Category: Investment - PFwise.com

How Rising Interesting Rates Affecting Bonds and Stocks - Part B

5/5/2022

In last blogpost, we discussed how rising interest rates affect bonds. Now let's see how rising rates affect stocks.

Short Term Impact
When interest rates are rising or if investors anticipate a rise, many will sell bonds or some of their bonds to avoid the fall in prices and buy stocks. This commonly results in stocks rising while bonds are falling. Like bonds, not all stocks react the same way to rate hikes. In fact, some sectors historically perform well during periods of rising interest rates. For example, banks typically have stronger earnings because they can charge more for their services. Rising interest rates also tend to favor value stocks over growth stocks because of the way many investors calculate a stock’s intrinsic value. Rising interest rates makes these investors demand more for their investment dollars, so they’ll commonly turn to stocks that have a history of earnings growth. Of course, past performance is not an indicator of future results.

Long Term Impact
However, over time, rising interest rates can have a negative effect on stock prices. Higher interest rates make it more expensive to borrow money. A business that doesn’t want to pay the higher cost for a loan may delay or scale back projects. This, in turn, may slow the company’s growth and affect its earnings. A company’s stock price generally drops when its earnings decline.

Also, rising rates increase margin rates or the rate in which traders borrow money to trade stocks. The higher rates make trading on margin less profitable, and many traders often cut back the amount of margin they use, which means there’s less demand for stock shares.

Finally, rising rates typically lead to a stronger dollar, which may put additional pressure on the stock prices of multinational companies because it becomes more expensive to do business in some countries.

How Rising Interesting Rates Affecting Bonds and Stocks - Part A

5/4/2022

Generally, bond prices and interest rates move in opposite directions - when interest rates rise, bond prices tend to decline. Think of it this way: Say, you have a choice of a $1,000 bond that pays 2% interest or one that pays 3%. All other things being equal, which would you choose? The higher interest rate can make the lower-yielding bond less appealing to investors, which causes the price to drop.

Not all bonds react the same way to interest rate changes. Some are more sensitive depending on the type of bond or its quality. For example, corporate bonds typically have higher coupon (interest) rates, which generally make them less sensitive than U.S. Treasuries. This is because higher-quality bonds tend to be more sensitive to changes in interest rates. So, if you have a AAA-rated corporate bond, you may see a larger change in the price compared to a AA-rated bond.

Bonds with shorter durations (maturities) are usually less affected by rate changes as well. An 1% rise in rates could lead to a 1% drop in the one-year Treasury bill’s price. The longer the maturity, the greater the effect a rise in interest rates will have on bond prices. The same 1% rise in rates could mean a 5% decline in the price of a five-year bond or a 16% drop in the price of a 20-year bond.

One way to potentially help minimize the risks of rising interest rates is to create a bond ladder, which involves having multiple bonds with different maturity dates. This diversified approach allows investors to own a variety of bonds with a variety of maturities so when interest rates change, each bond will be affected differently. Additionally, as each “rung” on the ladder matures, you can purchase new ones with higher yields, assuming rates are still rising. You may also want to consider diversified bond mutual funds or exchange-traded funds (ETFs).

In next blogpost, we will discuss how rising interest rates affecting stocks.

6 Biggest Behavior Pitfalls for Investors

4/27/2022

Avoid losses at all costs: Loss aversion
"I am the greatest1" Confirmation bias
Getting stuck on the first thing you see: Anchoring bias
The breaking news problem: Recency bias
There is safety in numbers ... right? Herding bias
The devil you know: Ambiguity aversion

If you want to know more details about these 6 pitfalls, Fidelity.com has a more detailed article explaining them.

Is International Diversification Necessary?

4/21/2022

Why Diversification
Diversification across asset classes is one of the core investment principles. By spreading out assets across a range of asset classes with varying degrees of correlation, one can reduce the overall risk to the portfolio (because a downturn in one asset class is likely to be ameliorated by the returns of the other less-correlated investments). And while many people diversify assets by investing in both U.S. and international equities, a combination of increasing correlations between U.S. and international stocks and relative underperformance by international stocks might have some wondering about whether they are actually adding value to the portfolios through international diversification.

The Problem with Diversification
A problem for investors looking to use international stocks to diversify their equity holdings has been high correlations between U.S. and international stocks in recent years. For example, between 2019 and 2021, the correlation between U.S. and developed market (ex-U.S.) stock returns was 0.93 and the correlation between U.S. and emerging markets was 0.82. Both of these figures are significantly higher than they have been in the past, reducing the international stocks’ diversification benefits in case of a market downturn.

