John Gardner

Outlook: Less Stress, More Fun in ’21

December 21, 2020 by John Gardner Leave a Comment

Last year at this time, I called 2020 the year of “Resiliency Amongst Uncertainty”. Like everyone else on the planet then, I had never heard of COVID-19 and a world overtaken by a pandemic was the last thing on my mind. So, I had no idea how right I was expecting investor uncertainty and market resiliency this year. We all know now 2020 has been a year of unprecedented uncertainty, stock price volatility and amazing market resiliency. Good-bye 2020 and HELLO 2021! As always this time of year, I look forward to the new year. Hope you enjoy my 2021 Outlook.

“Less stress and more fun in 2021” is what I am calling next year. Two huge contributors to investor’s anxiety in 2020, COVID and the presential election, are thankfully likely to bring less stress in 2021. November brought high hopes for a coronavirus vaccine with two promising cures: one that showed a nearly 95% efficacy and another indicating 90% effective and, with hopefully a smooth transition in the White House in January, Election 2020 is history. No doubt other issues we can think of, and some we can’t, will surface to cause investors concern next year. So, expect the usual bouts of spikes in market volatility in 2021. Below are my insights and forecast for the U.S. stock market and economy in the new year.

Stock Market Outlook

I have said for decades that earnings matter most when evaluating stocks and the major stock market indexes. Expectations are for a sharp rebound in earnings in 2021. With a $175 earnings target for the S&P 500, my outlook is for a higher stock market next year. However, how much higher depends on a lot, especially investor confidence. Without a big boost in confidence, the stock market may not deliver high returns in 2021. Perhaps the foundation of fundamental stock analysis is the Price-Earnings Ratio (P/E ratio). The P/E ratio is the ratio between current share price and per-share earnings. When dividing earnings into price, we get a “multiple” – in other words, how much investors are willing to pay for expected earnings. The more confidence, the more the multiple. Since the early 1970’s, the average P/E for the S&P 500 has been about 20. Applying that historical P/E to earnings expectations of $175 for the S&P 500 next year, we get 3,500. That is lower than where the index is today (3,610 November 16, 2020). That doesn’t sound good. So, to get a higher stock market next year (S&P 500) we will need either higher earnings OR greater confidence (higher multiple). A P/E of about 23 takes the broad stock index to 4,000. That is about a 10% gain in the S&P 500 from today, but also a P/E ratio about 10% above the norm. As noted above, higher investor confidence in stocks should yield a higher rate of return to stock investors.

A common question among stock investors looking ahead to next year is: Will the “rotation” continue? It’s a good question, and a macro market dynamic you will likely hear much about. So, what does this mean? The question speaks to which class of stocks are gaining the market’s favor. Specifically, will “reopening/recovery” stocks outperform the “stay-at-home” stocks? Generally, this rotation phenomena is about “value” vs. “growth”. Clearly, the “coronavirus bull market” winners were the stay at home stocks. Think Peloton, the stationary bicycle company. Those type of stocks jumped as economic sensitive stocks, such as travel and restaurants, were dumped. This situation has been in place since the outbreak of the global virus. During this time growth stocks dramatically outperformed value stocks. Then came the early November news of a late-stage, highly effective COVID-19 vaccine and the second, even better, vaccine announcement a week later. Immediately, the rotation began – COVID beneficiary stocks that had gone up so much began to fall as stocks that were deeply beaten down rose sharply. So, will this rotation continue and be a theme in 2021? The virus still controls the U.S. economy, and therefore, will determine when economic sensitive stocks rebound with earnest. Speaking of the economy next year…

Economy in 2021

As I mentioned above, the virus still controls the U.S. economy and will in 2021. The good news as of late is the development of promising vaccines. COVID-19 vaccine optimism and in turn a “return to normal” for 2021 has dominated investment news headlines and changed investor’s behavior. This is potentially the beginning of an economic recovery set to accelerate in 2021. I point to dual forces that could propel an economic rebound – shifts in behavior from consumers and corporations — that I expect to generate significant growth for the economy next year. It is expected that as much as $4 trillion in pent-up demand for goods and services from consumers could be spent in 2021 if they begin to feel like there’s a return to normal. Then there’s corporations. With historic highs of corporate cash on their balance sheets, an increase in corporation spending could also fuel economic growth.

After 2020’s weakest economic period since the Great Depression, the outlook for the economy in 2021 is less rocky and, at least, a little more rosy. I must reiterate, all depends on COVID-19. While a return to pre-pandemic GDP levels is unlikely, a 3-4% rate of growth in the U.S. economy is expected. A continued improvement in the jobs market it critical. No doubt, a new economic stimulus package would help jobs and boost the economy at least short-term. However, with Republicans and Democrats at odds, the timing of a new stimulus bill before Biden’s inauguration on January 20 is still up in the air. Global economic weakness began with the virus in 2020. Let’s hope it ends with a vaccine in 2021.

Wishing you Happy Holidays & Happy New Year!

Puts & Calls to Fight Market Falls

November 30, 2020 by John Gardner Leave a Comment

The more stock market volatility increases – like now – the more stock options benefit investors. Especially those selling stock options. Market volatility spikes cause certain stock option values to rise, which makes their selling price richer. Here’s a brief overview of stock options, then back to why they are timely to sell now.

