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Thoughts in Charts: Are the Tax Winds Shifting?

In Kansas you’ll often hear – “If you don’t like the weather, wait a minute.” Long-Term Capital Gains tax rates have historically been a bit like the shifting Kansas winds. The current proposal has a long way to go before its final, but it’s bringing this tax to the forefront of conversation.

Here is a bit of vocab so that you can sound smart when this comes up over dinner:

  • Capital Gains are the difference between the amount you paid for an investment and the amount the investment is worth when you sell it.
  • Long-Term means that you held that investment for over 1 year.
  • The tax applies when trading taxable accounts meaning that it doesn’t impact retirement accounts like IRAs or 401(k)s.
  • It’s a tax on realized gain so it only applies when you sell the investment.
  • The rate on the chart above is the top nominal rate which is the top rate paid on the last dollar. The proposed 43.4% would be assessed on taxpayers with greater than $1 million in taxable income. For those under that threshold, the top rate remains 23.8%.
  • The current proposal is retroactive. The timing is a bit vague, but, for now, there isn’t an incentive to run out and sell now to avoid higher taxes later.

I’m not going to lie; this proposed rate changes the equation on taxable investments. This tax is currently 100% avoidable by holding onto the asset. There are several factors that go into a sell decision, of which tax impact is one; the higher the tax rate, the less likely it is that selling is a good idea.

“If you don’t like the weather, wait a minute” isn’t a flippant statement. In Louisiana, as it was in Kansas, the weather is a life changing force. The statement is more pragmatic. We can no more control the weather than we can the tax legislation. We will deal with what comes and then we will wait for whatever comes after that. Even if it’s not right now, as this chart illustrates, it’s reasonable to hope that the tax winds shift favorably sometime in the future.

For disclosures, please click here.

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Thin(k) About Your 401(k) Plan

Market Volatility Is A Reality

It is Thursday, June 24, 2021, and one of my favorite financial periodicals arrived in the mail today.  It is dated June 21, 2021, with a cover article exclaiming that last week was the worst week of the year for the DOW with the Index down 3.45% at 33,290.08.  The market seems a bit skittish to me with the pundits speculating on inflation and what the Fed might do to interest rates and when.  Volatility is real and it impacts the value of investors’ portfolios.  So, I do not take these swings lightly; but I do try to take them with perspective.

First, the DOW, while a very popular index watched by many, tracks 30 large, publicly owned blue-chip companies trading on the New York Stock Exchange and the Nasdaq Composite.  The S&P 500 which tracks the 500 largest corporations by market capitalization listed on the New York Stock Exchange or Nasdaq Composite is naturally more diversified and was down only 1.9% over the same period.  Here is a time where diversification worked to protect on the downside when the S&P 500 is compared to the DOW.  So, before you get excited or nervous, look at your portfolio to see if it looks more like the DOW or the S&P 500.

Second, the markets have periods of time where they are up or down dramatically.  We call them “corrections” and they are measured as declines of more than 10%.  In fact, the chart below illustrates very well what transpires when markets correct, which is a much bigger event than a down week.  As you can see, corrections happen fairly regularly and every year noted has a down period of time as noted as the “intra year decline.”

Now, below is a chart of the S&P 500 over roughly the same time period.  The trend is upward even though down periods occurred each year.

Back to the present. As I mentioned earlier, the periodical is dated June 21, so now it’s Thursday, five business days after the sell-off began.  The DOW just closed at 34,196.82 and is UP 2.72% for this one-week period (June 17-24).  Much is happening in the markets as we emerge from the pandemic with economies re-igniting around the world, albeit at different paces.  I fully expect volatility to remain in the markets.  However, this is good.  We are returning to normal and that means good things for the world economy and the markets over the long-term.

Just a reminder, that volatility can be positive too.  Let’s celebrate a week where the DOW was up 2.72%.

For disclosures, please click here.

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Thoughts in Charts: Retirement Ready vs Debt Free

This week’s chart illustrates why I encourage people to consider their retirement savings with the same weight as they consider aggressively paying off debt. The idea of living debt free is so catchy and liberating, but what if it’s costing you your financial freedom later in life?

The Forbes Advisor article, “Should You Pay Off Debt or Save For Retirement?” walks through a decision tree for how to prioritize your savings and debt decisions. It’s a great read, but I’d add one behavioral hack to your decision-making process: The Rule of 72.

One of the issues with deciding between paying down debt or saving for retirement is that you can’t predict the returns of the market. It’s pretty easy to calculate the interest that you owe over the life of the loan, but it’s hard to know what your investment will be worth later in life.

The Rule of 72 gives you a shortcut to help estimate how long it would take your investment today to double, given an assumed interest rate.

