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!

First of all, thanks to all of you who have checked in with us regarding the Pfizer Covid 19 vaccine trial which Marci and I are both participating in. We appreciate your interest and we did promise updates!

• The update is that all is going according to plan, at least Pfizer’s plan, as far as we can tell. Both of us are 6+ weeks past our second injection and aside from slightly sore arms and more sore bottoms from doing the long drive to the clinic several times in Atlanta traffic, we have experienced no injection side effects. And neither has anyone else we know in the trial. As a reminder, we have no idea if we got the vaccine or the saltwater placebo. With all of you, we are hoping for a positive announcement from Pfizer followed by a positive announcement from the FDA, after all the efficacy and safety data are submitted and reviewed.

• I’m sure most of you got the (exciting) email from Ameritrade announcing that the merger with Schwab is now legally complete. As we all know however, now is when the real work begins. We are continuing to be told that the systems integration will take 18 to 36 months and that there will not be any significant changes until then. We are keeping a watchful eye. And we remain committed to do whatever is required so that the work for you is minimal or non-existent during this transition. Feel free to bounce back questions. Our sense is that the Ameritrade operations team knows very little at this point, but that doesn’t mean we can’t ask questions anyway.

• And because Ameritrade has nothing else to do, they are retiring the “classic” Advisorclient.com at the end of the month. This change is to enable features which are not supported by the old technology. If you are using the old site, you will be automatically redirected to the new site. It looks different and takes a little getting used to, but the new functionality is good. And you will be able to screen share with us which will make troubleshooting much easier. None of your automatic transactions will be impacted. There is an online demonstration video and we are happy to help too.

This is obviously another very complex topic but let’s try to cover the easiest scenarios and then share what we are thinking as the election draws closer and the end of 2020 is in sight. 

Disclaimer:  I am sure I got some of the facts wrong so I apologize in advance for that.  Feel free to correct me. 

What is clear is that whoever wins the November presidential election will have a monumental job – leading the country’s economic recovery after a global pandemic which has created unemployment rates which this country has not seen in 90 years.  The expectation is that once the virus is contained, the economy will quickly recover, but whether or not that is really the case, remains to be seen.  For our purposes today, we will assume this is indeed true!

Of course, we must remember that whether or not any of these scenarios actually comes to pass depends in large part on whether the president’s party also controls the legislative branch, as Congress does get a say in these policies.  We won’t go down the rabbit hole on this part but just recognize that this fact certainly adds additional uncertainty.  There are also definitely pundits out there who believe individual income taxes will increase regardless of election outcomes, due to the level of new federal debt which has been created this year alone.   

Let’s start with the scenario that Trump retains the White House as this is the easiest scenario to play out even though the full plan is still being developed.

What may happen to individual income taxes, subject to Congressional support:

• The 2017 individual income tax cuts may be extended, along with other provisions in the Tax Cuts and Jobs Act legislation, which also included an increased standard deduction and higher dependent tax credits. This  Act is currently set to expire in 2025. 

• Q4 employee paid payroll taxes (primarily social security) which had been deferred until 2021 may be forgiven.  There is also some talk of a permanent payroll tax cut. 

• Individual tax rates for middle class Americans might be reduced from 22% to 15%.

• There is talk about reducing the long term capital gains rate (which is currently 0%, 15% or 20% depending on your income) or indexing it to inflation. 

• There are possible additions of tax credits tied to school choice or domestic travel.     

Now let’s look at the scenario that Biden wins the White House.

What may happen to individual income taxes, subject to Congressional support:

• The components of the Tax Cuts and Jobs Act would likely be rolled back, at least for high income earners.  The income tax rate for Americans earning more than $400K would go from 37% to 39.6%.

• Payroll taxes of 12.4% might be applied to earners on income over $400K, split between employers and employees.  Today this tax is applied to income up to $137,700.