There are two types of stock options: puts and calls. A call option is essentially the right to buy a stock. Oppositely, a put option is the right to sell a stock. You can buy or sell the right to buy or sell. I often use stock options as a strategic way to enter (buy) or exit (sell) stocks. Again, this approach to stock portfolio management is especially effective as market volatility is high. For this month’s column, I will focus on “calls”.

There are critical variables that are necessary to consider with stock options: direction, amount, strike price, and time. First, time. All stock options have a finite “life”, that’s the time they exist until they expire. An option’s life could be one day or over a year. The stated “expiration date” determines the life of a stock option. Direction is just which way the underlying stock goes – either up or down. Now, “strike price”. A stock option’s strike price is the price the underlying stock must reach to cause an option to be “in the money”, and potentially be “exercised” or “assigned”. The amount variable in a stock option refers to the difference between the current market price of a stock and the option strike price chosen. For example, here’s a hypothetical call stock option for Apple stock. A “December 18 140″ would be a December 18 expiration with a 140 strike price. Let’s say at that same time Apple stock is $131.50. In this example, the option is “$8.50 out of the money”; the difference between the stock price per share and the option’s strike price.

One major differentiator between buying and selling stock options is risk. To help explain this key point about option risk, I’ll use call options. Remember, “calls” are the right to buy a stock. Basically, the buyers of calls are risk-takers. They are speculating that a stock will not only go up, but also by a specific amount and in a usually short time frame. They have to be right on direction, amount and time. All three must occur for the call option buyer to have a winning bet. I use the word ‘bet’ to emphasize what buyers of options do. Sellers of stock call options do not take any risk. They are just selling the right to buy their stock. Here’s more on that. Again, a call is the right to buy a stock. You could profit from selling the right to buy. If you already own a certain stock, you can sell the right to buy your stock – and you get paid for that. Say, back to the Apple example, you own 500 shares. You might consider selling your Apple stock at a higher price in the near future. In the example, Apple is priced at $131.50. Suppose you decide you would be happy to sell it at $140 by December 18. Let’s say at this time an Apple December 18 $140 call is $2.00. So, you could sell 5 contracts (each representing 100 shares) for $1,000. Since option prices are quoted on a per share basis, each contract is $2 times 100, valued at $200. What you would have done in this example is collected $1,000 while creating an obligation to selling your Apple at $140 in the next month or so. This does three things at once: increases cashflow from your stock (in addition to dividends), reduces risk, and limits your gain to the strike price ($140 per share).

I stressed the point earlier that increased market volatility can cause stock option values to rise, making them richer and more beneficial for option sellers. As stocks soared from the March market bottom, demand for buying calls – bets on stocks going up – has also soared. As the gambler’s demand for buying calls has jumped, so have the prices of call options. This is good for sellers of those call options. The conservative stock owner can sell rich calls as the speculators make bullish bets. Though I said earlier that call options sellers don’t take any risk, understand that if a stock that you sold a call against should rise above the option strike price, you do not get those gains in your stock. That is called “opportunity cost”. Sticking with the Apple December 18 140 call option sell example, if Apple climbed to $200 by expiration date, you would have it “called away” (sold) at $140. There is a way to undo this, but this is noted to say there is opportunity cost in selling calls.

I first wrote about stock options in my Investor’s Edge column in October of 2018. I made an important point then; I want to reiterate it now. Stock options are not suitable for all investors and they are not ideal for all stocks. Remember the old adage, “There’s no free lunch”. Even now with increased market volatility and rich call options prices benefitting sellers, call and put options require a thorough understanding of their unique variables and potential opportunity costs.

Put and Call options are a proven way to profit from stocks even as the market falls. They work for me and can work for you. Let me know if you have any questions.

Year-end Money Moves

October 11, 2020 by John Gardner Leave a Comment

If it’s not too early for stores to put out Christmas decorations, it’s not too early to think about year-end financial planning. While 2020 maybe a year we are all looking forward to being over, there’s still time to start some beneficial retirement, tax and investment planning before the year’s end. Here are five things you can still do to make the most of your financial life in what has otherwise been a challenging year.

Maximize Retirement Savings Contributions

Now is the time to see if you are on pace to max out your retirement contributions for the year. Making sure you are making the maximum contribution to your retirement plan is always on top of the list. Once the calendar flips to the new year, you won’t be able to go back and add contributions to your 401(k). The contribution limit for employees who participate in 401(k), 403(b), and most employer sponsored retirement savings plans for 2020 increased from $19,000 last year to $19,500. The “catch-up” contribution limit for employees aged 50 and over who participate in these plans increased from $6,000 to $6,500 (so if you are over 50 with a 401k you could max out with a $26,000 contribution). If you are not on track to saving the most you are allowed, consider changing how much you contribute to your retirement savings account. Consider putting most or all of any bonus you receive into the plan. Do the same for IRA and Roth IRA contributions as well. The IRA contribution limit for 2020 is $6,000 unless you’re 50 or older, then it’s $7,000. You may also want to consider converting some of your traditional IRA funds to a Roth IRA. 2020 is an unprecedented opportunity for a Roth IRA conversion. The 2020 CARES Act allows retirees 72 or older to skip their Required Minimum Distribution (RMD) this year. So, with the required withdrawal waived, a retiree over 72 should consider converting their RMD to a Roth IRA. While you pay taxes on the amount you convert, all future gains and withdrawals are tax-free.