If you assume a rate of 5% then 72/5 = 14.4 years to double your money. If you assume 8%, then it would take 9 years to double your money.

Since you probably know how many years you have until retirement, the Rule of 72 can help you design an estimated range of probable values for your investment.

In the above example, if you have 48 years until retirement, a $10,000 investment given a fairly reasonable rate of return should have a value of between $40,000 to $160,000. In an extreme case, it could be as much as $2,560,000.

This type of table frames-up the impact of saving and gives you more information as you make your decision. If the loan interest you save by prepaying is far less than the gains suggested by the Rule of 72 table, it’s time to consider if “debt free” is really worth the cost.

For disclosures, please click here.

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Thin(k) About Your 401(k) Plan: In-Plan Roth Conversion

The Small Business Jobs Act of 2010 modified by The American Taxpayer Relief Act of 2012 gave retirement plan sponsors the ability to offer in-plan Roth conversions.  Additionally, plans that don’t currently offer the provision can add the option.  An in-plan Roth conversion is a way to convert pre-tax savings to Roth savings.

Participants opting to do so must report the conversion amount as gross income on their tax return in the year of conversion and pay taxes due as a result.  The Roth money then grows tax deferred and can be distributed tax free as long as the participant leaves the converted money in the Roth account for five years and has reached the age of 59 ½.  This is a complex tax issue and anyone considering an in-plan Roth conversion should consult with their tax advisor.

Some of the reasons to consider an in-Plan Roth conversion are:

  • Expectation that tax rates will be the same or higher in the future
  • Taxes due can be paid from a source other than the retirement account
  • Desire to have a bucket of cash available tax free in retirement
  • Investing for the long-term, especially five-plus years to avoid penalty and taxes

If you expect your taxes to be lower in retirement, you don’t have cash available to pay taxes due at conversion or you will need access to the money in less than five years, this option may not be for you.

There are a few things to consider before you explore an in-plan Roth conversion.  First, does your plan offer the option or intend to in the future?  No need to consult your tax advisor if the answer is no.  Second, make sure you fully understand the requirements for the money to be distributed tax free (five-year holding period and age 59 ½) or you may subject yourself to a 10% penalty tax and taxes due for early withdrawal.

However, given the current chatter about higher taxes in the future, more and more savers are interested in exploring the in-plan Roth conversion option.  Vanguard provides a helpful table here, that explains in further detail the option.  ThirtyNorth Investments does not give tax advise.  You should consult your tax professional regarding in-plan Roth conversions.

For disclosures, please click here.


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Thoughts in Charts: Quilting Lessons

My grandmother was a skilled quilter. She and I spent many summers in her sewing room meticulously building these works of art. I often would get so lost in the block-by-block detail, that I’d forget to step back and see what was really being created.

Sometimes I get stuck in the blocks with this chart too. I immediately dive into what segments of the US Markets did the best or the worst during specific periods. I wrote (and deleted) four paragraphs on the nitty gritty of this chart before I remembered my grandmother’s advice to step back.

Big picture, I see is a fairly random quilt. The bottom of the chart is a bit darker, with underpriced value companies toward the bottom but sometimes popping to the top. The lighter blocks, the growth companies, tend toward the top but sometimes fall downward. It’s just two years of information, so the picture is small.

Delving into the details of this chart, you can get trapped into looking for conclusive patterns. It’s tempting to think that if one segment is doing badly, it will pop to the top next quarter, or that a block will continue to stay at the top because it’s been there for several quarters. I often hear pundits articulate their points of view as if they are a foregone conclusion – like they are reading from a clear pattern. This chart, however, illustrates that they are not.

Our job is about probabilities and risks. If anything in our business is actually a certainty, then it has no risk, and therefore, no upside or downside potential. Our job isn’t to know the future. When I step back and look at the entire quilt, I’m reminded that our task is attempting to increase our probability of success while managing the risks that make return possible.

The chart is not only one color and that’s what makes my job interesting. We stay exposed to the pieces or boxes, because we don’t know for certain what order the blocks will fall next quarter. This chart informs decisions, and this chart also reminds us that all portions of the market have good times and bad.

For disclosures, please click here.

Lynch, Katherine. “2020 Market Performance in 7 Charts”, Morningstar. 5 January 2021. https://www.morningstar.com/articles/1016670/2020-market-performance-in-7-charts

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Three Key Risks of Retirement

Ready for Retirement?

As Boomers get older, we can expect that the number of retirees will grow each year.  After all, the oldest member of this generation is now 74 while the youngest is 56.  If we look at the statistics of Pew Research Center starting in 2012, the annual increase in the retired Baby Boomer population has run between 1.5 million to 2.5 million a year… until 2020.  The increase in 2020 was markedly higher at 3.2 million, for a total number of 28.6 million retired Boomers.