• Dividends and long term capital gains might be taxed as ordinary income, at a rate of 39.6%, for incomes above $1 million.  Today these dollars are taxed at 20% for this set of filers.  Remember this does not impact IRA’s because your RMDs are already taxed at your full tax rate. 

• The step up cost basis for capital gains taxation might be eliminated as wealth is transferred to future generations.

• Tax credits for child and dependent care, earned income, children and first time home-buyers might be added/increased.

Our thoughts (with lots of input from Bernie of Bernie’s Blog fame):

The election will hopefully be decided before the end of the year so we have time to execute some tasks, but now is the time to talk about what we might want to do….        

• Regardless of election outcome, a Roth Conversion is still a great strategy for those of you who have a traditional IRA and can free up some cash to pay the taxes in April 2021.  As many of you know, a Roth conversion means that you convert pre-tax assets in your traditional IRA to post-tax assets in your Roth IRA.   We can pick which assets to transfer so we can choose those which generate high capital gains/dividends and which may also be still recovering from the 2020 market downturn. Because these transferred assets are taxed at your full tax rate, this option is even better if Biden wins since tax rates for high income earners may increase.  Many of you have already done a Roth conversion this year but there is no limit to how much you can convert, as long as you are willing to write the IRS a bigger check.  If you want to do more, let’s talk about it. 

• If Biden wins, you have big gains in a taxable account, and you will need cash anyway in the next 12 to 18 months, we may want to sell some of those assets this year in case the capital gains tax rate increases from 15%/20% to your ordinary income tax rate.  If Trump wins, capital gains taxes might go down, so there is no income tax reason to do this year, although we will do our usual end of the year re-balancing. 

• This has not been discussed yet, BUT dad believes that Biden may want to really limit Roth contributions in the future.  He doesn’t believe that anyone will change the tax treatment of existing Roth accounts, but there is a possibility that the maximum income level will be reduced sufficiently that the tax benefit essentially disappears.  So what that means is that if you can contribute to a Roth for 2020, you should be doing it because it might not be possible in the future. Remember that you have until April 2021 to make your 2020 Roth contribution but let us know if you want to do so we can ensure that the contribution gets assigned to the correct year. 

In our last blog post we talked about the history of the Dow Jones Industrial Average (DJIA) and how the value is calculated every day.  In this post, with a lot of help from WAPO columnist Allan Sloan, we will talk about what happened to the Dow when Apple split and then what the actual split, and other Dow 30 changes, mean to average investors like us.  Get your calculators – or you can just trust my math! 

Apple stock split

On Friday August 28, the Dow closed at 28,653.87.  Over that weekend, Salesforce, Amgen and Honeywell were added to the Dow 30 and ExxonMobil, Pfizer and Raytheon were removed.  Apple also split 3 for 1.  And on Monday August 31, the Dow opened at, wait for it, 28,653.87.   Remember that Tesla also split that weekend, BUT Tesla is not part of the Dow 30.  None of these changes had any impact on the S&P 500. 

Let’s look at what actually happened on the Dow:

On Friday the sum of the price of one share of each of the 30 components was $4177.68.  The Dow Divisor was 0.1458.  SO the closing price that day was the sum of the prices of 1 share of each stock, divided by the Dow Divisor.  ($4177.68/.1458) or 28,653.87

• Next the prices of ExxonMobil, Pfizer and Honeywell were subtracted from $4177.68 and the closing prices for Salesforce, Amgen and Honeywell were added.  Apple’s price was modified from $499.23 to $124.81

• When the prices for the new Dow 30 were added, the total was $4355.02. The new Dow Divisor, was then calculated to be 0.152 ($4355/28,653.87)

• Thus the closing DJIA on August 28 and the opening DJIA on August 31 were the same.  The Dow Divisor moved from .146 to.152 to account for the changes and  keep the DJIA constant. 

So now what does all of this mean to us? 

