Portfolio Management Archives | Page 11 of 23

Is a Roth IRA the Right Choice for You? Here’s What You Should Consider

In the financial planning process, clients often ask us if it makes sense to open a Roth IRA or convert a traditional IRA to a Roth IRA. As a refresher: With a Roth IRA, you contribute after-tax dollars, your money grows tax-free, and you can generally make tax- and penalty-free withdrawals after age 59½. With a traditional IRA, you contribute pre- or after-tax dollars, your money grows tax-deferred, and withdrawals are taxed as current income after age 59½. Roth IRAs are best suited for individuals in a lower tax bracket who expect to be in a higher tax bracket when they start taking withdrawals later in life. A traditional IRA may be best suited for those who expect to be in the same or lower tax bracket when they start taking withdrawals in retirement.

There are three main distinctions between a traditional IRA and a Roth IRA: eligibility, tax treatment and withdrawal requirements. The chart below provides a good summary on the differences.

• Eligibility – With both types of IRAs, the owner must have earned income to be eligible to contribute. For a Roth IRA, you must remain under a total income threshold to be eligible to contribute (income limits can be found here). There are no such limits with a traditional IRA; anyone at any income level can contribute.

• Tax treatments – Contributions to a Roth IRA won’t provide any immediate tax benefit because they are not deductible. Contributions to a traditional IRA may be deductible if you are not a participant in an employee-sponsored plan. Withdrawals from a Roth IRA can be tax-free if requirements are met. Withdrawals from a traditional IRA are typically fully taxable as ordinary income.

• Withdrawal requirements – Both traditional and Roth IRAs allow for withdrawals of any amount once you reach age 59½. Once the owner reaches age 72, traditional IRAs are subject to the required minimum distribution (RMD) rules, forcing money out of the IRA and triggering ordinary income. There are no RMD rules related to Roth IRAs; owners can leave the money in the Roth IRA to grow tax-free as long as they want. A Roth IRA’s beneficiaries generally will need to take RMDs to avoid penalties, although there is an exception for spouses.

Chart showing the differences between traditional and Roth IRAs

For those who are not eligible to contribute to a Roth IRA, there still is a way to take advantage of the tax-free growth. The Roth conversion, also known as a “back door Roth IRA,” allows a taxpayer to withdraw funds from a traditional IRA in a taxable distribution and then roll those monies into a Roth IRA. There are no income thresholds for a Roth conversion. If your tax bracket in retirement may be higher than your current tax rate, it may make sense to convert to a Roth IRA from a traditional IRA. This could happen if you accumulate significant savings in your retirement accounts or achieve top earnings later in your career. Here are five potential reasons to convert to a Roth IRA:

1. Portfolio losses: By converting a traditional IRA to a Roth IRA, the tax will be assessed on the value on the date of the conversion. If you convert to a Roth IRA while the value is lower, the amount of tax owed will be less, and the rebound in value can grow tax free.

2. Anticipating higher tax brackets: If you expect your tax bracket to be higher in retirement, then you may prefer to pay tax on savings now, while you are in a lower tax bracket, and then access those funds tax-free in retirement.

3. Longer growth horizon: Roth IRAs have no RMD obligations, whereas traditional IRAs have RMD after the age of 72. Money in a Roth IRA can stay invested in the stock market longer, giving additional opportunities for growth.

4. Helping your heirs: If your traditional IRA is passed on to your heirs, they will also owe taxes on their withdrawals — and they must be completely withdrawn after 10 years. The Roth IRA withdrawals will be tax free, so you are effectively gifting tax savings to your heirs.

5. Paying for Medicare: If you are enrolled in Medicare Part B or D and your modified adjusted gross income (MAGI) is above a certain threshold, you pay a surcharge on top of your Medicare premium. Withdrawals from a traditional IRA are included in MAGI, while withdrawals from a Roth IRA are not.

Keep in mind the two biggest drawbacks to a Roth IRA conversion are that you must pay income taxes on any pre-tax funds you convert in the year you make it, and you cannot change your mind once you convert. It generally makes sense to use taxable assets rather than proceeds from the converted IRA to pay the tax cost of the Roth IRA conversion. This is because — all things being equal — the rate of return is generally higher for a Roth IRA because no taxes are due for any gains inside the Roth IRA.

Please remember that CD Wealth Management does not offer tax advice, but we work closely with your CPA and attorneys to ensure the right strategy is in place for you and your situation.

The CD Wealth Formula

We help our clients reach and maintain financial stability by following a specific plan, catered to each client.

Our focus remains on long-term investing with a strategic allocation while maintaining a tactical approach. Our decisions to make changes are calculated and well thought out, looking at where we see the economy is heading. We are not guessing or market timing. We are anticipating and moving to those areas of strength in the economy — and in the stock market.

It is important to focus on the long-term goal, not on one specific data point or indicator. Long-term fundamentals are what matter. In markets and moments like these, it is essential to stick to the financial plan. Investing is about following a disciplined process over time.

Sources: Fidelity, Schwab

Promo for an article titled The Importance of Compound Interest and Tax Planning on Your Portfolio

This material contains an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources.

Using diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss of principal due to changing market conditions.

Past performance is not a guarantee of future results.

The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra Investment Services, LLC or Kestra Advisory Services, LLC. This is for general information only and is not intended to provide specific investment advice or recommendations for any individual. It is suggested that you consult your financial professional, attorney, or tax advisor with regard to your individual situation.

Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment Advisory Services offered through Kestra Advisory Services, LLC (Kestra AS) an affiliate of Kestra IS. CD Wealth Management and Bluespring Wealth Partners LLC* are affiliates of Kestra IS and Kestra AS. Investor Disclosures: https://bit.ly/KF-Disclosures

*Bluespring Wealth Partners, LLC acquires and supports high quality investment adviser and wealth management companies throughout the United States.