Some Boomers made a lifestyle choice in 2020, accelerating their retirement plans for personal reasons.  Others may have been furloughed, or lost their positions, and decided to not get back into the game.  For whatever reason, this choice is best made with preparation – emotionally and financially.

Let’s begin with our financial readiness, including the consideration of the risks during retirement. The Society of Actuaries identifies 160 retirement risks, but protecting against all of these is not possible.  Many are completely out of our control and not probable. Here are three significant financial risks, however, for which we can make plans:

  1. Longevity risk. This risk of outliving our money is a sobering one, especially considering the extension of our life expectancy.  Recent statistics are that for a 65-year old couple in relatively good health, there is a 50% chance that one in the couple will live to age 92, and a 25% chance that one in the couple will live to age 97.  Planning for 30 years of retirement is becoming the norm, and we should prepare ourselves accordingly.
  2. Market fluctuations.  If your life savings are invested in the stock and bond markets, you can expect to confront the uncertainty of market fluctuations.  Historically, 20%+ downturns in the stock market have been less frequent than people realize, but they do happen (remember March?) and create anxiety.  This is when an investment plan which dovetails with our personal needs and risk tolerance is critically important.
  3. Unexpected spending needs. It would be nice to know what negative surprise might present itself, and when it might happen, but that is not the nature of unexpected needs. What we can do, though, is model various scenarios for unexpected expenses and plan for addressing them. Stress-testing our plans also provides confidence that even an uncertain future can be handled.

Downside risks are a reality, but we can create peace of mind by addressing them. When we do, we are truly bringing together our money with the meaning it serves in our retirement lives.

Retirement planning can be an exciting process, filled with dreams of being liberated from a more structured schedule and envisioning more time to enjoy life, friends and family. Whatever our dream, planning financially and emotionally will help us enjoy it.

For disclosures, please click here.

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Thin(k) About Your 401(k) Plan: Reflections on 10 Years as An Advisor – Part 3

It’s probably not surprising that investment strategies are unique just like people. Each investment client is different in what motivates him or her to invest or how he or she feels about risk.  As a result, advisors use both science and art when working with each client to develop an investment strategy and construct a portfolio of diversified investments.

Based on my experience, I begin with two overarching goals for each client:

  1. Invest the client’s money in a globally diversified portfolio. The variety of different asset classes we consider include stock and stock like investments, bond and bond like investment, and real estate, among others.  Additionally, we consider growth and value stocks in companies of all sizes.  In the bond space, we look at bonds issued by governments, municipalities, corporations, and other issuers.
  2. Take the appropriate amount of risk for the client’s circumstances and goals. It is important for an advisor and client to have a full discussion to determine an appropriate risk level using both art and science in the process.

So how much risk is appropriate for each client?  First, there is a science to this decision that is driven primarily by the amount of time until the money will be needed.  For some this might be retirement while for another it might be to buy a house or pay for a wedding.  If there’s more time until the money is needed, the science side of investing says more risk may be appropriate.  Likewise we need to reduce the risk as we get closer to needing the money.

Stock investments generally are more volatile than bond investments.  So, we usually reduce the stock exposure as the date the money is needed approaches.

Second, there is also an art to determining the appropriate risk for a client to take.  This is the softer side of the decision.  How does the client feel about risk? Does he wake up at night worrying about the value of his account?  If so, we might recommend reducing the risk level.  Does she want to put the pedal to the metal and take as much risk as possible?  This could lead us to considering taking more risk than the science side would dictate.

As we craft a client’s investment strategy we continue to be mindful of bringing together money and meaning.  We can accomplish that when we know what each client’s ultimate goal is for his or her money.  That way, we can plot a course to reach that goal and help our clients create a globally diversified investment portfolio, take the appropriate amount of risk and adjust that risk lever as the need to use the money approaches. It’s about realizing that investment is both art and science.

Follow this link to see our core Investment Principles.

For disclosures, please click here.

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Thoughts in Charts: Office Space


Office Uncertainty: it’s a real thing. With so many people working from home, I’d love to see a graph about how much time people have spent wondering if they will ever return to the office. It’s probably up there with the thought time spent how to make sourdough.

Office uncertainty has also led to some discussion about the virus’s impact on the broader real estate market. With people leaving cities, will apartments struggle? Now that companies know we can work from home, will they cut down on the overhead of office space? We learned that everything can be delivered to our door – will we ever go back to shopping in person?

The answers to these questions may not matter as much for publicly traded US Real Estate Investment Trust (REIT) investments as you may think. These investments allow liquid access to real estate exposure, so they are a nice fit for most clients. Like many things, all of the uncertainty around the virus left this investment space pretty banged up, but the above chart challenges the notion that real estate can’t thrive without offices and malls.