• On Friday before the stock split, Apple was by far the largest Dow 30 component at 12%.  On Monday after the split, it was 3%. Because Apple has been such a hot stock, it has disproportionately impacted the Dow’s performance.  On Monday, Apple gained $4.23 which moved the Dow by 28 points.  If that had happened on Friday before the split, that same share price percentage increase would have moved the Dow by 116 points!   Will the Dow’s growth slow due to this change?  Could very well happen. 

• The higher Dow Divisor should mean less volatility for the DJIA.  On Monday when the Dow Divisor was higher, a $1 change in any share price moved the DJIA by 6.58 points.  On Friday when the Dow Divisor was lower, that same $1 share price change moved the market by 6.86 points.  Given the world we live in right now, we will take less market volatility any way we can get it. 

• One of the stated reasons that companies undergo a stock split is to make their shares more accessible to average investors.  Presumably more investors can afford a $125 share price rather than a $500 share price.  While this is technically true, the vast majority of shares are owned by institutional buyers (mutual and pension funds) who are not worried about such mundane things.  Additionally more brokerages are now offering partial share purchases to help investors buy some of these high priced individual stocks.  Although pundits are split about equally on whether stocks go up or down after a split, this could be a good opportunity to buy some gift shares for your children or grandchildren.   

• For any investors who own one of the two ETFs which track the Dow, this change triggers significant buying and selling of equities to match the new Dow.  Luckily, ETFs are relatively tax efficient, so these changes should be inconsequential unless the ETFs are sold shortly after a major update.

Some of you have asked us this question over the last month so we finally decided to answer it.   The real answer is a bit complicated but also quite interesting – in a geeky  financial advisor sort of way.  I learned a few things while I was researching this topic so hope you will too! 

Now, before I get to that actual answer, we need to start with some information on the Dow Jones Industrial Average – yes, you are reading this right -  which we will do in this post.  And then we will actually attempt to answer the question in the next post. 

Spoiler alert, you may need a calculator. 

A bit of history and math: the Dow Jones Industrial Average, aka DJIA

The DJIA is comprised of 30 large publicly owned companies which trade on the NYSE and the NASDAQ.  It is designed to serve as a proxy for the broader economy.   When people refer to the “stock market,” they are most often referring to the DJIA.  As the economy changes and industries or companies become more or less relevant OR the price gets too high or too low (more on that later), the Dow composition changes.  In fact the composition has changed 60 times since 1928!  In late August,  Salesforce, Amgen and Honeywell were added to replace ExxonMobil, Pfizer and Raytheon.  (GE was replaced in 2018.)  And of course Apple shares split at the same time. 

Trivia alert:

1884 Original 12 DJIA stocks: American Cotton Oil, American Sugar, American Tobacco, Chicago Gas, Distilling & Cattle Feeding, General Electric, Laclede Gas, National Lead, North American, Tennessee Coal & Iron, U.S. Leather pfd, U.S. Rubber

August 2020 DIJA stocks: 3M, American Express, Amgen, Apple, Boeing, Caterpillar, Chevron, Cisco, Coca Cola, Dow, Goldman Sachs, Home Depot, Honeywell, IBM, Intel, Johnson & Johnson, JP Morgan Chase, McDonalds, Merck, Microsoft, NIKE, Procter & Gamble, Salesforce, The Travelers Company, United Health, Verizon, Visa, Walmart, Walgreens Boots Alliance, Walt Disney

OK here is where the math comes in.  Unlike the S&P 500 and other indexes which are market cap weighted, The DJIA is price weighted.  That means that in the S&P 500, the largest companies have the most weight.  In the DJIA, the companies with the most expensive share price have the most weight. This is why the Dow is very careful to avoid adding stocks which have very high prices - they will have a disproportionate impact on the average.  Apple was added in 2014 after its 7 for 1 stock split.  This also explains why Amazon probably will not be added anytime soon!   Although this price weighting has its share of critics, and seems a bit silly to us now, in the late 1800’s when the DJIA was formed, share price was the only easy/possible thing to measure in real time.  In truth, the Dow has actually performed eerily similarly to the Wilshire 5000 which is the largest U.S. stock index.   