Tax Strategies

There are many tax planning strategies that you can consider approaching year’s end. As mentioned above, most retirement account contributions are tax favored. Beyond that, another is tax harvesting. This common strategy involves selling investments at a gain or loss to balance out your tax liability. Losses can be deducted against ordinary income up to $3,000, but they can also be used to offset gains up to any number. If you don’t have gains, the loss can be carried forward to next year. The losses are applied against gains before they are applied to $3,000 of ordinary income. If you want to repurchase that same investment, you need to wait 30 days to avoid “Wash Sale” rules. There is one certain way to avoid owing tax on capital gains: defer. That means don’t sell any investments with gains until next year. By just waiting until January to take gains, you postpone taxes for a year. As I note below, certain charitable gifting and estate planning techniques before year-end will save you 2020 tax payments.

Re-balance Investments

Over the course of the year, the investments within your portfolio will perform differently, resulting in a weighting change (representing more or less than at purchase). Rebalancing is the process of buying and selling portions of your portfolio in order to reset the weighting of each asset class back to its original desired amount. Also, if your investment strategy or tolerance for risk has changed, you should rebalance to readjust the weightings to be better aligned with your plan. Portfolio rebalancing is like a tune-up for your car: it helps keep your investments aligned and in sync with your risk tolerance, income needs and growth goals.

Charitable Contributions

Now is a great time to consider making charitable contributions. The tax deduction may pale in comparison to the feeling you get from helping an organization fund its cause. However, the tax benefits may be substantial. You may be able to not only avoid capital gains taxes, but also get a deduction by making a charitable donation of securities that have risen in value. Another 2020 charitable giving benefit comes uniquely from the CARES Act. As part of the bill, individuals and corporations that itemize can deduct much greater amounts of their contributions. Individuals can elect to deduct donations up to 100% of their 2020 AGI (up from 60% previously). Corporations may deduct up to 25% of taxable income, up from the previous limit of 10%. The new deduction is for gifts that go to a public charity. Also, your IRA is a great tax-advantaged source of gifting before this year’s end. Again, thanks to the CARES Act, you can make a qualified charitable distribution (QCD) this year which allows you direct up to $100,000 from your IRA to charities in a tax efficient manner.

Estate Planning

Following the idea of charitable giving, consider making gifts to family members to help reduce the size of your estate. The IRS allows every taxpayer to gift up to $15,000 to an individual recipient in one year. So, you and your spouse could give $30,000 to each child every year, for example. There is no limit to the number of recipients you can give a gift to, but there is currently a lifetime exemption of $11.58 million.

Hope you found these do-before-December 31 tips helpful.

Have questions? Need professional wealth management or investment advice? Call me, I am happy to help. I’m at 888-985-PLAN.

Election 2020: Economic and Equity Market Impacts

September 16, 2020 by John Gardner Leave a Comment

We are less than two months from the 59^th presidential election on November 3. In addition to normal pre-election concerns, this year’s virus crisis election worries amplify existing concerns about the weak economy, a possible second wave of the corona virus this fall and the current all-time high market. In this month’s Investor’s Edge column, I hope to share with you a proper perspective on the presidential election’s impact on the economy and stock market.

Markets tend to be volatile ahead of elections, and October and November tend to be the wildest months of the year anyway, so with the two combined this year, wide swings in stock prices are near certain. When we throw in the wild card of the politics of politics, Election 2020 could impact the economy and stock market even more. The possibility of a contested election could wreak havoc in both the country’s economy and our financial markets, as Americans might then question the viability of our nation’s democratic process.

I want to start with the impact presidential elections have on the U.S. stock market in general. I hate to disappoint you, but for all the campaigning, polling, conventions, billions of dollars spent by the candidates, fretting, fighting, and rhetoric, for long-term investors, the presidential election doesn’t matter much. Markets have tended to power through presidential elections, though, not without some volatility along the way, regardless of whether a Democrat or Republican won the White House.

History and research proves this point. Market data since 1789 (using a mix of the S&P 500 & Dow Jones Industrial Average) shows, over a full 4-year term, there is virtually no return difference between Democrat or Republican president. It is a near tie: Democrat +8.6% vs. +8.8% for Republican presidencies. Keep that in mind as we approach November. Election years can be a tough time for investors to maintain a long-term perspective, given the strong emotions often induced by politics. The election/emotion meter could easily peak this election, perhaps the most in modern times — stoked by the combination of a deadly pandemic, a global economic weakness, widespread civil unrest and unprecedented market volatility. So, investors should keep emotions in check, and focus on the market’s fundamentals, their asset allocation, the economy’s condition and potential policy changes the election could bring. That leads to the impact potential policy changes could have on the U.S. economy. Tax policy, like in the last election, may be a big one with this year’s election outcome.

