an individual may roll their gains into an opportunity zone fund, and defer the taxes until 12/31/2026. If you hold the investment for more than 10 years, any appreciation earned on the opportunity zone fund will be tax free. For investments made before 12/31/2021, an investor can get a 10% step up in basis for holding the fund at least five years.

  • Donor Advised Funds

If you are making substantial donations to charity, it could make sense to donate the property to a Donor Advised Fund and receive a deduction up to its fair market value. The limit for non-cash assets held more than a year is 30% of your AGI, but there is a carryover for five years if the deduction exceeds these limits.

All of that being said, please remember to not let the tax tail wag the dog. Taxes should be considered, but not at the expense of all else. Speak with both your financial advisor and accountant to weigh your options and determine the best strategy for your personal situation.

 

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With the S&P 500 Index down close to 16% and the US Aggregate Bond Index down almost 10% year-to-date, there has been nowhere to hide in markets. Frankly, the start to the year has been awful any way you slice it. 

Whether it stems from inflation, Fed policy, the dire situation in Ukraine, the strong US Dollar or declining US economic growth, there’s plenty of uncertainty out there at the moment. We acknowledge these are trying times. 

But it is moments like these that separate successful long-term investors from the rest. We believe this is when our value as advisors truly makes the most difference – helping our clients navigate rough waters. 

Staying the course and sticking to a financial plan in times like these is difficult. We all know markets don’t always go up but when corrections occur it just doesn’t sit right. 

Our natural instinct as human beings is to take action when we sense danger. Unfortunately, this instinct leads us to wanting to make emotional decisions about our investments at the most inopportune times. Even if doing nothing at all is the best option. 

As studies have shown, investors who try to get in and out of markets at the “right time” have consistently underperformed investors that stay invested. 

JPMorgan Asset Management reports that, from 2002 to 2021, based on research from Dalbar, Inc, the average investor had an average annual return of 3.6%. While a fully invested portfolio consisting of 60% stocks and 40% bonds returned 7.4% annually. 

In other words, the average investor does not have a great track record of timing when to get in and out of the market.

As further proof that it is difficult to know when to get in or out, we only have to look back a couple of years. The S&P 500 bottomed on March 23rd, 2020, about the time the US and global economies essentially closed their doors for business due to Covid. The S&P 500 was down over 30% from its all-time high a month earlier. Things looked bleak. 

But given the benefit of hindsight, we now know March 23rd, 2020 was the best day to put money into the stock market during the pandemic. It was, in fact, when things looked the worst and not when things were starting to feel better that produced the best future returns. 

Here is the good news though. I know a lot of individuals and families who were fully invested on March 23rd, 2020. I know these individuals and families because they are clients of SBC Wealth Management, and they rode the bull market through the end of 2020 and again through 2021. Not because they knew the market was going to do well or felt good about the economy, but because they were sticking to a plan and had stayed invested through the good times and the bad. 

So here we are again. Bad times in the markets have returned. We don’t have control over the current events causing uncertainty and we don’t know what the markets will do tomorrow. 

We do, however, have control over the investment decisions we make and the plans that were created with these times in mind. 

Is now the time to abandon ship? I don’t believe so.

With all that said, if you haven’t already, now could be a great time to revisit your financial plan with your SBC advisor. As always, we are determined and prepared to help you and your family through these rough waters.

 

The information provided in this post is being provided for educational and informational purposes only and should not be considered an individualized recommendation or personalized investment advice.  Those seeking information regarding their individual financial needs should consult a financial professional.  Opinions expressed are current as of the day of posting but are subject to change without notice based upon changing market, economic, political, or social conditions.  All information is from sources deemed to be reliable, but no warranty is made as to its accuracy or completeness.  SBC, our employees, or our clients, may or may not be invested in any individual securities or market segments discussed in this material.  Past performance is no guarantee of future results and any opinions presented can not be viewed as an indicator of future performance.  Investing involves risk, including loss of principal.   

All of us, no matter what our income or financial status, are subject to being a victim of financial fraud and other scams.  Both the number of these scams and their sophistication means that we should all be vigilant and protective of our personal information.  According to the credit card bureau Experian, 1 in 20 Americans are the victim of identity theft or related financial fraud every year, with a cost of approximately $17 billion. But the good news is that we can all take some steps to protect ourselves from these frauds and scams.

