An early February Yahoo-Harris poll said that 9% of Americans bought GameStop shares in January. The same poll revealed that 24% of Americans bought GameStop or another “viral stock” in January. The other viral stocks included the likes of AMC Entertainment and Blackberry, among others. The average investment was $8535. Men in the 18-44 age group were the most likely demographic group to participate. The majority planned to hold the shares less than a month and bought the shares in a brokerage account which was less than a month old. GOOGLE search records revealed that more people than ever before googled “how to buy stock” in the days prior. Hm….

The trading frenzy was sparked by talk on the social media Reddit sub-platform r/wallstreetbets. No one really knows why this happened. Was it boredom, Covid exhaustion, social media frenzy about making a quick buck or some extra cash from stimulus checks or not going out to eat? Or was it a bit of all these things? The good news for small investors: some made lots of money and learned a little about the stock market. The bad news for small investors: some lost a lot of money and learned nothing. What happens to the industry, something we all care about, remains to be seen.

So what really happened, or is perhaps even still happening? Let’s peel it back a little more….

GameStop owns video game stores, mostly in malls. In Aug 2020, the share price was $4 and the total value of the company was $280 million. In January, a few hedge funds decided that GameStop was overvalued and decided to “short sell” shares, which is a common practice of hedge funds.

“Short selling” occurs when an investor “borrows” shares of a stock and then sells these shares which he doesn’t actually own. The investor hopes that the stock will go down in price so he can then buy shares at a lower price, return the borrowed shares and pocket the profit. Now this is all good, until the shares instead go up in price. Now the investor has to buy the shares at the higher price (In this case a much higher price) in order to return the borrowed shares.

In this case, someone on Reddit noticed the short selling of the GameStop shares by the hedge funds and enlisted an army of Reddit loyalists to start buying the shares, which of course drove the share price higher. In this case, the price shot up to as high as $480/share (from $4/share in August) and the company value rose to $33.5 billion from the August value of $280 million. The hedge funds then had to buy the shares at up to $480/share so they could return the ones they sold at $4. Of course, this all also led to a very complicated mess at trading platform Robinhood, details about which I will spare you.

Fast forward to today, the stock is volatile but not anywhere near how it looked two weeks ago, and the criticism and blame is rolling in on all sides. Who knows what will happen? But as we all know, what goes up, goes down.

One more thing…. Some of you who do options trading might have had moments of unrest as you watched this saga unfold, so I want to explain how what we are doing with you is different, to put your minds at ease: The GameStop situation involved the purchase of “uncovered calls.” In other words, the buyers were “uncovered” – they didn’t own the shares they were selling. When we sell calls with you, they are “covered calls” – you always already own the shares you are trying to sell. The worst case with covered calls is that the share price doesn’t get to the pre-determined strike price and you keep the shares – and the income from the sale of the call. Best case is that you sell your shares at the pre-determined strike price and also get the income from the sale of the call. Of course, there are also times when the share price goes up beyond your strike price and you leave a little money on the table! All are ultimately good outcomes!

Next up: Bitcoin, et al

We are so happy to share photos of Mom and Dad getting their first doses of the Moderna vaccine a few weeks ago! Also loving the stories and photos of your own vaccinations – keep them coming!

P.S. For those of you who are following our Pfizer vaccine trial journey, Marci and I are 95% confident that we both got the real thing back in August and September, but we have not yet gotten official word from Pfizer. That’s expected in the next few weeks so we will confirm then!

P.P.S. See you soon! We will be ready to meet in person when you are!

Happy New Year once again! We have three important administrative items for you today:

Roth IRA Contributions (and yes, you can still do for 2020)

The eligibility “phase-out” AGI (adjusted gross income) has been increased for 2021

• For taxpayers filing jointly, the phase-out AGI range has been increased: $198K to $208K (from $196K to $206K in 2020)
• For single/head of household taxpayers, the AGI phase-out range has been increased: $125K to $140K (from $124K to $139K in 2020)
• The maximum contribution remains at $6000 ($7000 for taxpayers over 50)
• Remember that you can make 2020 Roth IRA contributions until April 15, 2021. Let us know if you want to do this, so we can advise how to provide instructions to Ameritrade to ensure the contribution is applied to the correct year.