The Importance of Compound Interest and Tax Planning on Your Portfolio

Benjamin Franklin famously once said that “Money makes money. And the money that money makes, makes more money.” He was referring to compound interest. When interest you earn on a balance in a savings or investment account is reinvested, you earn even more money. You aren’t just earning interest on your principal balance; you are earning interest on your interest as well.

For example, if you make a one-time investment of $10,000, then earn 9% per year, the chart below shows the power of compounding your money. After 10 years. the initial $10,000 investment would be worth more than $24,000 — and after 30 years, it would be worth more than $133,000.

Chart showing returns on compound interest versus simple interest over time — Source: Investor.gov, as of November 4, 2021. This hypothetical example assumes the following: (1) starting investment of $10,000; (2) no additional pre-tax contributions; (3) an annual rate of return of 9%; (4) the ending values do not reflect taxes, fees or inflation. If they did, amounts would be lower. Earnings and pre-tax contributions are subject to taxes when withdrawn. Distributions before age 59 1/2 may also be subject to a 10% penalty. Contribution amounts are subject to IRS and Plan limits. Systematic investing does not ensure a profit or guarantee against a loss in a declining market. This example is for illustrative purposes only and does not represent the performance of any security. Consider your current and anticipated investment horizon when making an investment decision, as the illustration may not reflect this. The assumed rate of return used in this example is not guaranteed. Investments that have potential for 9% annual rate of return also come with risk of loss

There is a shortcut to help you estimate the value of a future investment, called the Rule of 72. It’s a quick way to estimate approximately the number of years it will take to double your money using compound interest. As seen in the chart below, if you earn a 6% compounded return per year on your investment, then in about 12 years your money would be worth double. If you annualize 12% a year for 48 years, $10,000 could turn into over $2,500,000! To use the Rule of 72, simply divide 72 by the expected annual rate of return and that will provide you the number of years it would take to double your investment.

Chart explaining the Rule of 72 as it regards compound interest

Simple interest is interest that is earned based solely on the principal amount and is not reinvested. For example, if you have $1,000 and earn a 5% annual interest rate, you will get $50 a year in simple interest. In the second year, you would earn another $50. To calculate how long it would take to double your money with simple interest, the formula would be 1 divided by the rate of return. For example, if you made the same investment of $1,000 earning 5% simple interest, it would take you 20 years to double your money. Note that if you were able to reinvest the money and have it compounding, then it would take approximately 14.4 years to double.

It is important to consider tax implications prior to making any investment. If an investment is going to pay 10% interest on your principal and is in a taxable account, your actual return may be only 6% if you are in a top tax bracket and the income is taxed as ordinary income. If you are not able to reinvest the income, then the income becomes simple interest, and your money can take even longer to double. Suddenly, the 10% investment return that sounded great may not be nearly as good.

Taxes can dramatically impact your investment portfolio, both in the short and long term. There are different types of taxes on investments, and each one is taxed differently:

• Capital gains are profits from the sale of an asset. If you own the asset for more than one year and you sell for a gain, then you will pay long-term capital gains tax. The rate depends on your income level and can either be 0%, 10% or 20%. If you own the asset less than a year and sell it for a gain, then the gain will be taxed as ordinary income.

• Dividends usually are taxable income in the year that they are received. Even if you reinvest the dividend income, you pay tax on that income that year. There are two types of dividend income – qualified and non-qualified. Non-qualified dividends are taxed as ordinary income. Qualified dividends are taxed at either 0%, 15% or 20%, based on income level.

• Investments in 401Ks or IRAs allow you to defer taxes while the money is inside the account. Taxes are paid when you make a withdrawal, and that money is then considered ordinary income and is taxed at your income level.

Portfolio design and allocation are very important in order to minimize the tax impact on your returns. Structuring the portfolio to have the least tax-efficient assets in retirement accounts helps ensure that those assets are being taxed at ordinary income levels. The chart below shows the difference that tax management can have in a portfolio over time. If your portfolio is managed inefficiently — if it is heavily traded and focused on short-term gains — a $1 million portfolio could miss out on as much as $500,000 of returns over a 10-year period. Compound interest is an extremely powerful tool — whether it is in a retirement account, such as a 401K or IRA, or a taxable account, earning qualified dividends that are reinvested.

Chart showing the impact of taxes on investments over 10 years

The CD Wealth Formula

We help our clients reach and maintain financial stability by following a specific plan, catered to each client.

Sources: Fidelity, Forbes, Investopedia, Russell Investments

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Using diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss of principal due to changing market conditions.

Past performance is not a guarantee of future results.

*Bluespring Wealth Partners, LLC acquires and supports high quality investment adviser and wealth management companies throughout the United States.

Student Debt, Loan Forgiveness and the Crazy Cost of College

Those of us with kids or grandkids are well aware of the crazy cost of college today. Between 1980 and 2020, the average price of tuition, fees and room and board for an undergraduate degree increased 169%. In 1980, the price to attend a four-year college full time was roughly $10,000, adjusted for inflation. By 2020, the total price had increased to roughly $29,000!

Why have the costs of college gone up over time? There are many reasons: growing demand, pressure to go to college, rising financial aid, lower state funding, cost of administration and increasing student amenity packages to keep up. Aside from tuition payments, public colleges depend on funding from state and local governments. Typically, state and local funding make up about 44% of public four-year college revenues. However, economic downturns like we saw in 2008 and 2020 can lead to funding cuts. To make up for the lost dollars, universities must turn to other sources to raise monies, with the most direct source being higher tuition.

For most people, the cost of college may not be manageable – let alone the cost of graduate school or medical school.

More than half of bachelor’s degree recipients from public or private four-year colleges graduated with debt in 2020, with the average debt load being $28,400.

For college graduates with $50,000 or more of debt, the idea of one day owning a home and being debt-free feels like it’s a world away.

Even before President Biden was elected, one of his objectives was to provide student debt relief. Last week, he announced that the government will provide $20,000 in debt relief to Pell grant recipients and $10,000 for many other borrowers. Roughly 43 million Americans hold federal student loan debt, estimated at $1.75 trillion.

