It’s hard to believe that we have never actually written a BLOG or talked with most of you about investment tax loss harvesting but now, unfortunately, is the time. This is a very complicated topic so we will attempt to keep this overview simple and then we will talk to you individually, where applicable, over the next 4 – 6 weeks.

Quite simply, investment tax loss harvesting is selling an investment in a taxable account when you have a tax loss (on paper) and then using that tax loss to offset capital gains from other investments and/or to offset ordinary income. Sounds quite straightforward, but there are guidelines to ensure that the process is done in accordance with both IRS guidelines and your individual long term investment plan.

Just what is it?

• As a reminder, the investment capital gain or loss is defined as the difference between the market value on the day the investment is sold and what you paid for it, a.k.a the cost basis. This cost basis includes any dividends or capital gains which have been re-invested in the security while you owned it.
• After the tax harvesting loss is applied against capital gains, any additional loss can be applied against ordinary income up to $3K per tax return per year ($1500 per return if married, filing separately) But any excess tax losses can be carried over to future years with no expiration date on the carry-over amount.
• The resulting tax benefit applies only to Federal income taxes.
• Tax loss harvesting is only done in taxable accounts. In IRA’s, we apply many of the same principles when we rebalance but there is no immediate income tax impact.

What’s the Biggest Watch-out?

• The most complicated piece of tax loss harvesting is compliance with the IRS “Wash Sale” rule. Your CPA can provide a lot more information here, but basically the Wash Sale rule says
• An investor cannot buy back a security which has been sold with a tax loss or buy a “substantially identical” security for 30 days before or after the tax loss sale, in any account associated with the investor. The IRS will disallow the tax loss if this happens.
• The “substantially identical” requirement is quite gray. We tend to be very conservative here. So for example, if an investor sells Home Depot with a tax loss in a taxable account, we recommend waiting 31 days before buying Lowes, even in a different account.

Why Now?

Besides the obvious market downturn which means there are some tax losses to take, there are other reasons for this to be a priority as we head into the last two months of the year.

• The security sale with the tax loss must be done by 12.31.2022 to be helpful for your 2022 Federal tax filing.
• As bad as the market has been in 2022, after a pretty darn good bull market for the last 15 years, not all of you will actually have a tax loss in a taxable account. In some cases though, we would like to take the opportunity to re-position or re-balance portfolios with more tax-efficient investments while we have the opportunity to do it without creating a large tax bill for you. For example, we might replace a not very tax-efficient mutual fund with a tax loss (or with only a small gain) with a much more long term tax-efficient exchange traded fund. After 30 days of course.
• And this is the complicated piece – many mutual funds distribute capital gains at the end of the calendar year. As you know, this distribution is a taxable event, with absolutely no value to the shareholder, so it makes sense to avoid paying taxes on those capital gains if the plan is to sell the fund anyway.

We are usually in favor of KNOWING more, so we are sharing what little we have learned about AI in our investment advisory and personal investing world.

First of all, just what is AI? The simple definition is that AI is the ability of a computer to do tasks which are commonly done by (intelligent?) people. It combines computer analysis with huge data sets to solve problems. Got it?

Which begs the “so why should I care” question.

We have all experienced very simple forms of AI when we have purchased from Amazon and seen the “people who purchased what you bought also bought xxx”. Or when you have searched a vacation spot on GOOGLE and then started getting ads for that location on Facebook. We can debate how useful any of that is, but it’s certainly there. Some experts believe that AI will be the most disruptive influence of our lifetimes!

AI is used today in the financial advisor and retail investor space, although LFS is not currently using AI for anything related to our advisory business. We did try ChatGPT – more on that below. Large financial services firms are using AI to analyze historical market/company date to build portfolios for clients or for their own managed funds. Some brokers are using it to automatically buy and sell stocks. And some are using it to enhance fraud detection capability – which is a great application in our minds.