Should You Diversify?
However, historical correlations suggest that international stocks could provide increased diversification benefits in the future. For example, as recently as 2019, the correlation between U.S. and developed market stocks was below 0.8 and the correlation between U.S. and emerging market stocks was less than 0.6. And looking back further, correlations between U.S. and non-U.S. stocks were as low as 0.12 during the 1970s, 0.29 in the 1980s, and 0.54 in the 1990s, making them significantly more valuable as a portfolio diversifier (of course, there is no guarantee that these historical conditions will return). Also, those looking for equity diversification could also look to emerging markets, which are typically less correlated with the U.S. than are developed markets.

In the end, having a diversified portfolio of assets with low correlations means that some portions of a portfolio will necessarily underperform others. And so, while some people might be frustrated by the recent underperformance (and higher correlations) of international markets compared to the U.S. in recent years, a return to lower correlations between the asset classes could increase the value of international stocks as a portfolio diversifier!

Asset Allocation by Investment Accounts

4/20/2022

Which investments do you put where to help enhance after-tax returns?

Each person will have to find the right approach for their particular situation. But generally, depending on your overall asset allocation, you may want to consider putting the most tax-advantaged investments in taxable accounts and the least in tax-deferred accounts like a traditional IRA, 401(k), or a deferred annuity, or a tax-exempt account such as a Roth IRA (see chart below).

What is Active Asset Location Strategy - Part D

4/19/2022

In last blogpost, we discussed how to rank investment on tax-advantaged scale. So, which investments do you put where to help enhance after-tax returns?

Each person will have to find the right approach for their particular situation. But generally, depending on your overall asset allocation, you may want to consider putting the most tax-advantaged investments in taxable accounts and the least in tax-deferred accounts like a traditional IRA, 401(k), or a deferred annuity, or a tax-exempt account such as a Roth IRA.

What is Active Asset Location Strategy - Part C

4/18/2022

We discussed if you can benefit from active asset location strategy here. Now we will continue the discussion.

If you are in a position to benefit from an asset location strategy, you have to choose which assets to assign to your tax-advantaged accounts and which to leave in your taxable accounts.

In general, the following are higher on the tax-advantaged scale:

Individual stocks are, as a general rule, relatively tax-advantaged if bought and held for longer than a year.
Equity index mutual funds and ETFs are generally quite tax-advantaged.
Tax-managed equity funds (that is, equity funds that name tax management as an explicit goal) tend to be highly tax-advantaged.

In general, these are lower on the tax-advantaged scale:

Bonds and bond funds (with the exception of municipal bonds and funds, and US Savings Bonds) are generally highly tax-disadvantaged, because they generate interest payments that are taxed at relatively high ordinary income rates. Potentially higher returning types of bond investments, such as US high yield and emerging markets bond funds, are the most tax-disadvantaged.

Actively managed stock funds with high turnover rates are less tax-advantaged because they tend to have high rates of capital gain distributions. They sometimes even distribute short-term capital gains, which are taxed at the higher ordinary income tax rates.

So, which investments do you put where to help enhance after-tax returns? See next blogpost for the answer.

What is Active Asset Location Strategy - Part B

4/17/2022

In last blogpost, we discussed what is active asset location strategy. Now we will discuss if you can benefit from it.

There are 4 main criteria that tend to indicate whether an asset location strategy may be a smart move for you. The more of these criteria that apply to your situation, the greater the potential advantage in seeking enhanced after-tax returns.

You currently pay a high marginal income tax rate: The higher the marginal income tax rate you currently pay, the bigger the potential benefits of asset location. Remember, as you earn more money, you may move into a higher marginal tax bracket. Consequently, the benefit of your additional income can be significantly reduced if you are being taxed at a higher marginal tax rate.
You expect to pay a lower marginal income tax rate in the future: If you expect your marginal income tax rate to be lower in the future than it is now, active asset location may allow you not only to defer your taxes but to reduce them as well. Note that it is very common for investors to see their marginal income tax rate fall following retirement, and if you have assets with a time horizon into retirement, this may well be the case for you.
You have significant assets in tax-inefficient investments held in taxable accounts: The more tax-inefficient investments, such as taxable bonds and taxable bond funds, you're currently holding in taxable accounts (see chart, below), the greater the potential to take advantage of asset location.
You are investing for the long term: Asset location strategies generally take time to work. While small tax benefits may be realized year over year, sizable benefits may be realized by allowing potential tax savings to compound. If relocating assets in a taxable account, you may incur initial tax costs when implementing an asset location strategy and it may take time for the benefits to outweigh the costs.