Chart showing the growth of student debt for college tuition from 2006 to 2022

Borrowers eligible for loan forgiveness must make less than $125,000 per year individually or $250,000 if married for the 2020 or 2021 tax year. Private loans will not be forgiven as part of the debt relief act. At the same time, the president also announced an extension of the pandemic pause on student loan payments through the end of the year, with payments resuming in January 2023. The Education Department said nearly 8 million borrowers are likely to have their loans forgiven automatically, and the remaining borrowers will have to apply for loan forgiveness. Current students also are eligible for loan cancellation, provided their loans were obtained before July 1, 2022.

There also is a new income-based repayment plan. For undergraduate loans, the relief act caps monthly payments at 5% of a borrower’s discretionary income; currently, borrowers must pay 10%. For borrowers with original loan balances of $12,000 or less, the balance will be forgiven after 10 years of payments; currently, they have to repay their loans for 20 years.

The plan will provide relief for borrowers at a time when the cost of education continues to surge. Critics question the fairness of the plan and warn about the potential impact on inflation should students with forgiven loans increase their spending. The debt forgiveness plan will not be like the $1,200 relief checks that the government sent out during the global pandemic, however they will be relieved of making loan payments over many years. Critics also believe that this relief bill penalizes those who scrimped and saved for college and worked jobs while in college to pay off their loans.

The elephant in the room remains the exorbitant cost of college, and many fear that government debt relief might encourage future students to take on even more debt, allowing colleges and universities to raise prices even further.

Chart showing the highlight's of Joe Biden's student loan debt plan for college costs, including tuition

Regardless of political beliefs, the affordability of higher education remains a larger issue. Between 2000 and 2021, the cost of college tuition increased at more than twice the pace of overall inflation, despite a slowdown in tuition hikes during the pandemic. As is most often the case with many bills passing Congress, only time will tell the full economic impact of the Student Relief Act.

While the form for forgiveness is not available yet, federal student loan borrower updates can be received by subscribing via the Department of Education’s website here.

The CD Wealth Formula

We help our clients reach and maintain financial stability by following a specific plan, catered to each client.

Sources: Forbes, CNBC, Newsweek, USA Today

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Using diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss of principal due to changing market conditions.

Past performance is not a guarantee of future results.

*Bluespring Wealth Partners, LLC acquires and supports high quality investment adviser and wealth management companies throughout the United States.

Are Alternative Investments Too Good to Be True? Here’s What You Should Know

We have all been there before. You’re at a social event or party where you hear of a great opportunity to invest in some “private” deal or alternative investment. Maybe it is someone starting a business or an inventor with the next great idea — or even a new technology that may change the world. Some people may think these opportunities are like being invited to join an exclusive club for the rich and famous. Others may be searching for different ways to invest money outside of the liquid, public markets.

Historically, these types of investments have been more accessible for the super-wealthy and made popular by Harvard or Yale endowments. They tend not to be correlated with the stock market and may offer the potential for high returns, but typically with much higher risk.

Opportunities such as these are called private investments or alternative investments — financial assets or investments outside the stock and bond market. Examples include private equity, hedge funds, venture capital, real estate, commodities and cryptocurrencies. Here’s a brief description of several alternative investments:

• Private equity funds are invested directly into companies rather than into publicly traded stocks or bonds. Private equity firms raise money from investors and institutions and invest those monies directly into non-traded companies. There are several different types of private equity investments, such as distressed funds, leveraged buyouts and “fund of funds,” for example.

• Hedge funds are investment structures that pool monies together to invest in many different asset classes, and they are typically unconcerned with market direction. In its simplest form, a hedge fund is known as Long-Short. They go “long” by buying one stock in an industry, such as Ford, and “short” by selling another stock in the same industry, such as GM. Therefore, they are what is called market neutral. Hedge funds, like private equity, take on many different types, such as macro, equity, value and distressed.

• Venture capital investment typically involves financing startup companies and businesses. This is similar to how private equity works, but venture capital invests more in startup and early-stage businesses, whereas private equity investments are usually in more developed companies. There are different forms of venture capital investments such as seed, early-stage and expansion investments.

• Real estate investments such as investment properties, office buildings, apartments or vacation homes also are considered alternative investments, as they are purchased outside of the publicly traded markets. There are many other types of alternative investments within real estate such as hard money loans, private notes, real estate partnerships and opportunity zone investments.

• Commodities are investments that typically are available to investors of all experience levels and easier to purchase than other alternatives, such as gold, silver, oil or natural gas.

• Cryptocurrency has become a more recent phenomenon among alternative investments. Investors are putting money into Bitcoin or Ethereum or in the network blockchain, which is a digital ledger to track cryptocurrency movement and ownership.

Graphic illustrating different investment types

The pros and cons of alternative investments

PROS:

• They are not correlated to the stock market. This means that they add diversification to your portfolio while attempting to minimize risk. As we briefly outlined above, there are many different types of alternative investments, and the more investments one owns, the more one can potentially further reduce volatility in the portfolio.

• There is a potential for increased returns. As with any risky investment, there are no guarantees or guaranteed returns. Proponents of alternative investments maintain that higher returns can be achieved through these types of investments — but with the potential for higher returns comes higher risk.

CONS:

• They lack liquidity. Alternative investments tend to be private, i.e., not publicly traded, and therefore, they are less liquid. This means that they may be difficult to exit, and your monies could be tied up for many years, giving you no access to those funds. During the Great Recession, for example, many alternative investments stopped any redemptions of their funds, and clients who needed the money had no access to those monies.

• They have high investment minimums. For many people, higher minimums may make such investments unavailable. If an investment requires a high minimum to participate and that investment makes up a large percentage of your net worth, then it may not be prudent to have that much of your nest egg in one, potentially illiquid investment.