The most common type of fraud is the unauthorized use of credit or debit cards, where your card or account number is used to make unauthorized purchases.  This is followed by account takeovers, where someone attempts to take over your investment account, bank account, or credit card account, preventing you from accessing it and taking money or making unauthorized purchases from it.  The opening of new accounts or loans is yet another type of fraud.  This is where a new account or loan in your name is opened, and when spent or drained of funds, the resulting default gets charged to you.  Types of accounts opened often include credit cards, bank loans, car loans or leases, or utility or phone accounts.  Finally, governmental, tax, or employment fraud is used to generate identification in your name, apply for tax refunds in your name, or receive other government benefits in your name.  This type of fraud exploded during the Covid pandemic, when many people found that their identity had been used to apply for unemployment benefits or other covid related benefits.

The most important thing that you can do is to put a ‘lock’ or ‘freeze’ on your credit.  This will prevent unauthorized individuals from opening an account in your name, or using your credit or information to open an account in their name. While it is a bit time consuming to do, this is one of the best things that you can do to protect yourself from fraud, so the small investment in time is really worth it.  You can fill out a freeze online with the three major credit bureaus, by phone, or by mail.  The easiest way is online, where you can go to the websites of all three bureaus, answer a number of questions to verify your identity, and where you will be given passwords and pins.  KEEP THOSE PASSWORDS AND PINS in a safe place, for if you ever need to temporarily unfreeze your accounts (for example, to apply for a loan, open a new credit card or bank account, or the like) having ready access to those passwords and pins will make the unfreezing process a lot swifter.  You can also call each of the credit bureaus and do a phone version of the online forms.  Finally, you can do the request by mail, but this is by far the most cumbersome method, as the amount of documents that need to be mailed in, and the time to review them, makes this a last resort choice for most people.  You can usually request a free copy of your credit report at the same time, which is another great way to monitor open accounts and check for discrepancies.

The next best thing that you can do to protect yourself is to carefully monitor your account activity.  Most credit and debit cards have an option where you can be texted or emailed any time your account is used to make a purchase.  Be sure to enable this feature for all of your credit and bank/financial accounts.  By noticing any unauthorized transactions early, you can prevent further fraud, as well quickly notify your financial institution for reimbursement.

You should also pick unique, complex passwords, and regularly change passwords for important services, such as email, bank and financial accounts, and credit card accounts.  And be sure to choose different passwords for your email accounts and financial accounts!  If your email password is hacked and it’s the same password that you use for your bank or financial accounts, you’re putting yourself at needless risk.  Many people find it best to use a Password Manager.  This is a program that will generate and maintain unique, complex passwords for most of your online accounts.  While some charge a small annual or monthly fee, there are a number of free program that you can use as well.  PCMag has listed some of the better ones here https://www.pcmag.com/picks/the-best-password-managers.

Also, always authorize two-factor authentication (sometimes known as multi-factor authentication) when available.  Most all email services, financial companies, and bank offer this (in fact, many require use of two-factor authentication).  This is where you are only permitted access after entering your correct username and password, as well as entering a unique, ever changing password or pin that is sent to a phone or email account.  This way, even if someone does gain access to your username and password, without access to the device or account to which that second password or pin is sent, they would not be able to access that account information.

Lastly, always be mindful of where and how you are accessing your personal information.  Utilize secure online connections every time you check private accounts, and use a Virtual Private Network (VPN) when you can.  Never check your private accounts or financial accounts from an unsecure network connection – hotels, airports, and other ‘open’ networks are not the time and place to be accessing such sensitive information.  Wait until you are back at your home or office or elsewhere where you can be assured of a secure connection.

And one more thing – don’t forget paper documents!  Credit card offers, mailed statements, mailed bills that include account numbers, tax returns, and the like should always be disposed of properly.  If you have not done so already, purchase a cheap paper shredder and use it to securely shred all such paper documents.

By following the above advice, you can dramatically increase the chances that your private, personal financial information will remain secure from criminal activity.  And while some of the above steps do require a bit of a learning curve or time commitment to set up, it is time well invested – for your peace of mind and for the safety and security of you and your family!

 

Source: https://www.experian.com/blogs/ask-experian/how-common-is-identity-theft/