If you are in a position to benefit from an asset location strategy, you have to choose which assets to assign to your tax-advantaged accounts and which to leave in your taxable accounts, see next blogpost here.

What is Active Asset Location Strategy - Part A

4/16/2022

There are 3 main investment account categories:

Taxable accounts such as traditional brokerage accounts hold securities (stocks, bonds, mutual funds, ETFs) that are taxed when you earn dividends or interest, or you realize capital gains by selling investments that went up in value.
Tax-deferred accounts like traditional 401(k)s, 403(b)s, annuities, and IRAs allow payment of taxes to be delayed until money is withdrawn, when all or a portion of it is taxed as ordinary income.
Tax-exempt accounts like Roth IRAs, Roth 401(k)s, and Roth 403(b)s, require contributions to be made with after-tax dollars and do not provide a tax deduction up front, but they allow the investor to avoid further taxation (as long as the rules are followed). Fully tax-exempt accounts such as health savings accounts (HSAs), allow you to make pretax or deductible contributions, earnings, or withdrawals, if used for qualified health expenses.

Asset location in action

Let's look at a hypothetical example. Say Adrian, age 40, is thinking about diversifying his portfolio by investing $250,000 in a taxable bond fund. For this example, we will assume Adrian pays a 35.8% marginal income tax rate on net investment income and the bond fund is assumed to earn a 6% rate of return each year—before taxes.

In what account should he hold the investment? The answer matters, and can mean the difference between paying taxes annually and deferring them until withdrawal.

Suppose Adrian has 2 accounts with sufficient assets to choose between, to hold the investment. One is his taxable brokerage account where interest earned on the investment will be taxed annually; the other is a traditional IRA he has been making after-tax contributions to for many years. Since Adrian began contributing to the IRA midway through his career, he never made any tax-deductible contributions. If Adrian chooses to hold the investment in the tax-deferred IRA, the return on his investment, after-taxes, could be nearly $72,000 greater than it would be in the taxable account when he begins withdrawals 20 years later at age 60, assuming his tax rate remains the same.

Tax deferral has the potential to make a big difference for investors—especially when matched with investments that may be subject to high tax rates, as interest on taxable bonds can be.

In next blogpost, we will discuss if you can benefit from active asset location strategy.

6 Steps to Prepare the Worst Case Scenario Budget

4/15/2022

1. Get Clear On Your Fixed Expenses
One of the first steps for getting a handle on your budget is understanding how much money you must spend each month. Fixed expenses are expenses that generally remain the same every month or expenses that you are required to pay or there will be consequences. This can include things like:

Rent/mortgage
Utilities
Debt/loan payments
Subscriptions
Insurance
Healthcare costs, such as co-pays and prescriptions

When you have a clear list of your fixed expenses, you have a good starting point for your budget. You’ll understand how much money must be going out each month to keep yourself housed and warm. Plus, you might be surprised by some of these expenses that you had forgotten about. This could be a good opportunity to cancel or negotiate items you no longer want to pay for.

2. Identify Which Expenses Can Be Cut
Obviously, there are some expenses that we can’t put on hold or cut entirely. Things like rent, utilities, and food are pretty essential. However, in times of crisis, we often are required to make some sacrifices and cut some things out. Get clear on which fixed expenses you would be safe and capable cutting or reducing if you were to lose your income or have some other financial emergency. That way, if crisis strikes, you’ll know exactly which expenses to cut, reduce, or pause. This will take some of the stress out of the situation if the time comes.

Debt and student loan payments can’t just be turned off, but there might be an opportunity for flexibility. If you have federal student loans, you can put your loans into forbearance if you’re in a moment of financial hardship. Alternatively, even if you have private debt, you may be able to reach out to the lender or bank to see if they’re willing to help you. In the beginning of the pandemic, many banks were helping customers who were struggling to make payments. Understanding what your options are ahead of time will help you when crisis hits.

3. Review Your Typical Flexible Spending
Flexible spending is spending that you generally have more control over, but it doesn’t mean it’s all spending that can be completely cut out. These categories can include:

Food (groceries and dining)
Transportation (gas, cabs, or public transit)
Shopping (clothes, toiletries, etc.)

