Category: Investment - PFwise.com

Taxable Munis An Overlooked Asset Class For Good Yield and Quality

11/29/2020

Taxable municipal bonds are the fastest growing sector in U.S. fixed income right now, they offer an attractive alternative to corporate bonds, with higher yields and lower historical default rates.

In 2020, issuance has exploded mainly because a 2017 change in the tax law that prevents state and local governments from refinancing older high-rate muni debt in advance of their maturities with new tax-exempt bonds. Such refundings must now be done in the taxable market.

For regular investors, 3 major options are available to play in this sector. Below are some good candidates:

Closed-end Funds:

BlackRock Taxable Municipal Bond Trust (BBN): yield 5.4%
Guggenheim Taxable Municipal Bond and Investment Grade Debt Trust (GBAB): yield 6.2%
Nuveen Taxable Municipal Income (NBB): yield 5.0%

Open-end Funds:

MainStay Mackay U.S. Infrastructure Bond (MGVAX): yield 1.6%

Exchange-Traded Funds

Invesco Taxable Muni Bond (BAB): yield 2.6%

Taxable munis are well suited to retirement accounts as an exposure to fixed income.

Why the Traditional 60/40 Investment Portfolio No Longer Works

11/21/2020

What is the traditional 60/40 portfolio?
It refers to a portfolio with 60% in stocks and 40% in bonds. It has been popular for many years, especially buy and hold investors.

Why 60/40 portfolio no longer works?
Because the yields on the bonds are heading lower and lower, so the insurance value offered by bonds are disappearing. Plus, the government are boosting economy which will bring up inflation, and as interest rates start rising, bond prices will fall, talking about triple hits to bonds holders.

What's a better portfolio?
It depends on what type of investor you are. If you are young and can tolerate volatility, stocks should carry more weight in your portfolio. If you need fixed income, you can find other types of fixed incomes, such as dividend paying stocks or convertible bonds which could offer the best of both worlds.

How Many Financial Markets Regulatory Agencies Are Out There?

11/4/2020

Financial Markets and Regulations
Financial institutions are regulated by a number of different federal and state agencies that ensure they comply with the law. Here are the major players and their functions.

The Consumer Financial Protection Bureau (CFPB)
The CFPB’s mission is to provide consumers with a one-stop shop for registering complaints and getting answers. Since its creation in 2010, the CFPB has drafted a number of rules on mortgage lending, automotive financing, credit and debit cards, debt collectors, student loans and payday and title loans. The Bureau also offers a variety of tools to help consumers make smart financial decisions, such as how to pay for college or navigating the home buying process.

Through the CFPB’s consumer complaint database, you can lodge a complaint against a financial institution and receive a formal case number. The financial institution is legally required to respond and explain their side of the issue. If found at fault, they are required to detail how the problem will be remedied. The database is public, allowing anyone to view recent complaints. This system has been in place for many years now and financial institutions have entire departments dedicated to responding to complaints lodged through the CFPB, so you can be confident that your voice will be heard.

Federal Deposit Insurance Corporation (FDIC)
The FDIC specifically regulates depository institutions, more often known as traditional banks. The FDIC insures bank deposits, meaning if your bank goes out of business or fails, you can be assured that you’ll get your money back—up to a certain amount. The Corporation has a wealth of resources dedicated to working with your bank, things to look out for when selecting a financial institution, and financial education tools. On their website, you can also find a contact form for submitting complaints as well as a phone number if you’d prefer to lodge your complaint over the phone.

National Credit Union Administration (NCUA)
NCUA’s MyCreditUnion.gov website is the consumer-facing end of a regulator body that functions almost identically to the FDIC, but for credit unions. The vast majority of credit unions are covered by NCUA’s depository insurance fund, similar to the FDIC. The NCUA website features a host of resources directed at consumers who are credit union members and also features a consumer complaint form.

Securities & Exchange Commission (SEC)
The SEC is charged with regulating and enforcing the nation’s security laws. This covers any investments you make, including stocks, bonds, exchange-traded funds, mutual funds, 401(k)’s and other retirement accounts. The SEC is also charged with regulating financial planners and other investment professionals, ensuring that they have appropriate credentials and stay current with applicable laws.