Outside our world, there is work to use AI to improve cybersecurity, to enhance self-driving vehicles and to aid drug research and manufacturing scale-up. And of course, to deliver increasingly tailored recommendations to us on Amazon, whether we want them or not.

Now let’s talk about ChatGPT which is one of the most visible signs of AI in our everyday lives. ChatGPT is a “chatbot” or digital assistant which is capable of conversing with people. It follows directions given in a prompt and provides a detailed response. If you have used SIRI or Alexa or a customer service online chat feature, you have interacted with a digital assistant. The promise is that the technology is evolving rapidly and that these experiences will improve quickly too.

For those of you that are curious about ChatGPT, I want to share our experience, albeit limited.

If you are a faithful Bernie’s Blog reader, you may remember that April was Financial Literacy Month and as usual, we provided questions designed to test our collective financial literacy and have a little fun. We do actually write Bernie’s Blog – it’s not a ChatGPT creation – but I thought it would be interesting to ask ChatGPT to provide some financial literacy questions for us to consider. What I discovered is that the detail provided in the prompt is critical and it took me three tries to get anything even remotely usable. See attached. You can see that by the third try, I requested multiple choice questions and answers although I did not use the answers ChatGPT gave me since ChatGPT doesn’t do fun. Apparently.

For those of you who are interested in investing in AI, there are ways to do that. In many cases, you probably already have some exposure via ownership of Amazon, Microsoft, NVIDIA, Alphabet, or any of the numerous funds which own these stocks. There are no “pure play” AI companies today BUT there are some ETF’s designed to give investors more concentrated exposure. We can help!

ALPHARETTA April 18, 2023 — Linder Financial Services has been selected for the 2023 Best of Alpharetta Award in the Financial Advisor category by the Alpharetta Award Program.

Each year, the Alpharetta Award Program identifies companies that we believe have achieved exceptional marketing success in their local community and business category. These are local companies that enhance the positive image of small business through service to their customers and our community. These exceptional companies help make the Alpharetta area a great place to live, work and play.

Various sources of information were gathered and analyzed to choose the winners in each category. The 2023 Alpharetta Award Program focuses on quality, not quantity. Winners are determined based on the information gathered both internally by the Alpharetta Award Program and data provided by third parties.

About Alpharetta Award Program

The Alpharetta Award Program is an annual awards program honoring the achievements and accomplishments of local businesses throughout the Alpharetta area. Recognition is given to those companies that have shown the ability to use their best practices and implemented programs to generate competitive advantages and long-term value.

The Alpharetta Award Program was established to recognize the best of local businesses in our community. Our organization works exclusively with local business owners, trade groups, professional associations and other business advertising and marketing groups. Our mission is to recognize the small business community’s contributions to the U.S. economy.

And so as always it is also time for our annual financial and investment literacy quiz…

But first some interesting findings from those who study financial literacy among American adults over time:

• The recently released 2022 Personal Finance Index sponsored by the TIAA Institute and the Global Financial Literacy Excellence Center at George Washington School of Business said that the biggest gap in financial literacy is “understanding financial risk” while the area where U.S. adults are the most knowledgeable is “borrowing money”. Hm. You can find all of the results of this study at https://www.tiaa.org/public/institute/publication
  • One of the questions on this 2022 survey asked which of the following is a greater financial risk:
    • 50% chance of car needing repairs of $1000 in 6 months
    • 10% chance of air conditioner needing replacement at cost of $4000 in 6 months

We have not included this question in our quiz because our definition of financial risk (as all of you can now recite) is having to sell an asset at an inopportune time to cover an expected or unexpected expense.

Now our quiz:

What is the difference between a market order and a limit order?

• A market order means that Marci decides when to buy or sell and a limit order means that Lori decides when to buy or sell
• A market order is an order to buy or sell at current price while a limit order is an order to buy or sell at a specific price or better
• A market order is one that happens when the market is open and a limit order is an order which happens when the market is closed
• This is a dumb question – I am investing for the long term, not buying and selling every day
• No idea. Guess I better call LFS.