Researching which stocks moved and to what degree around the 2016 election, I found taxes had the most impact. This makes sense, as taxes directly affect corporate valuations and is the primary policy that is within control of political lawmakers. Simply, lower taxes increase earnings, which helps boost stock valuations. Other policies will impact the economy and specific sectors, such as energy and healthcare, but tax policy tends to carry the broadest market influence if 2016 is any guide. Consider a Joe Biden victory in November; and if the Senate flips Democratic. Mr. Biden wants to raise taxes. He may increase the top income-tax rate to 39.6% and raise the tax on dividends and capital gains to the same. Another “what if” Biden wins and tax policy, he is thought to raise the corporate tax rate to 28% from the current 21%. As I noted above, expect potential policy changes to also impact the economics of the healthcare and energy sectors. Trade and infrastructure policies put in place post-election will impact the macro economy, too. In many cases, such as healthcare policy, it matters more which party wins Congress than which man wins the White House. Because healthcare policy is largely driven by legislators, a change in who controls Congress could determine whether the new president’s healthcare vision becomes a reality. Congress plays a big role on trade, also. Trade policy will not only be impacted by who occupies the Oval Office, though wide-ranging trade powers are granted to the president. It also hinges on whether the Senate remains in Republican hands, as Congress has the authority to approve new trade deals.

In review, historically, the stock market has consistently delivered positive returns year-after-year whether we had a Democrat or Republican president. Therefore, the presidential election itself has not mattered much. What matters more is the control of Congress as important and economically impactful government policies can be reformed. On an additional noteworthy election fact relating to the stock market is the “Presidential Election Cycle Theory.” This was originally put forth by Yale Hirsch, creator of the Stock Trader’s Almanac. According to its research, the market has been positive overall in 19 of the last 23 election years (from 1928–2016), only showing negative returns four times. Year three of a president’s term is usually the strongest year for the market, followed by year four, then the second, and finally the first. So, there’s some more food for thought on the election and equities market.

May the best candidate win. May we soon have a COVID-19 vaccine. And may 2020 be a successful investment year for you. As usual, call me if you ever have a question. I am always happy to help.

Factors to Consider When Evaluating Stock Investments

August 10, 2020 by John Gardner Leave a Comment

Serious money should be seriously invested. Having a set of factors to consider when investing in stocks is part of the serious endeavor of investing. A rules-based investment approach will help you remain invested in volatile markets, control your emotions and reduce your chances of large losses. In this month’s Investor’s Edge column, I want to share with you a list of factors you should consider when evaluating stock investments.

It all starts with knowing your risk tolerance. There is no investment without risk. With frequent wide swings in stock prices, stock investments are certainly not without risk. So, consider your ability and willingness to live with the ups and downs of stocks. One way is to quantify risk. I recommend doing this by asking yourself what number you are on a risk scale of 0 to 10. With this risk scale in mind, assign a 6 to the S&P 500 – a major U.S. stock market index. Are you willing to take more risk than the “market basket”, or less? You may be a 7 or greater. You may be a 5 or less. There is no right or wrong number.

Consider time. What is your investment time horizon? Long-term? Short-term? One proven axiom is “It is time in the market, not market timing that makes successful investors.” Time is essential to recover from prolonged down markets. For example, after the Nasdaq index peaked in March of 2000, it began a long, steep fall that didn’t bottom until October of 2002. It did not climb back to its’ 2000 high until March of 2015 – a long time to wait just to get back to even.

It is also important to know your investment objectives. Consider your “why” for investing in stocks. It may be for current investment income or future financial needs such as your kid’s college or your retirement. This consideration should help you determine which stocks are most suitable for you (and which are not). You may seek high dividend stocks, or growth stocks that offer great appreciation potential and do not pay dividends.

Now, let’s talk about how to evaluate stocks you may want to invest in and what to consider before selling them. Just buy low and sell high, right? It’s not that easy. The two main schools of thought on buying and selling stocks are FUNDAMENTAL analysis and TECHNICAL analysis. While volumes have been written about these two methodologies, and I have spent decades studying them, I will try to sum them up here. First, technical analysis. Think of this stock selection technique as the study of the supply and demand for a stock. This is accomplished through the analysis of a stock chart. This picture of a stock gives you valuable insight of price and volume behavior for a stock. From analyzing the historical price and volume trends and patterns, you are able to derive a sense of the future price direction of a stock. As your “chart reading” skills improve, technical analysis will give you reliable indicators as to when to buy or sell a stock you are evaluating. Famous technician, William O’Neil once said, “The whole secret to winning and losing in the stock market is to lose the least amount possible when you’re not right.” Technical analysis helped him do that. On the other hand, there is fundamental analysis. This method of evaluating stocks takes into consideration a broad view of the financial health of a company. It is a study of financial statements such as balance sheets and income statements for the purpose of determining key ratios and metrics. The most common is the price-to-earnings ratio (P/E). I also recommend focusing on sales (revenues), return on equity and profit margins. Debt ratios should be considered. Cash flow and book value are two more fundamental criteria to consider. Earnings and dividend stability should be evaluated. The macro nature of fundamental analysis includes knowing a company’s management and awareness of competition for its product or service market share. This stock analysis approach follows the way of Warren Buffet, which is to “buy stocks at bargain-basement prices and hold them patiently.” These time-tested, proven stock selection methods have sparked many a debate as to which is better. I think the winner is both. You will find it invaluable to have a sense of supply and demand for a stock as well as to know if it is financially sound or not. You get both when blending technical and fundamental analysis when analyzing stocks. Together they will help you make prudent and timely decisions, whether you are buying or selling stocks.

I hope this helps. While the stock market offers attractive investment return potential, it is not for everyone. Know yourself. If stocks are right for you, be disciplined. Your rules-based approach will reduce the emotional swings that market moves like the current coronavirus stock market cycle can cause.