Financial Industry Regulatory Authority (FINRA)
FINRA is charged with actively regulating a number of areas that fall into the responsibility of the SEC. Specifically, they regulate the broker-dealers of financial instruments, or in other words, the people you contact or work with to buy and sell stocks, bonds, 401(k)s and more. You can lodge a complaint directly to FINRA about a specific broker-dealer and use their BrokerCheck system to research financial professionals beforehand.

The Commodity Futures Trading Commission (CFTC)
The CFTC regulates the futures and commodities markets. Futures are agreements between individuals to buy a set amount of a product at a specific time. Commodities are the products themselves. The CFTC is likely to refer you to another agency if you submit a complaint or tip to them.

Federal Trade Commission (FTC)
The FTC’s entire role is consumer protection, and not just in financial products. You can complain to the FTC about any company, store or business. The FTC also helps ensure that the economy remains competitive. Generally, complaints about specific financial institutions and their products would flow through the CFPB, but you can also contact the FTC.

The Federal Reserve Board (FRB)
The FRB is chiefly concerned with broad economic policy and altering how money flows in and around the United States. It also works with other countries on market moving issues. There are a variety of consumer protection elements built into the FRB and you can submit a complaint through them if you would like. Generally, however, consumer protection is handled through other agencies, so the FRB will more than likely point you in a different direction.

State and Local Sources
States have different names for the regulatory agency in charge of financial institutions—some use the words banking, insurance or finances. Regardless of the name, each state has an agency that is dedicated to consumer protection.

State Attorneys General are an additional source of consumer protection, in that they can help you investigate any issues you believe may be a crime. Note, that they will not necessarily help you resolve your specific issue, but are rather concerned with broad problems rising to the level of legal remedy.

State Congressional members or local legislators have offices with staff dedicated to helping constituents navigate their way through all sorts of problems, including financial ones.

The Similarities Between 2008 Global Financial Crisis and 2020 COVID Impacts on Financial Markets

10/30/2020

The 2008 global financial crisis (GFC) is a good analog for the 2020 market cycle caused by COVID, as it relates to the timing of the price bottom vs. the earnings bottom.

Below is an analog of the 2 cycles, with the S&P 500 Index (SPX) drawdown in the upper left, the earnings drawdown in the lower left, the difference between expected fiscal year 2 (FY2) earnings and fiscal year zero (FY0) earnings in the upper right, and the subsequent realization of earnings over that 2-year time frame in the lower right.

So far so good, which tells us that earnings are likely bottoming now. If earnings are bottoming now, the market can finally start to grow into its valuation and be less reliant on the fiscal/monetary impulse.

Where to Find Yield While Controlling Your Risks?

10/24/2020

A multi-asset income strategy that can invest across a wide variety of asset classes may be able to deliver more consistent returns and a better balance between risk and return than those with fewer options to choose from.

The chart below depicts long-term directional and ranking relationships among a number of asset classes on the dimensions of yield and risk compared to US common stocks as represented by the S&P 500 Index. The relationships and relative rankings among these asset classes may vary over time.

How to Calculate Capital Gains Sale of Investment Property on Which Mortgage Is Owed?

10/23/2020

Below is an article from Zacks that answers the question.

When you sell investment property, all of your profits are subject to either capital gains tax or depreciation recapture tax, which is a special type of capital gains tax. Your tax gets calculated on the difference between your cost basis and your selling price. Any debt that you owe, such as the balance on your mortgage, will not affect your capital gains liability.

Your Cost Basis
Your cost basis isn't just the purchase price of your investment property. The initial cost is what you actually paid at the closing, including your closing costs.

For example, if you bought a small apartment building for $1 million and paid $1,500 in title fees, $5,000 in attorney's fees, $2,000 in miscellaneous fees and $8,000 in inspection fees, your actual cost would be $1.0165 million.