So how is the DJIA calculated?

The “Dow 30” is calculated every day by adding the price of one share of each of the component stocks, divided by the “Dow Divisor.”  The Dow Divisor is just a mathematical constant designed to determine the effect of a $1 move in any of the 30 stocks.  Obviously we wouldn’t need this complication if stocks never split, companies never merged or declared dividends, or there were no changes to the 30 stocks in the Dow 30.  But that would just be too simple! 

Dow Jones Industrial Average = sum of price of 1 share of each stock on Dow 30 divided by the ”Dow Divisor”

and of course

“Dow Divisor” = sum of price of 1 share of each stock on Dow 30 divided by the Dow Jones Industrial Average

We won’t attempt to understand or explain the Dow Divisor calculation, but just know that the Wall Street Journal has the job of ensuring that the Dow Divisor is appropriately adjusted to ensure that historical accuracy of the DJIA  is maintained, regardless of market changes. 

• The current Dow Divisor is 0.146.  Let’s just accept this, even though it feels like a circular argument!

• The important part is that with this Dow Divisor value, every dollar change in price of any Dow 30 stock results in a DJIA change of 1/0.146 or 6.8 points.

• Clearly, the most expensive stocks have the most influence on the average. And prior to its split, Apple was by far the most expensive and also fastest growing stock in the Dow.

Next up: So what did the Apple split do to the Dow and what does that mean for average investors like us?

We are sure this title got your attention and you can’t wait to see what piece of financial wisdom (or lack thereof) is inspiring us this time.  Well in truth, we can’t possibly explain the market right now, so we decided to share a more personal and decidedly more important topic…

As some of you know, Marci and I, along with several of our clients and friends, are participating in the Pfizer Covid 19 vaccine trial.  As you have undoubtedly heard, there is plenty of coronavirus here in Georgia.  The good news about that is that both Moderna and Pfizer are conducting Phase 3 clinical trials here in Atlanta.  We have gotten many questions already about what this is experience is like so we thought we would bring all of you on the journey with us.  We will go back to our normally scheduled programming in two weeks…

So what exactly is the trial?

The Pfizer Phase 3 work is a double blind, placebo controlled trial with 30,000 participants in the U.S.  What that means is that 15,000 of the participants will get the actual trial vaccine and the other half will get a saline (saltwater) injection.  No one involved in the trial, including the doctors, the clinical staff or us, knows which we got/will get.  There are two identical injections required and they are delivered about three weeks apart.  This vaccine has successfully completed Phase 1 and Phase 2 trials which showed the vaccine to be generally well-tolerated and with an ability to generate some antibodies which will hopefully fight the disease.  The purpose of the Phase 3 trial is to confirm the findings of Phase 1 and Phase 2 and hopefully prove that this vaccine actually works!  As you know, there is no component of the Covid virus in this vaccine candidate.   

How did the application process work?

This has been the most surprising part so far.  We saw an advertisement for the trial on Facebook and completed a simple form with a name and email address.  The next day, the clinical lab called and asked a few more questions – demographics, pre-existing health conditions and availability to come in the next day for the first injection.  I assume we applied early and so there were openings for all demographics – basically everyone “gets in” at the beginning but as the recruiting continues, the criteria will likely get tougher as they need to fill slots in all demographic groups.   We couldn’t wait to get started but we did talk to our primary care physicians, just to make sure they were aligned with the idea.  As expected, they were absolutely fine with our participation!

What happened when we got the first injections?

Marci and I have both had our initial injections – we started about 10 days apart.  The initial appointment was about ½ day.  Clinical trials generally are measured in years or decades, not days or weeks so the efficiency of the lab could be improved.  As much as we would have liked to take over and fix that, you will be delighted to know that we just laughed off that part.  There is definitely a sense of urgency though because the sooner there are jabs in arms, the sooner there will be an answer on the efficacy of this vaccine! 