Roth vs. Traditional IRA: Which is best for you?

July 9, 2020 by John Gardner Leave a Comment

Today, more workers are being asked to participate in and contribute to their own retirement plans. While Social Security is a valuable resource, we are wise not to rely on Social Security benefits alone for income during retirement. It is never too soon to start planning for retirement and it is the small decisions you make today that can have a big impact on your future. While you may already be saving in an employer-sponsored plan – such as a 401k – an Individual Retirement Account (IRA) allows you to save additionally for your retirement. And, you may also save on your taxes. There are different types of IRA’s with different rules and benefits. 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, ordinary income after age 59½. In this month’s Investor’s Edge column, I hope to highlight how these two vary and to help you determine which option is best for you.

A common question is, “Should I save for my retirement in an IRA or 401k?” The answer is one of affordability. If you can afford to, the answer is BOTH.

A Roth IRA and Traditional IRA are both good retirement accounts to consider. However, there are several key differences to keep in mind when determining which account is the best for you. Understanding the types of IRA’s available to you is an important step towards successful retirement planning. Understanding the differences between a Roth IRA and Traditional IRA will help you maximize your retirement savings. Let’s view the two side-by-side for comparison from 4 key considerations: Contributions, Taxes, Withdrawals and Penalties.

	ROTH IRA	TRADITIONAL IRA
Contributions:	Contributions are made with “after-tax dollars”.	Contributions may be made with “pre-tax dollars” (more on this below regarding taxes).
Taxes: *on contributions *on withdrawals	Contributions are not deductible. Your contributions are withdrawn anytime without taxes.	You may be eligible to deduct all or a portion of your contributions. Deductibility depends on your income, filing status, whether you and/or your spouse are covered by a retirement plan at work, and whether you receive social security benefits. Withdraw anytime, but deductible contributions are taxable.
Withdrawals: Penalties:	A qualified distribution is tax-free if taken at least 5 years after the year of your first Roth contribution and you’ve reached age 59½ (there are some exceptions). No penalties on withdrawals.	Taxable when withdrawn (there are some exceptions). Withdrawals are generally subject to penalties if withdrawn before age 59½ (there are some exceptions).

If you’re eligible to make a deductible contribution to a traditional IRA, consider putting as much as the $6,000 limit there—especially if you expect to be in the same or lower income tax bracket in retirement when you take withdrawals. If you’re age 50 or older, you can save up to $7,000 in 2019 thanks to catch-up contributions. As said above, the tax deductibility of contributions will be subject to income limits. If neither you nor your spouse (if any) is a participant in a workplace plan, then your Traditional IRA contribution is always tax deductible, regardless of your income.

If you’re not eligible to make a deductible contribution to a traditional IRA but you’re eligible for a Roth IRA, consider putting your $6,000 into a Roth (or $7,000 including a catch-up contribution). Contributions are made with after-tax dollars, meaning there’s no potential tax deduction in the year of the contribution, but qualified withdrawals are tax-free in retirement so long as you’ve held the account for at least five years and you’re over age 59½.

A number of things have to be weighed to know whether a Roth IRA is your best option. If you expect you might be in a higher tax bracket when you make your withdrawals, the Roth may be especially attractive. Ending up in the same bracket would mean a wash for income tax purposes—but a Roth IRA still has other advantages, including no tax on your accumulated investment earnings. It’s difficult to know what your future tax bracket will be in retirement. Consider, though, with current income tax rates historically low, they could rise in the future.

Also, a Roth IRA doesn’t force you to take annual required minimum distributions (RMDs) starting at age 70½, as you have to do with a 401(k) plan or traditional IRA. That’s an advantage in terms of letting your Roth IRA continue to grow tax-free in later years. It could also benefit your heirs, who’d be able take money out income tax-free at your demise.

Determining whether a Roth or Traditional IRA is best for you is worth doing. Like most things worth doing, it may not be easy. I hope this helped. If you have any questions, give a call at 888-985-PLAN.

Who Cares?

June 1, 2020 by John Gardner Leave a Comment

First of all, I hope all of you and those you love and care about are healthy. A big THANK YOU to all of who are first responders and medical professionals for your service and the care you give. COVID-19 has absolutely changed the way the planet’s population lives. The lives lost and those who are sick because of coronavirus is awful. America’s economic condition is the worst since the Great Depression already and the ultimate damage will likely be worse. The U.S. government cares. The recent passing of the CARES Act expresses that.

On March 27th, 2020., the Coronavirus Aid, Relief and Economic Security (CARES) Act was signed into law. The CARES Act is intended to provide fast and direct economic assistance for American workers and families, small businesses, and preserve jobs for American industries. The bill builds upon earlier versions of the CARES Act known as the Families First Coronavirus Response Act. It is the product of negotiations between Democrats and Republicans for a bipartisan response to the crisis. The bottom line, the CARES Act is a tremendous help to our country. With an attitude of “do whatever it takes”, the government is likely to throw even more trillions of dollars in the combat with coronavirus. The graph below depicts the allocation of the $2 trillion CARES Act. There are seven main groups that would see the widest-reaching impacts:

The CARES Act has been deemed necessary emergency relief. In my opinion, it is much more accurate to call this legislature a “Relief Act” than a “Stimulus Act”. No economic policy can fully end the current hardship so long as the public health requires that we put so much of our commerce on ice. And it will take a vaccine to fight the virus for that condition to completely thaw out. The CARES Act, though, is a positive step forward to provide economic relief to individuals and businesses facing potential economic ruin. Here are some highlights to retirees specific and American families in general:

Retirees & Retirement Account Holders – – The 10% early withdrawal penalty on retirement account distributions has been waived for taxpayers facing financial challenges due to COVID-19. Withdrawn amounts are taxable over three years, but taxpayers can recontribute the withdrawn funds into their retirement accounts for three years without affecting retirement account contribution limits. Eligible retirement accounts include individual retirement accounts (IRAs), 401Ks and other qualified trusts, certain deferred compensation plans, and qualified annuities. What retirees will find most beneficial is the CARES Act also waives required minimum distribution (RMD’s) in 2020.
Families – – Cash payments and student loan relief are just two immediate provisions to families from the CARES Act. Cash payments are estimated to total $300 billion. Most individuals earning less than $75,000 can expect a one-time cash payment of $1,200. Married couples would each receive a check and families would get $500 per child. That means a family of four earning less than $150,000 can expect $3,400. The checks start to phase down after that and disappear completely for people making more than $99,000 and couples making more than $198,000. The cash payments are based on either your 2018 or 2019 tax filings. People who receive Social Security benefits but don’t file tax return are still eligible, too. As I noted, student loans benefit also. Employers can provide up to $5,250 in tax-free student loan repayment benefits. That means an employer could contribute to loan payments and workers wouldn’t have to include that money as income.
All of us – – The IRS has been extended this year’s tax filing deadline to July 15.

I am optimistic that policymakers can build on this bill to ensure individuals and businesses can be victorious over the virus and rebound effectively when the crisis abates. A tremendous effort is underway to develop a coronavirus vaccine. Let’s not hope for a “new normal”. Let’s look forward to the way we lived our lives before the pandemic – that is normal.

Seven Things Investors Need to Know

May 2, 2020 by John Gardner Leave a Comment

While there are likely countless things we need to know to be successful investors over the long term, here are seven I believe are most critical now. The global financial markets have never seen such uncertainty and volatility brought on by COVID-19. I hope you find these investment tenets helpful.

1) Know Yourself

In the August of 2018 issue of ALIVE Magazine, my Investor’s Edge column was about rules-based investing. I highlighted my “Top 10 Tenets”. These are investment principals that have guided my investment decision making process for most of my 35-year career. Number 2 of those 10 is “Know Yourself”. I also call this the “Be true to you rule”. Knowing your unique investment parameters and constraints will help you stay true to you. An individual investor must know him/her-self to be a successful investor. You must be able to answer fundamental questions about yourself relative to investing. There are no wrong answers. Just an honest assessment of who you are as an investor. The goal here is to ensure you only own investments that are consistent with the type of investor you are.

2) Know Your Investments

Some investments offer relatively high income and little appreciation potential. Others are growth investments that offer great gain potential and little or no income. Still others offer a moderate amount of both. Some are high risk, while others are stable with relatively low risk. There are tax advantaged investments and investments with no tax benefits. Those, and other attributes, are easy to know. When I say “know your investments” I mean KNOW your investments. What are ALL the costs and expenses? How liquid is it? What is the quantifiable risk? What amount of leverage or debt does it have? How experienced is the management team? How does a particular investment complement your overall investment plan? As you have heard, “You can’t judge a book by its cover.” That wisdom applies to investments. You have to do your homework. Open the prospectus. Read the financial statements.

3) All Investments Are Risky

Bernard Baruch famously said, “There is no such thing as an investment without risk.” It’s true. Think about the safest investment in the world; a U.S. government guaranteed bond. It is guaranteed by the full faith and credit of the U.S. government. BUT it is still not without market risk. If you need to sell it when interest rates are climbing, you will likely get less money back than you invested. That is because of a basic investment fact: bond prices move inversely to interest rates. So, when rates go up, bonds go down. Conversely, bond prices rise as interest rates drop. There many types of investment risk, from liquidity risk and market risk, to currency risk and interest rate risks, for example. There is no such thing as an investment without risk.

4) Good Companies Not Always Good Stocks

I have often discussed the notion of “good company; bad stock” with clients. This concept is counterintuitive. Logic would suggest a good company should also be a good stock. The reason here is in part a function of where a company resides relative to industry groups. I monitor 197 industry groups daily. Think of the travel industry today in the face of the global coronavirus pandemic. Comprised of airlines, cruise lines, hotels, resorts, casinos and the like, the travel industry group consists of hundreds of companies. Many of those, such as Southwest Airlines, Marriot, MGM and Carnival Cruise Corp are widely viewed as good companies. They are really bad stocks, though, now (as of April 17, 2020). I know it’s obvious: while we are ordered to “shelter-in-place” and travel has essentially stopped, these companies are not profitable and therefore are bad stocks. The good news is the best of these “good” companies will be “good” stocks again. There are certainly many other factors that prove this concept true. Most industries move one way or another relative to macro-economic conditions. Telecommunications, utilities and real estate stocks, for example, are interest rate sensitive. They, like bonds, trade inversely to interest rates. Therefore, they tend to go down in price and interest rates go up. Those good companies are then bad stocks.