A large part of public real estate is now cell phone towers and data centers.  I recently spoke with a fund representative who reminded me that when you order something from your phone, you actually engage three types of real estate: cell phone towers, data centers, and industrial properties. By his measure, that is about 45% of the public REIT universe.

That office space we have been pondering so frequently lately – it makes up about 7% of the public REIT space.

Alright, so about that sourdough…

For disclosures, please click here.

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Thoughts in Charts: We Will Pay for This

Source: Congressional Budget Office

This week’s graph is a bit of a bummer, so if you are having a “rainbows and butterflies” type of day, maybe just skip it. The chart is the Congressional Budget Office’s (CBO) projection of the national debt as a percentage of output if we don’t make any changes to current taxes and spending. We are already at World War II levels, and the projected uptick is steep.

There is a solid argument out there that says that the national debt really doesn’t matter that much. I tend to agree with a lot of that – to a point. I also believe that there is a level at which it very much will matter. I buy into the CBO’s statement that:

“High and rising federal debt makes the economy more vulnerable to rising interest rates and, depending on how that debt is financed, rising inflation. The growing debt burden also raises borrowing costs, slowing the growth of the economy and national income, and it increases the risk of a fiscal crisis or a gradual decline in the value of Treasury securities.” 1

The good news is that this is a ratio. If Gross Domestic Product (the denominator) goes up, then the overall percentage goes down. If we produce more than anticipated, it may not look quite so bad down the road.

Will we reach a point where changes will be required? As I look at this chart’s big picture, I think we will eventually have to face the spending and revenue numerator in this ratio. Yes, I mean changes to both government spending and taxes. I warned you that this wasn’t a feel-good read.

At some point, it seems likely that this level of debt will matter enough that we need to act. That being said, there are a lot of variables at play. If you’d like to dig in and find out what drives this projected ratio, “The 2020 Long-Term Budget Outlook” is very readable – plus, it has a lot of great charts!

For disclosures, please click here.

1 Congressional Budget Office. “The 2020 Long-Term Budget Outlook.” PDF file. September 21, 2020. https://www.cbo.gov/system/files/2020-09/56516-LTBO.pdf

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Where Did It Go?

When special US government programs distribute money to individuals broadly, we often wonder how the money was actually used. It can occur after a natural disaster, and it happened in March with the $2.2 trillion CARES Act stimulus in response to the pandemic.

Federal Reserve Bank of New York economists published in Liberty Street Economics the results of surveys they conducted to answer this very question. You can read the entire report, “How Have Households Used Their Stimulus Payments and How Would They Spend the Next?” Here are the key points:

  • While the payments ($1,200 for qualifying adults and $500 for each child) were a significant boost to the economy, only a small share (29%) was spent by June 2020. The remaining funds were allocated to savings (36%) and paying down debt (35%).
  • Survey results suggest “households expect to consume even smaller shares of a potential second round of stimulus payments, while they expect to use a higher share to pay down their debt”.
  • Across all demographic sectors, an average of 8% of the funds were spent on non-essentials, such as hobbies, leisure or other items not absolutely necessary. This 8% is included in the 29% spent by June 2020, as is 3% which was donated.
  • The same survey found respondents receiving Unemployment Insurance payments during June consumed in approximately the same percentage (28%), but that amounts allocated to savings were less (23%) and a greater amount was used to pay down debt (48%).
  • The New York Fed Survey of Consumer Expectations (SCE) is a nationally representative, internet-based survey of approximately 1,300 U.S. households. The analysis in the post is based on data collected as part of two special surveys on the pandemic fielded in June and August, 2020. In the June survey, 89% of respondents reported that their households had received a stimulus payment.

While the allocation of these payments varies among differing income and age levels, the results speak to the high uncertainty of how long the pandemic will last and the possible economic impact on recipients. Questions abound about how much money will be needed and when. For example, were parents concerned about “holding the spot” with their daycare provider? Was there concern about how long rent forbearance would last? Concern about layoffs this fall?

For a rough validation of the results of the survey, you can consider that the average U.S. FICO credit score increased in July to 711, the highest level in the past 15 years. Consumer debt levels represented by credit card balances have also decreased from $6,934 in January to $6,004 in July.

The average American was likely using sound financial strategy with their stimulus payments. The choice to forego spending where possible, add to cash reserves, and reduce personal debt is a healthy one during uncertain times and should reduce the possible negative economic implications as we work out of this situation.

Suzanne T. Mestayer is managing principal of ThirtyNorth Investments, LLC.

All investment strategies have the potential for profit or loss.

ThirtyNorth Investments, LLC, is registered as an investment advisor with the SEC and only transacts business in states where it is properly registered, or is excluded or exempted from registration requirements.

For disclosures, please click here.