After reading and signing about 50 pages of fine print disclaimers and forms, we got a brief physical, followed by the donation of several vials of blood and a Covid test.  Although the Covid test absolutely brushed some cobwebs out of our brains, I continue to assert that if we can each give birth twice, we can handle a swab up our nose. 

After that it was time for the vaccine – a bit anti-climactic for sure.  After that we had to sit for 30 minutes and be cleared by one of the study doctors before we could leave.  The doctors were looking for redness or swelling at the injection site.  We didn’t have and neither did anyone else the days we were there.  We also downloaded a phone app to track and report any side effects or Covid symptoms.  And they paid $150 – which we will be investing of course. 

And then what? 

We were told that the side effects of the vaccine and the placebo after the first injection were reportedly quite mild in the initial phases.  Both of us had the expected sore arms for the first day.  The sore arm happens with the actual vaccine and the placebo.  Neither of us experienced any other side effects.  Again that could be because we got the actual vaccine and didn’t have any side effects OR because we got the saline injection.  We obviously don’t know.  We would have loved to wake up on Day 2 with a little fever to give us a hint that we got the real vaccine of course!  Side effects are reportedly a little more common after the second dose but we will see. 

How long the trial lasts depends on many variables but we will keep you posted.  We are thrilled to be able to do our small part to make the world a healthier, safer and happier place!  And we also want to see our parents and our kids, as we know many of you do!

Lori and Marci 

Press Release

FOR IMMEDIATE RELEASE

Linder Financial Services Receives 2020 Best of Alpharetta Award

Alpharetta Award Program Honors the Achievement

ALPHARETTA July 22, 2020 -- Linder Financial Services has been selected for the 2020 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 2020 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.

SOURCE: Alpharetta Award Program

In our last post, we talked about what a recession actually is.  This week, we will talk about what it means to us as investors.

As you know, we do not give individual investment advice on the Blog since each of you have different situations and different plans.  But there are a few ideas which all of us can use.

1. Stick to the BIG plan but be ready to adjust the SMALL plan.

As we have talked with all of you over the last quarter, we have continued to emphasize the importance of sticking to the plan!  But let’s be honest - that is really easy to say and really hard to do!  For many of you that have been through significant stock market volatility (mostly downward!) before or have decades until retirement, you lost a little sleep and didn’t look at the spreadsheet with lots of red too closely.  For others, this has been a time of significant concern and second guessing. This has been the first significant market downturn since I joined LFS and I too have had times of concern and second guessing – and I do this for a living!   At the end of the day, if you are too worried about your investments to sleep, we need to make a change.  We can and will do that with you. 

Remember that we are for you – regardless of where you fall on the “worry” scale!

2. Diversification is more important than ever. 

We often talk about this and as you look at your own results, you can see why we do.  Those fixed income bond holdings have been  steady, but not superb performers over the last few years – as planned.  But all of us have been really glad we had them over the last several months.  Large cap stocks and technology have recovered the fastest so far.  Other asset classes and industries hopefully have more upside to come.   Expect some portfolio re-balancing to come as asset classes perform very differently through this period. 

3. There are opportunities for those with a strong stomach. 

It’s really hard to invest when the market is terrible rather than when it’s improving but if you can bear to do it, there are plenty of choices.  For those of you that are dollar cost averaging every month and/or re-investing your dividends, you are automatically getting some of the upside.

As you know, we recommend a strong cash or cash reserve position. For some of you, that’s to ensure that you have ample cash for living expenses without having to sell into a bad market.  For others, it’s more like a little dry powder for some good potential market opportunities.  These market opportunities might be stocks you have always wanted to own but deemed too expensive or funds in industries you think might be near the bottom of the economic cycle (maybe airlines or lodging) or asset classes like small cap equities.  It’s a good time to have a “wish list” and maybe some limit orders!