• They have higher fees. Most alternative investments carry higher investment fees than publicly traded funds do. At the same time, alternative investment fees are not always transparent, nor are they regulated by the SEC. Fees vary based on the type of investment, so it is important to understand the fee structure and how the fund manager gets paid.

• They lack regulation. Alternative investments are not regulated by the SEC and are not subject to reporting requirements. In addition, the underlying assets are often difficult to value, which can be deceptive for pricing and price transparency. Because of the lack of regulation and transparency, this can lead to risk of fraudulent investments. When you buy a stock, index fund, mutual fund or bond, you know that what you are buying is a real asset.

• They are complex. Alternative investments are often complex instruments and may require a high level of due diligence. If you are considering an alternative investment, it is imperative to do the research and understand all tax implications as well. For example, you may be a limited partner requiring a K-1, which in turn may delay filing your taxes. If you have several private investments, you may receive several K-1s, and this could lead to increased fees for filing taxes.

In recent years, alternative investments have grown in popularity. During down markets, alternative investments seem to become more popular as investors look to invest in something other than stocks.

Since alternative investments don’t have the same liquidity, transparency and valuation requirements of publicly traded stocks and bonds, investors may think that alternatives offer more security.

As seen in the pyramid below, alternative investments are higher on the risk scale, and therefore need to be well thought out and researched before investing capital. Please remember: If it sounds too good to be true, it normally is!

Pyramid chart ranking investment types according to risk

The CD Wealth Formula

We help our clients reach and maintain financial stability by following a specific plan, catered to each client.

Sources: Forbes, Investopedia

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Using diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss of principal due to changing market conditions.

Past performance is not a guarantee of future results.

*Bluespring Wealth Partners, LLC acquires and supports high quality investment adviser and wealth management companies throughout the United States.

Unpacking the Inflation Reduction Act: How Will It Affect You?

The Build Back Better Act that was so widely discussed at the beginning of the year has come to fruition in the form of the Inflation Reduction Act of 2022, which President Biden signed into law Tuesday. Its objective is to reduce inflation and the deficit, lower drug costs and increase investment in domestic energy production. The outcome of the Inflation Reduction Act will not be known for years to come, of course, but we want to discuss how some important parts of it may affect you.

What’s in the Inflation Reduction Act?

1. The bill introduces a 15% minimum corporate tax that applies to companies generating more than $1 billion in annual profit (based on a three-year average). Congress’ Joint Committee on Taxation estimates that fewer than 150 companies will be subject to the new rate. At the same time, there is a new 1% tax on stock buybacks. A stock buyback, or share repurchase, occurs when a company buys outstanding shares of its own stock to reduce the number of shares available on the open market. One reason companies may do this is to increase the value of the remaining shares available. It is an investment a company makes in itself when it believes its shares are trading too cheaply in the open market. The new 1% tax goes into effect in 2023, which could cause some companies to speed up buying shares this year and “tilt future capital deployment toward dividends,” Wells Fargo says.

2. The act has the potential to save retirees a significant sum of money on healthcare costs. It allows Medicare to negotiate prices for certain drugs for the first time in 2026 — starting with 10 drugs, then expanding the list to 15 drugs in 2027 and 20 in 2029. The act caps out-of-pocket drug costs at $2,000 a year for Medicare beneficiaries, starting in 2025. Today, there is no cap on what people may spend. The act also caps insulin costs at $35 per month for those on Medicare. Additionally, all vaccines will be covered under Medicare part D. According to a recent study by the Center for Retirement Research, retirees spend about 25% of their Social Security on medical expenses, including Medicare premiums and out-of-pocket costs for prescription drugs.

3. The Inflation Reduction Act allocates $80 billion over 10 years to increase IRS enforcement on taxpayers with more than $400,000 in income, with the goal to catch more tax cheaters. It is widely believed that this will dramatically increase the need for labor in our country, but with the unemployment rate at 3.5%, the question is: Where will the IRS find the new auditors needed?

Expected Results from the Inflation Reduction Act

REVENUE
15% corporate minimum tax: $313 billion*
Prescription drug pricing reform: $288 billion**
Enhanced IRS tax enforcement: $124 billion**
Total revenue raised: $725 billion

INVESTMENTS
Energy security & climate change investment: $369 billion***
Affordable Care Act extension: $64 billion**
Total investments: $433 billion

TOTAL DEFICIT REDUCTION: $292+ billion

^{* Joint Committee on Taxation, ** Congressional Budget Office, *** Both}

4. The largest investment made by the Act relates to energy security and climate change, with billions of dollars going to expand wind and solar power production. Additional subsidies will be available for purchases of electric vehicles as well as funding for people to install energy-efficient heating and cooling systems in their homes. However, new rules make the EV tax credit harder to get, as there are limits as to the percentage of production that must occur in North America for the cars as well as for batteries. The credit is unavailable if the taxpayer’s adjusted gross income exceeds a threshold amount ($300,000 for taxpayers filing a joint return, $150,000 for single filers). There also is money available to oil companies to reduce greenhouse gas emissions and penalties for those that fail to do so.

No one can predict the long-term results of the Inflation Reduction Act of 2022. The good news is that inflation appears to be easing on its own as global supply chain disruptions ease and the Federal Reserve’s tightening of money supply is working. There is little debate, though, that this bill will help reduce the deficit. Retirees stand to benefit heavily from the future reduction in drug costs. The legislation stands to create the single largest investment in climate and energy in the U.S. to date: roughly $369 billion, with estimates of cutting emissions by as much as 40% by 2030. At the end of the day, though, we won’t know for many years how the Inflation Reduction Act affects inflation or corporate profitability.

The CD Wealth Formula

We help our clients reach and maintain financial stability by following a specific plan, catered to each client.

Sources: CNBC, Investopedia, Financial Planning Magazine, Kestra Investment Management

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Using diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss of principal due to changing market conditions.

Past performance is not a guarantee of future results.