What is an expense ratio?

• The cost of buying or selling a stock
• One of the many useless columns in the LFS quarterly spreadsheet
• The amount of money I pay to borrow money from a bank
• The percentage of a mutual fund assets which are used to pay that fund’s expenses
• No idea. Guess I better call LFS

What is the difference between a traditional IRA and a Roth IRA?

• Traditional IRA contributions are tax-deductible and Roth contributions are not
• Roth IRA withdrawals are tax-free and Traditional IRA contributions are not
• Both a and b are correct
• I have both so what difference does it make anyway?
• No idea. Guess I better call LFS

If interest on my high yield savings account is 1% and inflation is 2%, my ability to buy anything in a year will be

• Better than today
• Worse than today
• Bring it on – love to have THIS problem
• Who cares? There is nothing worth buying anyway.
• No idea. Guess I better call LFS.

Which of the following are FDIC insured?

• The $25,000 CD I just bought in my new Schwab account
• The $25,000 in my Synchrony High Yield Savings account
• The $25,000 in cash in my Ameritrade Roth IRA
• My GE stock
• The $25,000 in the Schwab Money Market Mutual Fund
• No idea. Actually do call LFS on this one!

For those of you who have not heard Schwab CEO Walt Bettinger talk on CNBC, we have attached his letter to all of us, clients of Ameritrade and Schwab, sharing his perspective on the banking sector challenges. Clearly this is an evolving story so we expect more to follow.

Our Most Recent Perspective on Industry Events from Founder Charles Schwab and CEO Walt Bettinger.

March 23, 2023

To our clients, employees, and owners:

As someone with an interest in financial markets, you may have seen some of the recent news about the banking sector. If you are like us, you may have also wondered why Schwab has recently been lumped in with concerns regarding regional banks in particular. The fact is we are a different kind of financial firm, which can make us harder to understand. That may help explain many of the misconceptions about us compared to other parts of the financial sector. As such, we want to offer an updated perspective on some of the topics that have come up.

First and foremost, Schwab is a brokerage firm. We exist to help investors and those who serve them. Schwab is the largest public broker-dealer in the U.S. and the most regulated, since we are also regulated by the Federal Reserve. Approximately 95 percent of the $7 trillion clients have entrusted us with is custodied at the broker-dealer and segregated for clients and their benefit. Every client of a U.S. broker-dealer enjoys the same SEC-mandated customer protections. That means these assets are not subject to risk related to banking or credit. Anyone who claims that client investments are at risk from banking issues is ignoring this basic fact. For more information on asset protections, please visit: www.schwab.com/legal/account-protection.

Schwab also owns a bank, though not like other retail banks. Our bank structure exists to help us serve investors’ banking needs. It also helps our financial performance, which enables us to better serve our clients and continue to lower costs. As a different kind of firm – a broker-dealer with a banking side – we do not believe one should confuse our business model with regional banks, or any other banks for that matter, that have different business lines, client bases, and geographic footprints.

It is also important to remember that Schwab was built to serve clients through all economic environments. Our broad base of high-quality clients is well protected. Our firm has capital well in excess of regulatory requirements, a high-quality and relatively small loan book, and a conservative investment portfolio of securities backed by the U.S. Treasury and various government agencies. And more than 80 percent of client cash held at Schwab Bank is insured dollar-for-dollar by the FDIC.