We also have started talking to some of you about some interesting new funds which are designed to take advantage of the new world we all live in now.  For example there is an ETF which holds stocks in Covid testing companies and potential therapeutics/vaccines.  There is also a brand new ETF which holds stocks in companies which enable employees to work from home (think ZOOM and cloud computing).  These are high risk funds but might be interesting to some of you.  I wouldn’t invest my entire life savings in these but I might put a few dollars here.  There has to be some positive news about this pandemic!  If there are other industries you are interested in, challenge us to find some options for you!

The first of our two part blog will focus on what a recession actually is and then our follow up will talk about the implications.

Defining a recession, and then  understanding if we are actually in one, should be easy, right?  Uh, not so much….

When all of us took macroeconomics in school, the textbook definition of a recession was “ a two consecutive quarter decline in gross domestic product (GDP)” along with some other monthly economic signals, like rising unemployment.  This definition was relatively straightforward and easy to measure.  Either we have two consecutive quarters of GDP decline or we don’t.  Even I could almost figure this out. 

Now however, a recession must actually be “declared” by the National Bureau of Economic Research (NBER).  The word “recession” is defined by NBER and Investopedia as a “significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income and employment, industrial production, and wholesale-retail sales.”   At least now we understand why there is a question about whether or not we are in a recession AND why there is some debate week in and week out about it, even now. 

Normally the NBER looks at certain monthly economic indicators to determine if we are in a recession rather than waiting for two quarters of GDP decline.  The NBER officially declared a recession in February 2020.  Historically, recessions have been caused by financial factors, economic factors and/or psychological factor or by structural shifts in industries – like oil price changes or new breakthrough technologies.  There is little doubt among economists that we have had a severe economic downturn, caused by the COVID-19 epidemic.  What experts are still debating is whether we are now in a short term period of economic recovery, a long term period of economic recovery growth or a plateau.  Of course as we all know, by the time we get to Part 2 of this Blog, the economy could be in a completely different phase. 

It's been 10 years since our last declared recession.  And although we all realize that recessions are a normal part of the business cycle, that doesn’t make it any easier.  We were absolutely due for an economic downturn, but this one came on quickly and violently, and is greatly exacerbated by the real fear of the COVID-19 virus. 

Next up:  What are the implications of a recession to us as investors?

You may remember Part 1 of our CARES Act Blog which we posted on April 1.  At that times, we labelled the post as Part 1 because we were confident there would be a change to the Act.  Glad we were right about SOMETHING!

As a reminder,  CARES stands for Coronavirus Aid, Relief and Economic Security Act.  The bill itself is over 800 pages long and has economic provisions for individuals, small and large businesses, state and local governments, public health and education/other. 

Back in April, we talked about the following changes to required minimum distributions (RMDs) from IRAs for 2020:  

RMDs (Required Minimum Distributions) have been suspended for 2020: 

• This suspension includes inherited IRAs

• There will be no penalty assessed if the distribution is eliminated in 2020

• Obviously the majority of retirees need this money for living expenses and will need to take the 2020 distribution anyway

If you have already taken your 2020 RMD, but don’t need the cash for living expenses in 2020:

• You have 60 days to return the dollars to a retirement account without paying the taxes

• We are not yet sure how Ameritrade will want to handle this transaction so let us know if you are interested in pursuing

• You can also convert this distribution to a Roth IRA and pay the taxes as you had planned.  Again, call us if you are interested  in doing this. 

The newest change is that the 60-day limit for return of funds to an IRA has now been eliminated, which means that any distributions taken in 2020 can now be returned to your IRA, even if you actually took the distribution in January.  You will get the taxes refunded to you in April 2021.  Alternatively, you can put the dollars in your Roth IRA. 

As always, let us know if you have questions or want to pursue.  As expected,  there is paperwork. 

Happy Father's Day to all of you dads out there, including ours!

This is a photo from February trip to Morocco.  As expected, Mom was smart enough not to participate in this particular activity. 

We have decided to run a contest for the best caption for this photo - knowing many of you will add a caption whether we request it or not.  Send back your caption ideas and we will share the winning entry!

Happy Father's Day to all of you!