5) It’s Time in the Market, Not Timing the Market

I mentioned my “Top 10 Tenets” above in need to know #2. Time in the market, not market timing is another. It is critical to know for successful investing. Throughout the ’80’s and ’90’s I taught an investment class. “Market timing” was a popular topic with the students. I talked them out of it. A key to successful investing is time; it is the amount of time in, not the timing, that matters. Time in the stock market does two things: It reduces risk and avoids the cost of being out. The longer your time in the market, the lower your risk. Quite simply, no one can consistently time markets. Fact is no one knows the future, and there is no “crystal ball”.

6) Know How to Diversify

Common wisdom isn’t always the best wisdom. Diversification is common investment wisdom. For some it may not be wise. The opposing investment approach to diversification is “concentration”. Maintaining a ‘less-is-more’ conviction, concentrated stock investors choose to invest a lot of money in a few companies. Holding 5-8 stocks is a concentrated portfolio. The best of the two is answered by which is best for a specific investor. Too much diversification can dilute profit potential. Too much concentration can be dangerous, also. Knowing your investor-self will help you with concentration vs. diversification. Diversification is a time-tested way to reduce risk. Just know the right amount for you.

7) Tax-Deferred Compounding Secret to Wealth Accumulation

Albert Einstein is known to have said, “Compound interest is the eighth wonder of the world.” Why so? And, why should you know? It’s in the numbers and works like magic – – especially if the interest (or return on your investments) is compounding tax-deferred. This phenomenon is truly exponential. You should know this because it is this concept that, through your 401k for example, will allow you to retire rich. Another wise man worded what Einstein said differently. According to Benjamin Franklin, “Money makes money. And the money that money makes, makes money.” That is probably the simplest explanation of compound interest you’ll ever hear.

Stay healthy and invest to be wealthy.

2019 Tax Filing – How You Can Still Lower Taxes

April 7, 2020 by John Gardner Leave a Comment

Welcome to tax month 2019! Last year’s tax season was new and different as sweeping changes in our federal income tax laws took effect. We had a major change in the tax code late in 2017, known as the Tax Cut and Jobs Act, that changed the tax code as we knew it. This year we will be living in real time with the ramifications of those new laws. The biggest surprise relating to filing your tax return this here happened last month. On March 17, the U.S. government announced they will postpone the April 15 tax-payment deadline for millions of individuals, giving Americans an additional 90 days to pay their 2019 income-tax bills in an unprecedented move intended to ease the economic pain inflicted by the Coronavirus. In light of all the changes, and with the tax filing deadline just days away, I want to share some last minute, but not-too-late, tax planning/tax reducing actions you can still do. Also, secondly, I will shed light on five key issues to be aware of this tax season.

Here are some beneficial moves you can still make before filing:

1. Increase Your 401(k) Contribution

For 2019, there’s been a $500 increase in the maximum employee contribution amount to 401(k) plans and other employer sponsored retirement plans. That raises the maximum contribution from $18,500 to $19,000 for 2019. The $6,000 catch up contribution for taxpayers 50 an older remains unchanged. So, for us over 50, we can reduce taxable income by $25,000 by maxing out our 401K.

2. Increase Your IRA Contribution

This year’s $500 retirement plan increase also applies to IRA accounts. The IRA contribution maximum is increasing from $5,500 in 2018, to $6,000 for 2019. The $1,000 catch up contribution for taxpayers age 50 allows a maximum $7,000.

3. Set Up an HSA

The higher standard deduction means it will be more difficult to write off medical expenses. But you may be able to work around that by establishing a Health Savings Account (HSA). Under an HSA, you can make a tax-deductible contribution up to $3,500 for a single person, or up to $7,000 for a family for 2019. There’s also a catch-up contribution of $1,000 if you’re 55 or older. Last month’s Investor’s Edge column was titled, “One Account – Three Tax Benefits.” It was all about HSA’s. (Let me know if you would like a copy).

Five Tax Return Items to Be on Alert For This Year

Expect delays due to new forms. It’s estimated that 450 forms were revised in order to take all the tax law changes into account, including the 1040 itself. This is now completely revised for all of us as a short form. But shorter doesn’t mean simpler—it just means different. And because so many forms have been redesigned but not actually put into play yet, taxpayers be testing them in real time. Delays and glitches are highly likely.

Don’t be shocked if your typical results are vastly different this year. That refund you looked forward to may now be a tax bill you owe the IRS. Because the withholding tables changed in early 2018, many taxpayers may find themselves owing taxes. If you made changes to your withholdings, it will make filing this year easier. If not, be prepared for possible changes and expect the unexpected.

Consider your state or city income tax changes. For example, California did not conform to Federal tax law changes. That means that taxpayers are basically experiencing two unique and non-integrated taxation systems. If you haven’t already, work with your tax professional to determine the best way to maximize what’s afforded within both systems. There may be disadvantages for one compared to the other.

Planning for 2019 taxes should have started last year. Still, you can still review your 2018 return to look for opportunities to benefit from the tax law changes or to mitigate any negative impacts regarding laws that didn’t pan out in your favor. One example would be for retirees over the age of 70 ½ who are able to direct up to $100,000 of their annual Required Minimum Distributions (RMD) to charity, tax free, and still have it count toward their RMD each year.