*Bluespring Wealth Partners, LLC acquires and supports high quality investment adviser and wealth management companies throughout the United States.

Are We in a Recession? Here Are the Indicators You Should Be Watching

Reports last week indicated that gross domestic product (GDP) contracted by -0.9% for the second quarter of the year, the second consecutive quarter of negative GDP growth after the first-quarter decline of -1.6%. As a reminder, GDP is the monetary value of all finished goods and services produced within a country’s borders during a specific time period, adjusted for inflation.

Many investors and economists accept that a recession is traditionally defined as two consecutive quarters of GDP decline. However, negative GDP growth alone may be insufficient to describe a recession. Typically, we see rising defaults from companies and individuals as well as higher unemployment during a recession. As we have often written before, the National Bureau of Economic Research — a private research organization and the official arbiter of identifying recessions in the U.S. — describes a recession as “a significant decline in economic activity, spread across the economy, lasting more than a few months.” This definition leaves a lot of room for interpretation.

The following are other observable and measurable economic conditions that could be recession indicators:

• Decline in real GDP: As stated above, we have seen two consecutive quarters of negative GDP growth. Expectations for GDP growth have continued to decrease. Annual GDP growth rates remain positive, but estimates continue to be lowered as the year progresses.
• Decline in real income: Real median household income takes time to calculate due to revisions in inflation data. Data from May shows that personal income increased by .5%, disposable personal income increased by .5% and personal consumption expenditures increased by .2%. However, real disposal personal income decreased by .1%. Why the difference? Inflation. Remember, real income — also known as real wage — is how much money one makes after adjusting for inflation.
• Decline in employment: The unemployment rate has remained steady at 3.6% for five months in a row and arguably represents near full employment for the economy. The low unemployment rate combined with the rise in wages may suggest that consumers are somewhat resilient to a potential recession and economic slowdown.
• Decline in industrial production: The industrial production index measures levels of production and capacity in the manufacturing, mining, electric and gas industries. Industrial production for June declined .2%, and prior months also were revised lower. The average monthly gain so far this year, however, remains positive at .4%. Industrial production increased at an annual rate of 6.1% for the second quarter. In a recession, we typically would see strong negative levels in the industrial production index.
• Decline in wholesale/retail sales: The consumer has remained strong and resilient for the first half of the year. The most recent wholesale report showed an increase of .5% and an increase in 20.9% from the May 2021 level. The most recent retail sales report exceeded expectations and showed an increase of 1% from the previous month and 8.4% above June 2021.

If a recession were to occur, remember that not all recessions are the same. Recessions generally fall into three categories:

• Asset bubble recession: Think of the recession from the technology bubble in 2000 or the great financial crisis of 2008, caused by the housing crisis. This typically leads to a larger financial crisis and results in steep market declines.
• Geopolitically driven recession: These are based on events such as the oil embargo of 1973-1974 or the COVID recession of 2020. They are typically the shortest in duration because they are event-driven.
• Cyclical slowdown recession: This type of recession is usually the least extreme and occurs when there is a shift in supply and demand. As the chart below shows, cyclical slowdown recessions going back to 1947 decline 19.2% on average and have a very strong return the following year.

Average Equity Drawdown and Recovery During Recessions since 1947

While the probability of a recession has increased, recessions in and of themselves are unavoidable. The economic indicators listed above will continue to provide us measurable data about the U.S. economy.

In spite of two consecutive quarters of negative GDP growth, the labor market remains strong, consumers seem resilient today, and output shows that supply-chain issues may be resolving themselves, especially with automobiles. Remember, recessions don’t last forever, and neither do bear markets.

Sources: AssetMark, Investopedia, Lord Abbett

Promo for article titled The Portfolio Changes We're Making as the Third Quarter Begins

Using diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss of principal due to changing market conditions.

Past performance is not a guarantee of future results.

*Bluespring Wealth Partners, LLC acquires and supports high quality investment adviser and wealth management companies throughout the United States.

The Portfolio Changes We’re Making as the Third Quarter Begins

This is a big week for the stock market: Earnings season is under way with many of the large-cap names reporting this week, the Federal Reserve raised interest rates another 75 basis points (.75%), and second-quarter GDP estimates are set to be released. Many economists predict that this will be the second consecutive quarter of negative GDP growth, signaling to many that we are in a recession.

However, the National Bureau of Economic Research defines a recession as a significant decline in economic activity that is spread across the economy and lasts more than a few months. The bureau does not define it as two consecutive quarters of negative GDP growth. Nonetheless, the stock market — which is a leading indicator — has been signaling for most of this year that the economy is slowing and a recession is possible.

The chart below is a stark reminder of how the market performed the first half of 2022. There are many reasons for the broad-based declines in all asset classes – the ongoing war in Ukraine, China’s zero-COVID policy, fears of economic slowdown and — lest we forget — inflation. Stock markets look forward, pricing in what investors think will happen, not what is happening right now. As such, current stock and bond prices already reflect the significant economic slowdown, if not a full recession. Bear markets do end, and when they do, a bull market will ensue.

Q2 2022 Index Returns

Chart showing index returns for the first half of 2022 by sector — ***Past performance is not a reliable indicator of current or future results. Indexes are unmanaged and not subject to fees. It is not possible to invest directly in an index.*** Note: Views are from a U.S. dollar perspective. Source: Kestra Investment Management with data from FactSet. Index proxies: Bloomberg Municipal Bond Index, Bloomberg US AGG Bond Index, S&P US TIPS, ICE BofA US High Yield, S&P 500, MSCI World ex USA, MSCI EM, Dow Jones US Select REIT, Dow Jones Global X US & Bloomberg Commodity Index. Data as of July 15, 2022.