To that cost, add the cost of any improvements you made to the property. Improvements are anything that changes your property's use, increases its value or extends its useful life. Taking the apartment building as an example, a $50,000 roof and $115,000 in kitchen and bathroom renovations would count as improvements and increase your cost basis to $1.1815 million.

Depreciation and Basis
While you own your investment property, the tax code lets you claim a small portion of its cost basis every year as a depreciation write-off. Depreciation is an accounting tool that simulates the decline in value that accompanies the gradual deterioration of buildings (although in recent years, almost all property has actually gained value over time).

When you sell it for more than the depreciated value, the IRS will want you to return a portion of the money that you saved by claiming depreciation. To properly calculate your capital gains liability, you will need to total all of the depreciation that you were legally entitled to claim, whether or not you actually claimed it.

Calculating Tax Liability
You owe capital gains taxes on the difference between your adjusted cost basis and your net selling price. If you, for example, sell your apartment building for $1.95 million and pay $105,000 in commission and $8,700 in closing costs, your net selling price is $1.8363 million. Subtracting your $1.1815 million cost basis gives you a taxable capital gain of $654,800.

In addition, if you sell for a profit, you will have to pay depreciation recapture taxes on all of your accumulated depreciation. If you claimed $320,000 in depreciation while you owned your building, you need to pay depreciation recapture tax on the all of the $320,000.

If you sell for a loss, you will pay recapture tax on the difference between your net selling price and your depreciated basis. For example, if you sold the building for $925,000, you would have a capital loss, but since your depreciated basis would be $861,500 ($1.1815 million minus $320,000), you would pay recapture tax on the $63,500 difference.

Federal Tax Rates
Capital gains on assets that you hold for at least one year are considered long-term gains. For tax year 2019:

Taxpayers filing single pay 0 percent capital gains tax (income up to $39,375), 15 percent capital gains tax (income $39,376 to $434,550) and 20 percent capital gains tax (income more than $434,550).
Taxpayers filing married filing jointly pay 0 percent capital gains tax (income up to $78,750), 15 percent capital gains tax (income $78,751 to $488,850) and 20 percent capital gains tax (income more than $488,850).
Taxpayers filing head of household pay 0 percent capital gains tax (income up to $52,750), 15 percent capital gains tax (income $52,751 to $461,700) and 20 percent capital gains tax (income more than $461,700).
Taxpayers filing married filing separately pay 0 percent capital gains tax (income up to $39,375), 15 percent capital gains tax (income $39,376 to $244,425) and 20 percent capital gains tax (income more than $244,425).

Short-term gains are taxed at your marginal income tax rate. In addition, depreciation recapture is taxed at 25 percent.

You may also be subject to a 3.8 percent Medicare surtax if your income exceeds $200,000 if you are single or $250,000 if you are married. These rates went into effect for the 2013 tax year and will not change without new laws being passed. It's always a good idea to verify these rates with the IRS or your accountant.

Loans and Gains
What you pay off on your loan isn't tax deductible. However, you can amortize many of the costs of getting your loan over its life.

For example, if you pay $12,000 to take out a mortgage with a 10-year term, you can write off $1,200 per year. If you were to sell your property after only three years, you'd have $8,400 in remaining loan fees that you hadn't claimed. You would be able to add those remaining fees to your cost basis, reducing your gain when you sold your property.

5 Ways to Protect Retirement Income

10/21/2020

1. Plan for health care costs
Solution: Consider long-term-care insurance
Insurers base the cost largely on age, so the earlier you purchase a policy, the lower the annual premiums, though the longer you'll potentially be paying for them. It is also important to research the strength of the company you select, as well as investigate other potential options for funding LTC costs.

2. Expect to live longer
Solution: Consider annuities
To cover your income needs, particularly your essential expenses (such as food, housing, and insurance) that aren't covered by other guaranteed income like Social Security or a pension, you may want to use some of your retirement savings to purchase an income annuity. It will help you create a simple and efficient stream of income payments that are guaranteed for as long as you (or you and your spouse) live.