Many items that fall under flexible spending are important and even imperative. But it’s still necessary to have an understanding of how much you spend outside of your fixed costs. If you don’t know how much you’re spending, it’s impossible to make changes, if necessary. This exercise will help you identify if you’re overspending in certain areas. It can also help you understand what can get reduced or cut completely if you fall into financial hardship.

4. Identify How Much Money You Can Live Off Of
Once you’ve gotten clear on what can be cut and what absolutely can’t, you’ll have clarity about how much money is the least that you could possibly live off of. You want to make sure that you’re prioritizing things like food, transportation, healthcare, and anything else that is important for your overall wellbeing and that of your family. If you were to lose your job, and you drastically reduce your household spending, this will help reduce the amount of debt you might accrue, or reduce the amount you have to withdraw from savings. Remember, hopefully this restriction will be temporary, until you get back on your feet.

5. Prioritize Your Emergency Fund
Prioritizing funding your emergency savings account should always be top of mind. That should be even more apparent after what we’ve gone through over the past two years. Anything can happen at any time, and it’s so important to have money set aside to protect us and our families during a crisis. If you haven’t already started saving for emergencies, get started today. Even if you need to start with $5 a month, do it. You can increase that over time. If you already have an emergency fund, check back in with it to make sure you’re comfortable with the balance. How long could you live on your worst-case scenario budget if you only had your savings to use? If that amount of time scares you, it’s time to start increasing your savings.

6. Keep A Record Of Your Worst Case Scenario Budget
Once you’ve done all this work to create a worst-case scenario budget, make sure you actually save the information! Create a spreadsheet or a list of your expenses that will stay and the expenses that will be cut. That way, you’ll know exactly what steps you need to take in the moment of crisis. Don’t give yourself more stress by requiring yourself to go through this process again when it’s unavoidable.

What To Do With an Inverted Yield Curve?

4/10/2022

Many investors pay close attention to the yield curve, which, in a common form, represents the difference between the 2-Year U.S. Treasury rate and the 10-Year U.S. Treasury rate. A yield curve inversion occurs when the 2-Year rate exceeds the 10-Year rate, and this has served as a signal for future trouble in the economy. In fact, every recession since the mid-1970s has followed an inverted yield curve (although it can take up to two years following the inversion for the recession to begin). And so, with the yield curve inverting on March 31, many market observers are wondering whether the inversion presages a stock market downturn.

Because recessions are typically associated with negative equity returns, this could persuade some investors to pull their money out of the market now. However, this brings up a few issues.

The first issue with this, though, is that the stock market often surges between a yield curve inversion and an eventual downturn. For example, the S&P 500 returned 28.4% between the December 2005 yield curve inversion and the beginning of the bear market in October 2007.

More broadly, looking at the six yield curve inversions since 1978, 1-year returns following an inversion average 4.7% compared to 9.0% in all other 1-year periods, and annual returns two years out average 4% compared to 8% for other two-year periods. And while those looking to avoid below-average stock market returns might turn to bonds for relative strength in these periods, it turns out that 5-Year U.S. Treasuries underperform U.S. stocks on average in 1- 2- and 5-year periods after an inversion (suggesting that while below-average stock returns might be on the horizon, moving to bonds is not necessarily an attractive alternative).

In the end, the recessions (and any associated stock market declines) that follow yield curve inversions can be thought of as the price investors pay for participating in the market (and the strong returns associated with non-recessionary periods). While history suggests that you might not want to make dramatic changes to your portfolios because of the recent yield curve inversion, it can be an opportunity to consider whether your portfolios are aligned with your objectives and risk tolerance to get ahead of a potential market downturn in the years ahead!

Annuity Fighting Inflation Ideas

3/23/2022

Are you looking for more growth potential to help offset inflation? Below is a brochure from AIG about how a fixed indexed annuity (FIA) could be a good solution for people to combat low rates and rising inflation.

Should You Invest In Private Equity?

3/11/2022

Wealthy clients should invest more in private equity, a study says. Read the article from Financial-Planning.com if you are interested in this topic.

Business Cycle Framework and Current US Position

3/7/2022

United States

The mid-cycle expansion continues, underpinned by additional economic reopening, strong consumer balance sheets, and favorable credit conditions.
Although initial signs of the most extreme supply-related pressures are easing, labor-market shortages are creating more persistent inflation pressures and challenges for business activity.
Consumer spending is supported by rising wage growth, but high inflation has dampened consumer sentiment.
Financial conditions remain easy, although they have started to tighten alongside market expectations that the Federal Reserve (Fed) will hike rates in March and tighten monetary policy more quickly than during the last cycle.
The mid-cycle expansion is on a maturing trajectory, with sustained cyclical improvement the most likely scenario.