Knowing that bear markets will end and that they do not last as long as bull markets, we are in the process of reallocating and rebalancing our client portfolios to account for where we think the market is heading, not where it has been. We are making the following changes:

1. Earlier this year, we took additional profits in technology and healthcare and transitioned into broader value-based equities as well as mid-cap stocks for further diversification. From a long-term perspective, we believe strongly in both the technology and healthcare sectors and maintain broad exposure to both. Typically, in the late business cycle and entering a recession, we see growth moderating, credit tightening up, earnings coming under pressure and inventories growing as sales fall. With earnings season under way, we already have seen many Wall Street analysts and companies reduce earnings forecasts based on the strong dollar and the weakening economy. This must happen for the market to reach a bottom.

2. As we have written in the past, one of the positives of a down market is the ability to tax-loss harvest. Tax-loss harvesting does not always have to occur at year end. As a reminder, under current tax law, it’s possible to offset current capital gains with capital losses you’ve incurred during the year or carried over from a prior tax return. Capital gains are the profits you realize when you sell an investment for more than paid for it, while capital losses are the losses you realize when you sell an investment for less than you paid for it.

Short-term capital gains are taxed as ordinary income rates, whereas long-term capital gains are taxed at a lower capital gains rate. Being able to reduce the tax on both short- and long-term capital gains by harvesting losses can help offset the gains one incurs from taking profits. Harvesting the loss has no effect on the portfolio value, since one can use the proceeds from the sale to buy a similar investment. This allows the investor to maintain similar asset allocation and reduce federal income taxes. We want to take advantage now of several holdings trading at a loss and swap out those holdings to capture the loss while maintaining similar asset class exposure. We swapped out our small- and mid-cap funds, as well as the international fund, to harvest the current losses.

3. From a fixed-income perspective, we shortened the duration of the portfolio late last year as we anticipated higher interest rates in 2022. This has played out as we envisioned. While the fixed-income markets have not been spared the downdraft of the overall markets, we feel that most of the interest-rate change is accounted for in the bond market. Therefore, we are increasing the overall maturity of the portfolio to capture the higher yields that the market offers. At the same time, we are substituting a tax-free municipal bond position instead of a taxable bond fund, as municipal bonds offer great value in this market.

Our focus remains on long-term investing with a strategic allocation while maintaining a tactical approach. Our decisions to make changes are calculated and well thought out, looking at where we see the economy is heading.

We are not guessing or market timing. We are anticipating and moving to areas of strength in the economy and in the stock market. We strategically have new cash on the sidelines and buy in for clients on down days or dips in the market – as one does with a 401K.

In the short term, the sentiment and the outlook for the global economy remain negative. Economists are debating whether the United States is in a recession, and if so, what this means. Regardless, we continually speak with our clients about staying the course and not listening to the noise. Even if we entera recession, every recession ultimately ends and expansion ensues, with an accompanying bull market.

We will continue to drive home the fact that what really matters right now is time in the market, not out of the market. That means staying the course and continuing to invest, even when the markets dip, to take advantage of potential market upturns. We continue to adhere to the tried-and-true disciplines of diversification, periodic rebalancing and looking forward, while not making investment decisions based on where we have been.

It is important to focus on the long-term goal, not on one specific data point or indicator. In markets and moments like these, it is essential to stick to the financial plan. Investing is about following a disciplined process over time.

It all starts with a solid financial plan for the long run that understands the level of risk that is acceptable for each client. Regarding investments, we believe in diversification and in having different asset classes that allow you to stay invested. The best option is to stick with a broadly diversified portfolio that can help you to achieve your specific financial goals — regardless of market volatility. Long-term fundamentals are what matter.

Source: Kestra Investment Management

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Using diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss of principal due to changing market conditions.

Past performance is not a guarantee of future results.

*Bluespring Wealth Partners, LLC acquires and supports high quality investment adviser and wealth management companies throughout the United States.

Midterm Elections are Right Around the Corner. What Does This Mean for the Market?

We are more than halfway through 2022, and the midterm elections are right around the corner. Midterm elections for the U.S. Senate and House of Representatives have the potential to shift control of Congress, and they can also have a significant impact on taxes, laws, and foreign policy. If Republicans gain control of either the Senate or the House, we can expect to see a legislative gridlock. If Republicans gain control of both bodies of Congress, President Biden’s agenda will face strong headwinds. If Democrats were to retain control of both the House and Senate, we would likely see significant changes to spending and taxation.

What does this mean for the market? While we can’t predict future results, we can examine how previous midterm cycles have affected it. Let’s take a look at past performance during midterm cycles:

The S&P 500 has historically underperformed in the 12 months leading up to the midterm elections. Since 1962, in the 12 months prior to a midterm election, the average annual return of the S&P 500 is 0.3%, well below the historical average of 8.1% . ¹

The post-midterm election period is very different. The S&P 500 has historically outperformed the market in the 12-month period after the election, with an average return of 16.3%. This is also true for the one-month and three-month periods following midterm elections. Since 1962, there has not been one instance in which the S&P 500 has experienced a negative return either six months or 12 months following the midterm elections, as shown in the chart below.

chart of market performance before and after midterm election cycles — *Source: U.S. Bank*

Midterm election years are historically more volatile than the rest of the presidential cycle. As seen in the chart below, the second and third quarters have historically been the most volatile. The average S&P 500 intra-year decline in midterm election years is 19%. In the other three years of the presidential cycle, the average decline is just 13%.