We hope our long track record, conservative approach, and strong financial foundation is all you need to know to feel confident in our ability to serve clients over the long term. But we do know in the swirl of the past two weeks, some very important points are being misunderstood (or sometimes misrepresented) in the public discussion of what is happening. Here is our perspective on some of the misconceptions that have come up:

1. Our stock price does not reflect the strength of our business. Stock prices go up and down and we do not manage our business according to the stock price, but rather according to our long-term view on what is best for our clients and the health of the business. That said, we do not believe recent stock performance reflects our long-term business fundamentals and opportunity. As we shared for the week ending March 17, clients brought to Schwab more than $16 billion in core net new assets. We have attracted core net new assets of approximately $116 billion year to date through yesterday, and have added nearly $1 trillion in the past two years. We see strong flows continuing and remain confident in our fundamentals.
2. Focusing attention on ‘unrealized losses’ in our held-to-maturity (HTM) portfolio is very misleading. These “paper losses” are unrealized and would only be realized if we had to sell those securities. The profile of our depositors is very different from regional banks. Given our significant access to sources of liquidity, there is a near-zero chance we’d need to sell any of our HTM portfolio prior to maturity. That would be akin to assuming a large retail bank would sell a substantial portion of its loan portfolio.
3. Client deposits may move, but they are not leaving the firm. As is the case in every cycle, clients make choices about where to best allocate their assets. As interest rates have increased over the last year, our clients have made choices to reallocate assets within their Schwab portfolios, to reflect their preferences in this market. And in fact, we have actively encouraged them to do so. The important point is that those allocation decisions result in the assets staying at Schwab. Despite the events of the last two weeks, we have not seen any meaningful change in client behavior regarding their cash.
4. We have taken relatively little risk in our portfolio. We take very little credit risk. More than 85 percent of our assets are in a high-quality, liquid portfolio invested in government or agency-backed securities. As a comparison, most major banks have a majority of assets in multi-year residential and commercial loans with significant duration, varying credit quality and little liquidity. We feel comfortable that our portfolio carries materially less credit, duration (sensitivity to rate changes) and liquidity risk than many of those other banks.
5. The way we manage our balance sheet is very straightforward and hasn’t changed. We invest in high-quality securities with a portfolio duration that today is around four years, and just over two years in our available-for-sale (AFS) portfolio. Because of the quality of our portfolio, we are able to maintain access to high levels of liquidity that allow us to hold these investments to maturity if we choose. We have taken this same approach since we began offering banking services almost 20 years ago. We did not make a bet on interest rate movements going down or up, and we did not extend our portfolio long term like some other institutions.
6. We do not forecast Fed rates or make investments based on where rates are going. In our regular business updates, we have relayed the consensus opinion of the market (e.g., Fed Dot plots) at the time. These are not our predictions; we never base our strategy off our own view of interest rates. We share those market opinions in the context of helping analysts understand our business model and potential financial performance.
7. Comparing unrealized losses across firms with different business models can be misleading. Schwab Bank has a different business model than traditional banks. Our deposits come from transactional cash in clients’ brokerage accounts that is swept to our banks. We use about 10 percent of that cash to fund loans to our existing clients and with the remaining 90 percent, we buy securities – the vast majority of which are backed by the U.S. Government. With rates moving up, the fair value of all fixed rate assets – loans or securities – has gone down. But given that our securities are very high quality, we fully expect our securities to reach par at maturity, which means the unrealized “paper” losses will decrease over time. Because a much higher percentage of our assets are securities – and traditional bank loans are not disclosed the same way – our paper losses may appear larger than those of traditional banks. But that assessment lacks the appropriate context. In reality, our portfolio has less credit risk and is actually less sensitive to changes in interest rates than many large banks.

Not all financial institutions are the same; not even all banks are the same. So, one can understand how many watching the public dialogue on banking issues right now might conflate our brokerage-centric business with that of other banks. That is why it is important we set the record straight on some of these topics.

For more than 50 years, our conservative approach to managing risk has allowed our clients to weather market cycles and successfully manage their wealth. We remain confident in our client-centric approach, the performance of our business, and the long-term stability of our company. We are different than other banks. But it is precisely because we are different that we have grown to earn the trust of more than 34 million accounts across a broad spectrum of business lines in the U.S., Asia, and Europe. With this additional information, we trust you too can see why we are proud to be a firm like no other.

Sincerely,

Charles Schwab
Founder and Co-chairman

Walt Bettinger
CEO and Co-chairman