2020 1099’s from Ameritrade (we know you can hardly wait)

As usual, 1099’s will be available in waves

• The documents should be posted online on January 14, February 4 and February 11. Accounts with real estate funds will likely be in the last wave.
• The mailed copies should be received 5 to 7 days after the online posting
• There will be the usual rounds of corrected 1099’s for weeks and months
• You will not get a 1099 from IRA’s of any type unless you took a distribution or withdrawal

Required Minimum Distributions (RMDs) are at record breaking levels

• Your 2021 RMD is based on your IRA account value at the market close on 12.31.2020. As you probably remember from two weeks ago, despite what was the 2020 market rollercoaster, the end was pretty darn good.
• You got a year older in the last year – and your RMD as percentage of your account value goes up every year
• Many of you did not take a RMD in 2020 since the CARES Act removed the RMD requirement so your account balance got even higher – hopefully.

You can take your RMD’s in cash, shares or charitable contributions. Some states (like NC) require state income taxes to be withheld, regardless of which distribution option you select.

It is not yet clear whether RMD’s will actually be required for 2021 (although we have heard that the government needs tax revenue, so it’s likely that they will be required in 2021). If you do not need the cash right now, we advise waiting until path forward is confirmed. We will work with you individually on the process here.

As always, we are happy to help with any of the above!

As promised earlier in the month, we are now going to re-introduce you to Roth IRAs, but this time, as great financial gifts for your lucky and hard-working children or grandchildren. As I said earlier, there are very few investments which grow tax free, but 529 plans and Roth IRAs do just that!

Many of you are familiar with Roth IRAs, but for those of you that are not, here is a brief overview:

Roth IRAs were created by the Taxpayer Relief Act of 1997 to help Americans save for retirement. These IRA’s have become enormously popular in the last 20 years but there are some important considerations:

• The dollar contribution limits are the same for Roth IRAs and traditional IRAs. Eligibility for a Roth IRA requires “earned income,” subject to an income cap which is not present for traditional IRAs.
• Contributions are made with after-tax dollars, unlike those in traditional IRAs or most company sponsored retirement plans
• Because the contributions are made with after-tax dollars, the contributions can be withdrawn at any time, without tax or penalty. This might be important for young investors like your children or grandchildren who might need the money they invested before retirement
• Unlike traditional retirement plans, the earnings can also be withdrawn tax-free, subject to owner age and account duration rules, and there is no requirement for distributions to begin at 72 years of age

As I said above, there is a requirement for the Roth IRA account holder to have “earned income” in order to be able to contribute BUT the actual contribution can be funded by anyone (YOU in this case) as long as the dollar amount of the contribution does not exceed the owner’s earned income or annual maximum allowed.

Head spinning? How about an example? You have a 19 year old grandson who worked over the summer stocking shelves in the middle of the night for Kroger. He earned $2000 and will receive a W-2 from Kroger. I am guessing he probably can’t invest this $2000 in a Roth IRA because he is saving every penny for college, BUT you can fund it for him. You have until April 2021 to make this 2020 Roth contribution. We will help you understand eligibility requirements and then help you actually pull this off.

Want to read more about Roth IRA’s?  See attached link. https://www.investopedia.com/terms/r/rothira.asp

Back by popular demand, the next two Bernie’s BLOG posts will provide info on some great financial holiday gifts for you, your children or grandchildren. This blog will cover 529 educational plans and the next one will re-introduce many of you to Roth IRAs. By the way, we are not suggesting that you forego fun gifts for your offspring, but we really like the idea of longer term not nearly as “fun” gifts to help secure the financial futures of your lucky family members.

As many of you know, there are very few investments which grow tax-free but 529 plans and Roth IRA’s do just that, at least for now.

529 plans are state run educational savings plans which can be used for very broadly defined educational expenses for adults or children. These funds can be used for pre-college, trade school or college tuition/fees. The investments in a 529 plan can be made by anyone, subject to gift tax requirements, and are made with after-tax dollars although some states offer a state tax credit to parents who contribute in their state of residence (North Carolina does not offer this credit at this time). The funds in a 529 plan can be moved to another child and the funds do not have to be used in the state in which the plan was funded. Unlike other investments, 529 plans are controlled by the account “owner”, not by the child. Taxes and penalties are due if money is not used for educational expenses, but again, the definition of educational expenses is quite broad and usually includes computers, books, and room and board.

These plans carry low management fees because they tend to be “target date” funds where the investment mix is automatically re-balanced as the child gets closer to college age.

Although 529 plans are not LFS managed assets, we would be happy to assist you in starting one for your children or grandchildren, or even yourself! There is no minimum dollar requirement to open an account and dollars can be added throughout the year.

If you want to read up, see link below, or feel free to call us to talk more.

https://www.investopedia.com/terms/1/529plan.asp

We decided everyone could use a little laugh right now. We’ll be back to our normal dry financial stuff in December!