The past three midterm election corrections (2002, 2010 and 2018) were definitely painful, and this year is proving no different. The timing of this year’s decline has been faster than usual, largely due to the issues that we continue to discuss: heightened inflation, geopolitical risk from the Ukraine war, and China’s restrictions due to the ongoing global pandemic. Additionally, the market has been trending very similar to 1982, a year in which we were also dealing with high inflation, Russia and a midterm election all at the same time.

graph showing spikes in market volatility in midterm election years

The chart below also shows how the market has pulled back in each of the midterm election years dating back to 1962 — and rebounded the one year following the correction low. In each instance, the S&P 500 had a strong bounce back. The second chart below shows that, the earlier the decline in the midterm election year, the stronger the recovery. For example, corrections that began before September had a negative return of 21% on average, while their subsequent rebound was 34% on average for the following one year. While past performance is no guarantee of future results, analyzing historical data does offer insight into how midterm elections might affect the market in the coming year and beyond.

charts showing market corrections and rebounds during midterm election years — *Source: Baird*

Depending on which party controls Congress, U.S. fiscal policy may change after the election. However, economic fundamentals — and not election results — play the greatest role in stock market performance. How the Fed steers the economy amid ongoing inflation concerns will continue to be the dominant market driver. The last time the S&P 500 produced negative returns during the 12 months after a midterm election was 1939 – a time of terrible uncertainty. The U.S. was still battling the Great Depression, and World War II was beginning in Europe.

So, what can we learn from all this? Past results do not guarantee future returns. However, if the past gives us any insight, the 12 months following the midterm elections may see a strong market rebound. That said, it is important to be mindful that every individual year is different, and it follows its own path. U.S. midterm elections, and politics as a whole, come with a lot of noise and uncertainty. Investors should not let that be a distraction from the fact that long-term equity returns are generated by solid investment fundamentals over time. It is imperative to look past the short-term volatility that elections may bring and maintain a long-term focus.

We will continue to harp on the fact that what really matters right now is time in the market, not out of the market. That means staying the course and continuing to invest, even when the markets dip to take advantage of potential market upturns. We adhere to the tried-and-true disciplines of diversification, periodic rebalancing and looking forward, while not making investment decisions based on where we have been. It is important to focus on the long-term goal, not on one specific data point or indicator. In markets and moments like these, it is essential to stick to the financial plan. Investing is about following a disciplined process over time.

At the end of the day, investors will be well-served to remove emotion from their investment decisions and remember that over time, markets tend to rise. During volatile markets, it is important to remember that the fear of losing money is stronger than the joy of making money. Investor emotions can have a big impact on retirement outcomes. Market corrections and bear markets are normal; nothing goes up in a straight line. Making market decisions based on what might happen may be detrimental to long-term performance. The key is to stay invested and stick with the financial plan. Markets go up and down over time, and downturns present opportunities to purchase stocks at a lower value.

It all starts with a solid financial plan for the long run that understands the level of risk that is acceptable for each client. Regarding investments, we believe in diversification and having different asset classes that allow you to stay invested. The best option is to stick with a broadly diversified portfolio that can help you to achieve your own specific financial goals — regardless of market volatility. Long-term fundamentals are what matter.

Sources: Baird, Bloomberg, Forbes Advisor, U.S. Bank

1. Looking at 12-month periods when the price return is closing price on Oct 31.

Past performance is not a guarantee of future results.

*Bluespring Wealth Partners, LLC acquires and supports high quality investment adviser and wealth management companies throughout the United States.

What Does a Stronger U.S. Dollar Mean for You?

For the first time in nearly two decades, the exchange rate between the euro and the dollar is roughly the same. The parity in the two currencies comes after the euro has plunged almost 20% in value over the last 14 months compared to the dollar. This year, the U.S. dollar has gained against most major currencies, as the Fed’s interest rate hikes have made the dollar a safe haven for investors worldwide who are seeking protection against surging global inflation.

The chart below shows the value of the euro compared to the dollar since 1999 and the wild swings that may occur in the currency markets.

When the Federal Reserve raises rates, as it has done several times this year, Treasury yields also tend to move higher. This attracts more money into the U.S. from international investors, who in turn buy dollar-denominated bonds in hopes of obtaining higher yields than they can obtain in their own countries. The higher the yield, the better the return. The Federal Reserve has raised rates more aggressively in 2022 than many other central banks around the globe.

Another potential dynamic causing the strength of the U.S. dollar is the idea that the U.S. is a safe haven for investments, compared to many other countries. Russia’s war with Ukraine has caused considerable geopolitical and economic uncertainty in Europe. At the same time, China’s zero-COVID policy has been another drag on the global economy. While there is uncertainty in the U.S. regarding a potential recession, the bond market (i.e., U.S. Treasuries) remains a safe investment compared to other countries, boosting the dollar’s attractiveness.

Why does the strength of the U.S. dollar matter? For those traveling overseas, a strong dollar is quite advantageous. A stronger American dollar goes much farther abroad and provides more buying power. Everything is cheaper for Americans traveling out of the country.

From an investment standpoint, the implications may be different. U.S.-based companies that have large international businesses are likely to suffer from a stronger dollar, primarily because converting overseas profits earned in weaker currencies into U.S. dollars can weigh on sales as well as earnings. Income from foreign sales will decrease in value on balance sheets because the foreign currency value has lost value. At the same time, domestically produced goods become more expensive abroad as the dollar increases compared to the currency where the goods are being shipped and then sold, driving down earnings.

On the other hand, goods produced abroad and imported to the United States will be cheaper with a stronger dollar. For example, a luxury car made in Italy will fall in price in dollars with the current parity between the dollar and the euro. If a car costs 70,000 euros and the exchange rate is 1.35, then it costs $94,500. However, if the exchange rate falls to 1.12, it would cost just $78,400.

Many companies will employ hedging techniques that may help improve gross profit margins and recover some of the lost revenue from the strong dollar. Some companies may sell their products overseas, and that may help them recover lost revenue from lower production costs. It also is important to note that currency swings of this magnitude tend to be short-lived.

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So, what can we learn from all this? While the U.S. dollar is at parity with the euro for the first time in over 20 years, it is critical to remember that the overarching approach to investing in stocks and bonds is based on long-term fundamentals. There will be quarter-to-quarter fluctuations, currency headwinds and currency tailwinds with every company that performs business in multiple countries. The primary focus is to look at the underlying fundamentals of the businesses and not become consumed with shorter-term currency moves that may affect business for a quarter or two. In the meantime, if you have a trip planned overseas, enjoy the benefits of a stronger dollar.