Global

The global expansion remains intact, with many major economies in relatively benign mid-cycle phases.
China remains in a growth recession, but the industrial cycle appears to be bottoming, and monetary and fiscal policies are gradually shifting to a more accommodative stance.
Rising inventories relative to sales and the lagged impact of China's slowdown suggest global manufacturing activity may decelerate from last year's decade-high activity levels.
Many countries continue to struggle with COVID-19 challenges and higher inflation, though the worst of these headwinds might be behind us.
Despite the pattern of staggered and uneven growth, the general reopening trend supports continued global economic expansion.

Asset allocation outlook

The mid-cycle backdrop is constructive for more economically sensitive asset classes such as stocks that tend to do well as activity improves.
Financial markets have become increasingly sensitive to and dependent on extraordinary levels of policy support, leaving them potentially vulnerable to less accommodative global central bank policies.
Buoyant asset valuations reflect positive expectations built into asset prices.
The apparent pivot to a more hawkish tightening stance by the Fed and other major central banks may strain liquidity during 2022, raising the odds of higher market volatility.

4 Types of Direct Indexing

3/5/2022

First introduced in the 1970s, index funds have grown in popularity over time thanks to their ability to provide broad-based diversification at (typically) very low costs, making their benefits available to investors of any level of wealth. And while mutual funds and Exchange-Traded Funds (ETFs) have been the dominant way for investors to get index exposure, thanks to improved technological capabilities and reduced trading costs, direct indexing – buying the individual component stocks within an index – has emerged as an alternative tool with a range of potential use cases.

Historically, direct indexing was developed as a means to unlock the tax losses of individual stocks in an index – even if the index itself was up – and was primarily used only by the most affluent investors (who had the highest tax rates and benefitted the most from the available loss harvesting). However, direct indexing can be used not only to harvest tax losses but also to harvest capital gains (particularly for those taxpayers in the 10% and 12% tax brackets). In addition, direct indexing can provide tax benefits to investors who are charitably inclined by allowing them to donate the underlying shares within an index that have the largest gains, thereby helping them to maximize their tax savings.
For those whose primary goal is to benefit from a more personalized indexing strategy that still gains broad market exposure while specifically adjusting for personal preferences, using a personalized index can ensure the investor’s capital will support the exact industries or companies they wish to support (while also saving on the management fees otherwise charged by more packaged ESG/SRI mutual funds and ETFs).

This article from Kitches.com discusses in great details of 4 types of direct indexing -

Tax focused direct indexing
Personalized direct indexing
Rules-based direct indexing
Customized direct indexing

Equity Summary Score from Fidelity

3/3/2022

Fidelity provides a valuable service for its customer - the Equity Summary Score for most of the large cap stocks, and many smaller cap stocks. Below is a high level description, more detailed description in the attached document below.

The Equity Summary Score provides a consolidated view of the ratings from a number of independent research providers on Fidelity.com. Historically, the maximum number of providers has been between 10 and 12. However, some stocks are not rated by all research providers. Since the model uses a number of ratings to arrive at an Equity Summary Score, only stocks that have four or more firms rating them have an Equity Summary Score. It uses the providers’ relative, historical, recommendation performance along with other factors to give you an aggregate, historical accuracy‐weighted indication of the independent research firms’ stock sentiment.

All the EV Car Markers

2/27/2022

Momentum has been building for several years, driven in large part by increasing demand for EVs like Tesla's (TSLA) Model 3 (the top-selling EV worldwide in 2021) and Model Y, Wuling Motors' (WLMTF) Mini EV, Volkswagen's (VLKAF) ID.4, BYD's (BYDDY) Qin Plus DM, Ford's (F) Mustang Mach-E, General Motors' (GM) Bolt, and Nissan's (NSANF) Leaf.