Hi everyone.  This is Bradley again with the rest of my BLOG post on oil.  As promised, I want to share what has happened to oil prices in 2020 and even more importantly, why we all care about that!

Although Russia is not officially part of OPEC, it has generally cooperated in their supply agreements. Since 2017, OPEC and Russia have consistently tried to cut their production to maintain high oil prices. However, this deal came to a head in early March 2020. In the midst of probable decreases in oil demand due to economic slowdown related to COVID-19, OPEC demanded that Russia cut its oil production further. Russia refused, and in response Saudi Arabia (the world’s largest producer of oil) flooded the world market with oil. Thus, oil prices in the world collapsed (Brent crude dropped from $45/barrel to $30/barrel overnight and is now trading at $26/barrel.)  Oil prices actually went negative briefly in late April as oil storage tanks were used up due to a lack of customer demand.

Now, what does this mean for us? Most obviously, it will cause a decrease in gasoline prices at the pump. US oil producers may be hurt significantly since many of them are not profitable with oil at current prices.  Possibly prices of other products will decline as a result, but that will be difficult to determine with so many other factors involved.    

Now for some input from LFS:  What does this all mean to us?   As consumers, it is clear that gas prices are lower; now if we only had somewhere to go.    As investors, the collapse in oil has contributed in no small way to the market volatility we are experiencing.    Are there investment opportunities here?  Maybe – at least for the non-squeamish among us.   And as global citizens, it’s clearly just another example of how interconnected we are.   

This is Bradley again, reporting in from “Safe-at-home” in Southern California…(I needed a break from thesis writing). This week, I’m going to stay far away from COVID-19 news (because we definitely get enough of that) and talk about the global oil markets, and some recent “interesting” events.

We are all at least passingly familiar with oil. Oil is a mixture of chemicals (specifically hydrocarbons) that are derived from decay of organic remains of ancient organisms. In the past several centuries, humans have figured out how to separate oil into different useful parts (a process called refining) including fuels (gasoline, diesel, methane), feedstocks for the chemical industry (ingredients for plastics, perfumes, and pharmaceuticals), and building materials (asphalt and tar). As a result, oil production, trade, and refining has become an essential part of the global market.

Because of petroleum’s important uses, a global trade in petroleum has developed.  We’re probably all familiar with seeing pundits talking about the price of a “barrel” of oil. A barrel of oil is 42 gallons and is the primary trading unit in oil markets. There are many different kinds of oil that are traded in the global marketplace, but probably the two most common are Brent and WTI (West Texas Intermediate). Generally speaking, the differences between types of oil aren’t important financially (specifically they have different densities and quantities of sulfur) because they all produce fuels and other compounds after refining (that’s what we chemical engineers do). They generally move together in global markets, with Brent having a higher price than WTI.

Now, let’s finally talk about oil in the financial markets. Broadly speaking, oil prices move the same way as the economy. This is because when the economy is good, people buy more stuff (which often requires petroleum products to make and transport) and travel more (using more fuel), which increases the demand for petroleum products and thus the price. When the economy enters a recession, all things being equal, oil prices will decrease due to a decrease in aggregate demand.

However, the oil market is not a free market (at all), due to the presence of OPEC (organization of petroleum exporting countries) in the market. OPEC is a cartel made up of countries (and their state-owned petroleum companies) that produce much of the world’s oil, with the goal of maintaining high oil prices to maximize revenue.   Important members of OPEC include Saudi Arabia, Venezuela, Nigeria, Iraq, and Iran. Historically, OPEC has had a great deal of control over global oil prices.  However, recently due to technological advancements, the US (and to a lesser degree Canada) have diminished OPEC’s power due to development of shale oil resources. These resources significantly increased the supply of oil, resulting in lower prices and significant strife in OPEC which is no longer able to maintain their high prices.

Next up:  What has happened to oil prices in 2020 and why it matters to us

April almost got away from all of us without our very popular April Financial Literacy Quiz!