We will continue to focus on the fact that what really matters right now is time in the market, not out of the market. That means staying the course and continuing to invest, even when the markets dip to take advantage of potential market upturns. We continue to adhere to the tried-and-true disciplines of diversification, periodic rebalancing and looking forward, while not making investment decisions based on where we have been. It is important to focus on the long-term goal, not on one specific data point or indicator. In markets and moments like these, it is essential to stick to the financial plan. Investing is about following a disciplined process over time.

Making market decisions based on what might happen may be detrimental to long-term performance. The key is to stay invested and stick with the financial plan. Markets go up and down over time, and downturns present opportunities to purchase stocks at a lower value.

It all starts with a solid financial plan for the long run that understands the level of risk that is acceptable for each client. Regarding investments, we believe in diversification and in having different asset classes that allow you to stay invested. The best option is to stick with a broadly diversified portfolio that can help you to achieve your own specific financial goals — regardless of market volatility. Long-term fundamentals are what matter.

Sources: CNBC, Fortune, Investopedia, MSN

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Using diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss of principal due to changing market conditions.

Past performance is not a guarantee of future results.

*Bluespring Wealth Partners, LLC acquires and supports high quality investment adviser and wealth management companies throughout the United States.

How Will the Economy Fare in the Second Half of 2022?

The U.S. economy and the stock market struggled mightily in the first half of 2022, and the S&P 500 had its worst start in 52 years. Inflation levels not seen since the 1980s — combined with aggressive monetary policy by the Federal Reserve, the effects of the Russia/Ukraine war and continued COVID lockdowns in China — sent the S&P 500 into a bear market. While the S&P 500 officially crossed into a bear market in mid-June, many of the underlying stock holdings had been in a bear market for a while, which is similar with the Russell 2000 and the NASDAQ as well.

The market attempted several rallies during the first half of the year, but aggressive Fed policy and the removal of liquidity from the stock market kept pressure on stocks. As a result of the pandemic, the Federal Reserve and Congress added trillions of dollars to the economy in the last few years. The Fed began aggressive interest rate hikes and stopped bond purchases to remove excess liquidity from the economy and slow down inflation. Fears of a recession have intensified, and more companies are lowering earnings guidance for the second half of the year.

The bond market also had a difficult six months. Inflation spiked higher than anticipated, and rates rose more rapidly than the market expected. Bonds were down almost 10% for the first half of the year. As the economy continues to show signs of slowing down, with a potential recession on the horizon, the 10-year Treasury yield has decreased to under 3%. The bond market is showing signs that the Federal Reserve may have to slow down the rate of increase and potentially even reduce interest rates in 2023.

We do not know when the bear market will come to an end, but we do know that it will come to an end.

As we recently wrote, the average bear market since 1929 has lasted 9½ months. Going back to World War II, the average bear market has lasted 12 months, and it has taken 21 months on average to break even after a bear market. The chart below shows the peaks and troughs of every bear market since WWII. On average, it has taken much longer to reach 20% losses than it takes to reach a bottom. Seven out of the last 12 bear markets have bottomed in 46 days or less, once the 20% barrier was breached.

Chart showing peaks and troughs of previews bear markets — *Source: Ben Carlson, A Wealth of Common Sense.*

The chart below shows how the S&P 500 bounced back after first-half falls of 15% or more. The sample size is small, however, with only five instances going back to 1932. The S&P 500 did rise in each of these instances, with an average return of 23.66% and a median rise of 15.25%.

S&P 500 second-half performance after a first-half fall of 15% or more

Chart showing S&P 500 second-half performance after 15% fall in the first half — *Source: Dow Jones Market Data, MarketWatch.*

Looking at the Dow Jones Index provides a larger sample size. The Dow Jones has had 15 instances of first-half declines of greater than 10%. The Dow was down almost 15% for the first half of the year, its largest decline since 2008. More than two-thirds of the time, the Dow rallied in the second half of the year for an average return of 4.45% and a median return of almost 7%.

DJIA second-half performance after 10% fall in first half

Chart showing Dow Jones second-half performance after 10% fall in the first half — *Source: Dow Jones Market Data, MarketWatch.*

Please remember that past results do not guarantee future returns. Time will tell how the market responds to the current bear market. The charts above provide some great context for staying invested and hope that positive market returns may be around the corner.

So, what can we learn from all this? For the second half of 2022, we anticipate volatility to remain in both the equity and fixed-income markets. Our plan is to remain invested, take advantage of the markets being down by tax loss harvesting, and as always, to make the necessary tweaks to the portfolio as the economy continues to change. It appears more evident that the U.S. is headed towards a recession. GDP is likely to show two straight quarters of negative growth, a traditional sign that the economy is in a recession. Remember, though, that the stock market is a leading indicator and is already projecting that the economy is softening. Once the economy is in an official recession, the market is forward-looking and heading towards a recovery.

We will continue to focus on the fact that what really matters right now is time in the market, not out of the market. That means staying the course and continuing to invest, even when the markets dip, to take advantage of potential market upturns. We continue to adhere to the tried-and-true disciplines of diversification, periodic rebalancing and looking forward, while not making investment decisions based on where we have been. It is important to focus on the long-term goal, not on one specific data point or indicator.

In markets and moments like these, it is essential to stick to the financial plan. Investing is about following a disciplined process over time.

It all starts with a solid financial plan for the long run that understands the level of risk that is acceptable for each client. Regarding investments, we believe in diversification and having different asset classes that allow you to stay invested. The best option is to stick with a broadly diversified portfolio that can help you to achieve your own specific financial goals — regardless of market volatility. Long-term fundamentals are what matter.

Sources: Ben Carlson, Dow Jones Data, Schwab

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Using diversification as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss of principal due to changing market conditions.

Past performance is not a guarantee of future results.

*Bluespring Wealth Partners, LLC acquires and supports high quality investment adviser and wealth management companies throughout the United States.