Here are the 10 largest automakers by market cap who produce only electric vehicles:

Texas, US-based Tesla (TSLA)
California, US-based Rivian Automotive (RIVN)
California, US-based Lucid Motors (LCID)
Shanghai, China-based Nio (NIO)
Guangzhou, China-based XPeng (XPEV)
Beijing, China-based Li Auto (LI)
California, US-based Fisker (FSR)
Arizona, US-based Nikola (NKLA)
London, UK-based Arrival (ARVL)
California, US-based Proterra (PTRA)

It's not just the new entrants and startups with their potentially lofty valuations that have pushed the EV market into the next gear. All of the legacy automakers are ramping up plans to ride the electric trend wave. Some highlights:

General Motors has announced it will phase out all gas engines by 2035, and is close to completing several battery plants in the US. EV principals at GM believe its efforts to build their own battery line, as Tesla already has, will provide a competitive advantage.
Ford, which uses an external supplier for its batteries, is already seeing success with its Mustang Mach EV and has more than 200,000 reservations for its in-development F-150 Lightning truck, as of early 2022.
Honda plans to offer 2 electric cars in the US by 2024 using batteries supplied by GM.
Porsche (POAHY) recently broke the cross-country charging record in the US when its Taycan sedan spent just 2.5 hours charging during a January 2022 trip from Los Angeles to New York City.
Mercedes-Benz (DDAIF) recently rolled out its new EQS with a battery capacity of 350 miles.

US Leading Indicators Still Positive

2/23/2022

The US Index of Leading Indicators is a composite of 10 indicators ranging from measuring unemployment to stock market performance.

Proponents of this index believe that it captures a wide dispersion of information and can help forecast shifts in the economy. After rapidly plunging into negative territory in the wake of the spread of COVID-19 around the globe, this index took roughly a year to rebound to a positive reading—and actually surged to a multidecade high in 2021, reflecting the economic reopening.

Over the past several months, it has begun to recede from those peak levels, but has been strongly positive and near historically high levels.

4 Big Questions Investors Having Right Now

2/13/2022

Below is part of a recent WSJ article that discusses 4 major questions that investors are wrestling with, and any one of which could hit stocks hard.

Will inflation hammer profit margins?
Companies are faced with soaring input costs, with producer prices rising even faster than consumer inflation, itself the highest year-over-year rate since 1982. Investors are closely focused on which businesses have the power to raise prices to offset higher costs. On Friday Clorox stock plunged 14%, the worst in the S&P 500, in large part because it warned about rising costs. Amazon was up 14% in part because its planned increase in the price of a Prime subscription reassured investors that it can offset soaring delivery and labor costs.

Will Covid-era gains fade?
Lockdowns accelerated the switch to many online services, but some will prove temporary. No one wants to be like Peloton Interactive, whose home cycling workout has proved tougher to sell when customers have the choice of outdoor exercise, and whose stock has lost three-quarters of its value since its peak a year ago. Some of the reason for Netflix’s big fall after its earnings was because it turns out people prefer real life to home movies; similarly, Clorox disinfectant sales have fallen back, and PayPal growth has slowed.

Will Big Tech eat itself?
One of the most attractive features of the leading online platform companies is the defensive benefit they get from being big, what are known as “network effects.” People use Facebook because other people use Facebook, so everyone has to use Facebook. Except, not so much. Meta stock tumbled 26% on Thursday primarily because TikTok is beating it in the competition for young eyeballs. Amazon and Apple made Meta’s situation worse, Amazon because it is snaffling advertising dollars at a rapid rate, Apple by changing privacy settings, something Facebook has struggled with.

Competition has already hit several other tech themes. Netflix has to spend heavily to maintain its position because of the streaming wars with services from Amazon, Disney, Comcast and others. Uber Technologies got an early lead in online taxi services, but it turned out to be an easy model to copy and many other services sprang up around the world, competing both for customers and drivers. The pattern is a standard one in tech: Microsoft has long since lost its virtual monopoly in operating systems and word-processing software, while IBM’s dominance of PC hardware is ancient history.

The battlegrounds of the future are cloud computing and self-driving cars, and the competition is keen. So far there’s no sign of a slowdown in the cash milked from the cloud by Amazon, Microsoft and to a lesser extent Alphabet, but all are investing heavily, and it might become competitive in time.

True self-driving cars aren’t for sale yet, but Alphabet, Apple and Tesla are all spending heavily on development and, in the case of Alphabet’s Waymo, some limited services. Amazon and Intel have bought in to the area, and a bunch of traditional carmakers have made progress, too. Whoever cracks it first might get a big lead, and would deserve a big valuation, but competition, as well as regulation, would surely follow.

Will bond yields carry on up?
Growth companies are highly sensitive to bond yields, because so much of their lifetime profits lie further in the future than cheaper businesses. Bond yields jumped again on Friday on the back of a strong jobs report, taking the 10-year Treasury yield up to where it started 2020 for the first time since then. If the economy stays strong and yields keep rising, it will be a headwind for the big growth stocks.