As a reminder, being financially literate means understanding how money is earned, saved and invested in order to make the best financial decisions for our own situations.  Admittedly, all of this feels a bit surreal right now!

Research suggests that higher financial literacy has been clearly linked to responsible financial decisions to help us all

• Plan for our financial goals

• Avoid the highest cost debt

• Build an emergency fund AND earn higher interest on it

Financial Literacy Day on Capitol Hill has been canceled this year, although many recognize these skills are more critical than ever! 

Because my questions last year were so easy, I went to my collection of hard questions to try to stump all of you this year. Multiple responses might be correct.

1. How much should my emergency fund be?

a. This is a silly question  - enough to cover my emergencies of course

b. 3-6 months of average expenses

c. 2 years of average expenses

d. Whatever it needs to be so I can sleep at night

e. No idea.  Need to call LFS.

2. What is the biggest risk of owning long term bonds for capital preservation/safety?

a. Falling interest rates

b. Rising interest rate

c. Inflation

d. I have no idea since I am not interested in capital preservation/safety

e. No idea.  Need to call LFS.

3. If inflation is 2%, in what investment option am I most likely to lose purchasing power?

a. Stock market

b. Real estate

c. TIPs

d. Cash in multiple coffee cans scattered throughout my house to ensure adequate diversification

e. No idea.  Need to call LFS.

We hope all of you are healthy and at home as we begin the month of April.  We are all working from home so don’t hesitate to continue to reach out!

We are all starting to study the new CARES Act so we want share what we have uncovered thus far.  We have labelled this post as Part 1 because we are sure there will be more to come on this topic but let’s get started!

First of all CARES stands for Coronavirus Aid, Relief and Economic Security Act.  The bill itself is over 800 pages long and has economic provisions for individuals, small and large businesses, state and local governments, public health and education/other. 

There are implications for RETIREMENT PLANS which we want to summarize for you.  These pieces apply to all, regardless of whether you have been impacted directly by the virus.  There are other components of the Act which apply at this point only to those directly impacted.

 RMDs (Required Minimum Distributions) have been suspended for 2020: 

• This suspension includes inherited IRA’s

• There will be no penalty assessed if the distribution is eliminated in 2020

• Obviously the majority of retirees need this money for living expenses and will need to take the 2020 distribution anyway

If you have already taken your 2020 RMD, but don’t need the cash for living expenses in 2020:

• You have 60 days to return the dollars to a retirement account without paying the taxes

• We are not yet sure how Ameritrade will want to handle this transaction so let us know if you are interested in pursuing

• You can also convert this distribution to a Roth IRA and pay the taxes as you had planned.  Again, call us if you are interested in doing this. 

For those of you who aren’t subject to RMDs, but might want to take advantage of provisions in the CARES Act:

• The deadline for making 2019 contributions to an IRA of any type has been extended to July 15, 2020 to coincide with the federal tax filing deadline extension.  We need to ensure that the contributions gets coded to the correct year so let us know if you want to do.

• Roth IRA Conversions are “on sale” right now.  This is a great long term strategy for those of you who have traditional IRA’s and some cash.  In short, if you convert a traditional IRA to a Roth IRA this year, you pay the taxes on the full amount you are converting in 2020, but then the Roth grows completely tax free forever – for you or your heirs.  You can convert as much or as little as you would like so let us know if you want to discuss. 

There are more provisions for additional distributions from IRA’s and loans/distributions from 401K’s. At this point, these pieces require proof of direct impact from the virus, including job loss.  We can help work through these options with you if needed.

 Again, most important thing is to stay healthy!  We are here! 

As we all begin another chaotic week, we all know that your health and the health of all people around the world is far more important than the stock market, so let’s focus on that first.   Once that is taken care of, the market will hopefully regain its health too.

When you are ready for a distraction, we like this article from Vanguard which talks about the value of “staying the course” through market downturns.

But we also know it’s easy to say and hard to do! 

We are here for you so if you are nervous or just want to catch up, don’t hesitate to call!