You know it makes sense to work on your taxes as early as possible, even if you decide to wait to file, so that you can get a sense of whether you will owe or receive a refund. As noted above, there are still some helpful things you can do. And remember, if you owe, you have 90 days to pay – interest and penalty free.

With the impacts of the Tax Cuts and Jobs Act taking full effect this tax season, 2019 may become the most talked about tax filing time in a generation. If ever there was a tax year for “eyes wide open” planning, this is it! Collaborate with a tax professional and your Certified Financial Planner™ to be sure you are taking the new laws into account as you move forward this year and next. Doing so will allow you to file your taxes in confidence and with peace of mind.

One Savings Account, Multiple Tax Benefits

March 11, 2020 by John Gardner Leave a Comment

There’s a savings/investment account available to most working people that offers tax-advantaged contributions to be used for future medical expenses or retirement, or both. Think of an IRA, a ROTH, and an FSA (Flexible Spending Account) all in one. It is an HSA, or Health Savings Account. I first wrote about HSA’s in 2017. They were good then and are great now. For the most part, advantageous tax benefits and multi-purpose uses come with an HAS, but the bad news is, not everyone is allowed to contribute to one. The primary requirement for an HSA is a qualifying high-deductible health plan (HDHP). The IRS definition of this term changes annually. For 2020 it refers to a health insurance plan with a deductible of at least $1,400 for self-only coverage or $2,800 for family coverage.

What is an HSA?

An HSA is a type of savings account that allows you to set aside money on a pre-tax basis to pay for qualified medical expenses. I mentioned above the requirement that you have a “high deductible health plan” (HDHP). High deductible plans usually have lower monthly premiums than plans with lower deductibles. By using the untaxed funds in an HSA to pay for expenses before you reach your deductible and other out-of-pocket costs like copayments, you reduce your overall health care cost. Contributions to an HSA can have a meaningful tax impact. HSA contributions are an above-the-line deduction on a tax return (similar to an IRA contribution). For 2019, Americans can still fund $3,500 for individual plans and $7,000 into family plans. Further, if you are over 55, you can also do a “catch-up” contribution of $1,000. For many, this can translate into real tax savings. You have up to the tax deadline of April 15, 2020 for a 2019 tax-year benefit. Consider contributions to HSAs as important as your 401K and IRA savings. The HSA contribution limits are set annually by the IRS; for 2020, they’re $3,550 for an individual and $7,100 for a family. In addition to these limits, HSA participants who are 55 or older can contribute an additional $1,000 as a catch-up contribution. So, if you’re at least 55 years old and have self-only health coverage, you can contribute a total of $4,550 to your HSA in 2020. If you’re 55 or older and are the primary insured on a qualifying family health plan, you can contribute as much as $8,100 to your account. Here’s an important note on your contributions: If your employer makes HSA contributions to your account on your behalf, it’s important to realize that these are included toward your annual limit. When my ERPE Excerpts featured an article on HSAs in 2017, the contribution limits were $3400 for an individual and $6750 was the family limit. Since then, there have been efforts to dramatically increase these contribution limits, including a bill that passed the House of Representatives in 2018 that would have roughly doubled them. However, no new laws governing HSA contribution limits have passed.

HSA Tax Benefits

When I call HSAs tax-advantaged accounts, I mean HSAs are tax-advantaged accounts! I’m talking tax-deductible, tax -deferral AND tax-free benefits. As mentioned above, your contributions are tax-deductible. Your money in your HSA compounds tax-deferred. Then, when you take your money out to pay qualified medical expenses, it’s not taxed—these withdrawals are tax-free.

Using HSAs

As I noted above, if use for qualified medical expenses, HSA distributions are tax-free. While the cost of medical in retirement is high, using tax-free funds will be quite helpful. However, you do not have to use this source of funds for health expenses. You could instead choose to let your HSA money grow and grow, compounding tax-deferred, for use later, maybe in retirement. It is important to remember when investing in an HSA that you have a long-term horizon. If you are using your HSA for retirement planning, you could have a significant additional amount of money at 65, or older. That money can stay in, growing with postponed tax consequence as long as you want, unlike an IRA with required minimum distributions. Similar to other long-term savings accounts, such as an IRA or 401K, most HSAs allow you to choose from a menu of mutual fund investments. As you know, great growth can come from these over time.

HSA Tax Penalties

If your withdrawals from an HSA are not used for qualified medical expenses, you will have a tax bill. Tax penalties from HSA withdrawals are both a function of your age and what you use the money for. As noted above, using your HSA money to pay qualified medical expenses is tax-free. However, withdrawals to pay for anything else will trigger either a tax penalty or an income tax liability, or both. The “both” case applies to HSA withdrawals before age 65 (again, only for non-qualified medical expense withdrawals). These withdrawals before age 65 will cost you a 20% tax penalty AND be taxable at your ordinary income tax rate. For example, suppose you take $5,000 from your HSA and use it for unqualified expenses before you are 65. Say your income tax rate 25%. That reduces your $5,000 to $3,750. The second tax, the 20% penalty, will take an additional $750, leaving you with only $3,000. It’s not so bad if you are over 65. After age 65, you can use your HSA withdrawal for non-medical expenses without paying the 20% tax penalty. Spend it any way you want. You just have to pay income tax that year on the withdrawal amount.

I encourage you to consider an HSA. Their benefits speak for themselves.