Bond Strategies for 2022

2/11/2022

The Fed is expected to raise rates at least three times in 2022 and end its asset purchases in Q1. The trajectory of the coronavirus pandemic and fate of President Biden's economic plan could upend those expectations. Strategists recommend that investors stay in the short end of the yield curve and stick with high-quality securities.

The above is the summary of the bond strategies recommended by thinkadvisor.com for 2022, if you want to read for more details, follow this link.

Is Roth IRA Conversion a Risk Worth Taking?

2/9/2022

Financial-planning.com has an article analyzes if Roth IRA conversion is still a risk worth taking this year, see below -

Go all out on contributions to retirement plans
Didn’t max out your contribution limits last year? The IRS allows contributions for 2021 to be made through April 15, 2022. That’s three days before this year’s April 18 filing deadline, which was extended due to the Emancipation Day holiday in Washington, D.C. Some contributions are deductible, so they’ll lower the total amount of income on which taxes fall, a savings to the taxpayer.

For 2021 returns being filed now, Americans could contribute a maximum $6,000, plus an extra $1,000 if aged 50 or older, to a traditional individual retirement plan (IRA) or Roth IRA. So an older married couple can put in a maximum $14,000.

Traditional IRAs are generally funded with money on which taxes haven’t yet been paid, while Roth plans are fueled by after-tax dollars. Pretax contributions grow tax-deferred, with the owner paying ordinary rates on future withdrawals. While investors can also contribute money on which they’ve already paid taxes, they pay ordinary tax on withdrawals, making after-tax contributions to a traditional IRA a double tax hit. In contrast, Roth plans grow tax-free, with no levies on withdrawals.

Deductions get complicated, depending on how much a taxpayer makes and whether she or a spouse has a workplace retirement plan. A traditional IRA owner who doesn’t have a workplace retirement plan (or whose spouse lacks one) or whose income is below $76,000 gets a whole or partial deduction. If a married couple filing jointly has one spouse with an employer-sponsored retirement plan, typically a 401(k), then an IRA contribution by the other spouse is no longer deductible once their joint income hits $214,000.

Straightforward Roth IRA plans are a little different. The contribution limits are the same. But while there are no income limits on who can contribute to a traditional IRA, contributions to Roth plans now are limited to people who made under $140,000 last year (under $208,000 for couples). Because their assets grow tax-free and don’t bear future taxes, Roth contributions aren’t deductible.

The Roth conundrum
It’s still not clear what might happen to so-called backdoor Roth conversions, a mainstay of large retirement accounts and estate planning for the wealthy, under stalled legislation in Congress. While emerging versions of the Build Back Better tax-and-spending bill aim to limit or ban the ability of high earners to own Roths through indirect methods, the legislation is mired in infighting by Democrats. But some tax and retirement experts think that it’s probably safe to take advantage of their current tax benefits, even as legislators work to curb them.

January 31, 2022 8:36 PMBackdoor conversions involve an investor converting a traditional IRA into a Roth. They’re a way for wealthy people to sidestep the income limits for direct contributions to a Roth. An early version of the House bill banned conversions of after-tax dollars in IRAs and 401(k)s.

The House passed a somewhat softened version of that proposal last November. The legislation, which has to be passed by the Senate, would outlaw so-called mega-backdoor Roth conversions starting Jan. 1, 2022. The strategy came under a spotlight when ProPublica showed how PayPal co-founder Peter Thiel used it to transmute less than $2,000 worth of pre-IPO shares into a $5 billion account. The bill would still allow regular Roth conversions but would ban people with higher incomes from doing them starting in 2032. Last December, the Senate offered its own version of Build Back Better that proposes those same limitations.

The backdoor strategy involves using hefty after-tax contributions to a 401(k) plan that permits them. Under IRS rules, a taxpayer could put as much as $58,000 last year into a workplace retirement plan ($64,500 for those 50 or older). One chunk of the money reflects the maximum pre-tax amount of $19,500 ($26,000 if 50 or older), while the remainder, up to $38,500, reflects after-tax dollars. The limits include any company matches. The taxpayer then converts her 401(k) to a tax-free Roth. The higher amounts can swell a retirement portfolio far beyond what direct contributions to an ordinary Roth can.
Christine Benz, Morningstar’s director of personal finance, wrote in a Jan. 21 research note that it’s “unlikely” that when a final bill makes it to President Joe Biden’s desk for signature, if indeed one does, the proposed curbs would be retroactive to the start of this year.

“Given that these contributions and conversions are currently allowable,” she wrote, financial advisors have “been urging their clients to go ahead with them until the law officially changes." Benz quoted Aron Szapiro, the head of retirement studies and public policy for Morningstar, as saying that the likelihood of a retroactive ban on after-tax contributions is "close to zero.”

Of course, nothing’s final on Capitol Hill until it’s final. Nonetheless, Benz wrote, “given that backdoor Roths are one of the few mechanisms that higher-income heavy savers can use to achieve tax-free withdrawals and avoid RMDs in retirement, many such savers are apt to conclude that it’s a risk worth taking."

Not All S&P 500 Index Funds Are Equal

2/8/2022

Morningstar Direct said that the 10-year annualized return through last December for index funds in all forms ranges from 14.61% (for the Rydex S&P 500 H) to 16.49% (for the iShares S&P 500 Index K). The nearly 2% difference means that $50,000 invested in the Ryder fund would hand an investor just over $195,500 after a decade, while the same amount in the iShare fund would yield more than $230,000 — a roughly $34,500 difference.

The fees charged by mutual funds range widely, so it’s not surprising that returns for those funds vary, even if they’re passively following a benchmark.

What about returns by the four low-cost ETFs? They also vary in their performance, even though they’re roughly charging the same low costs and following the same benchmark.

Blame benchmark-tracking glitches and their lucrative practice of lending stock to big banks, a move that can paradoxically cause a fund that passively mirrors an index to, in fact, beat that index.

How to Use Crypto Tax Loophole to do Tax Loss Harvesting

2/7/2022

There may be a silver lining for crypto investors selling at huge losses during the recent market turmoil: a quirk in the Tax Code that lets people minimize what they’ll owe the government down the road.

Unlike stocks and bonds, cryptocurrencies aren’t subject to federal rules that bar people from claiming deductions if they sell an asset at a loss and then buy an identical or similar asset within 30 days before or after the sale. That provides a unique opportunity for people suffering steep losses to sell and reap future tax savings, then buy more virtual tokens at cheaper prices, according to crypto tax filing software firms.

This is a great time to store your capital losses, because when you exit the market at a future date at a huge gain, you can use these losses

After surging 60% in 2021 — and touching an all time high of nearly $69,000 in November — Bitcoin has fallen 20% to under $37,000 this year. The impact of crypto’s January turmoil won’t show up on investor’s 2021 tax returns. However, thousands of crypto investors who piled into the asset class last year must account for those investments as they file their returns during the next few months.

Investors who sold crypto at a loss and then purchased similar assets at a lower price — a move that some refer to as wash sales — are free to take advantage of the tax strategy, according to TaxBit, a crypto tax software company. Some Democrats tried to close the loophole in a roughly $2 trillion spending bill that failed late last year.

“Tax-loss harvesting” Strategy
Under the strategy, investors can use their losses to offset any gains in a given year. If they don’t have gain to offset, they can deduct up to $3,000 in losses from ordinary income. Any excess capital losses above that amount can be used to lower tax bills in subsequent years.

New Study Highlights Target Date Fund Flaws

2/5/2022

Thinkadvisor.com recently had an article that highlights the flaws of target date funds, it's worth a reading if you have or plan to invest in target date funds.

Highlights of the article include:

Target date funds have the same asset allocation for all investors regardless of their individual circumstances.
A new research paper shows that the allocation to equities in most target date funds is too low from many retirees.
Target date funds and similar funds could be improved by taking a number of external factors into account in their asset allocation.

ETF's Use of a Controversial Tax Loophole

2/4/2022

Mutual funds generate capital gains taxes each time they sell an underlying holding that has appreciated, even if an individual investor holds on to her fund. So that cost is passed on to her. By contrast, ETFs use an obscure tax loophole to cash in on appreciated holdings by swapping assets with a buyer — in this case, major banks.

For example, a fund sells an appreciated stock in its “basket” of shares to a bank and immediately buys back “substantially similar” shares. Because no cash has traded hands, there’s no capital gains tax on those profits. Or an ETF can sell a losing stock, deduct the loss, then buy back similar stock. The deduction boosts the returns of the fund. Of course, when an investor sells her ETF, she owes capital gains tax on the profits. But until she does, the capital gains taxes on internal trades made to keep the fund in line with its benchmark are “washed away.”

With active trading strategies, the tax perk for the new semi-transparent and opaque ETFs is even more significant. As well as potentially more prone to scrutiny. Sen. Ron Wyden, who heads the Senate Finance Committee, called in Sept. 2020 for an end to ETFs’ use of “in-kind” transactions to avoid triggering capital-gains taxes.

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