3. Be prepared for inflation
Solution: Consider cost of living increases
Social Security and certain pensions and annuities help keep up with inflation through annual cost-of-living adjustments or market-related performance. Choosing investments that have the potential to help keep pace with inflation, such as growth-oriented investments (e.g., stocks or stock mutual funds), Treasury inflation-protected securities (TIPS), real estate securities, and commodities, may also make sense to include as a part of an age-appropriate, diversified portfolio that also reflects your risk tolerance and financial circumstances.

4. Position investments for growth
Solution: Consider diversification
Build a diversified mix of stocks, bonds, and short-term investments, according to how comfortable you are with market volatility, your overall financial situation, and how long you are investing for. Doing so may provide you with the potential for the growth you need without taking on more risk than you are comfortable with. But remember: Diversification and asset allocation do not ensure a profit or guarantee against loss.

5. Don't withdraw too much from savings
Solution: Consider a sustainable withdrawal plan
Develop and maintain a retirement income plan or consider an annuity with guaranteed lifetime income as part of your diversified plan, so you won't run out of money, regardless of market moves.

ETF Myths - Are All ETFs Cheaper?

10/20/2020

Our last ETF myth discussion was here. Now the final one below.

Several factors have contributed to the trend, including expense ratios varying inversely with fund assets, a shift toward no-load share classes for long-term mutual funds, economies of scale, investor preferences, and competition from ETFs.

Most comparable ETFs continue to be less expensive than mutual funds. But it’s a mistake to assume that all ETFs are cheaper.

For example, mutual fund Fidelity® 500 Index Fund (FXAIX) has a net expense ratio of 0.015%, and it has no transaction fee on Fidelity.com.2 That compares favorably with similar ETFs, such as the SPDR S&P 500 ETF (SPY) with an expense ratio of 0.09% and the iShares Core S&P 500 ETF with an expense ratio of 0.03%. It is worth noting that Fidelity offers zero expense ratio index mutual funds.

Of course, expense ratios aren't the only thing to consider when evaluating ETF costs. Tracking error, which is a measure of how well the ETF tracks the performance of a benchmark, can affect the total return of an ETF. If you are looking to simply emulate the performance of a benchmark, like the S&P 500® Index, it may be prudent to seek out ETFs with low tracking error.

Bid-ask spread is another factor that can affect your total cost. An ETF with a wider bid-ask spread—the difference in price between what a buyer is willing to pay and what a seller is willing to receive as payment—may be more costly, all else being equal. You can find an ETF’s bid-ask spread, along with its tracking error and other trading costs, on Fidelity.com on an ETF’s snapshot page. By comparison, mutual funds trade at the net asset value and the buyer/seller is not subjected to a bid-ask spread.

ETF Myths - Are all ETFs tax-efficient?

10/19/2020

The last ETF myth was discussed here.

Taxes are an important consideration for any investment held in a taxable account. In general, passive ETFs are considered tax-efficient on an absolute basis due to their unique structure, generally lower portfolio turnover, and how they are managed. One of the primary advantages of the ETF structure is that when an investor buys or sells shares of the ETF, the ETF administrator can match purchases and sales with other investors so that no actual security purchases inside the fund need to be made. As a result, this creation/redemption structure avoids triggering a taxable event.

With that said, not all ETFs are equally tax-efficient.

For example, ETF dividends are subject to taxes, and ETFs that pay nonqualified dividends may be less tax-efficient than those that pay qualified dividends. Annual distributions from an ETF to investors may be treated as qualified or nonqualified dividends. Qualified dividends are taxed at no more than 15%. However, just because the ETF reports that its distribution was a qualified dividend, that does not automatically make it qualified for the investor. The investor must have held the ETF for at least 61 days during the 121-day period beginning 60 days before the ex-dividend date. ETF investors, like mutual fund investors, are subject to the relevant tax rates on distributions that flow through to end investors, whether they take the form of dividends on stocks or coupon payments on bonds.

It's also possible to invest tax-efficiently with ETFs by selecting those that minimize capital gains distributions and maximize exposure to qualified dividends, as well as holding tax-inefficient ETFs in tax-deferred or tax-exempt accounts. If minimizing taxes is a concern, consider consulting a qualified tax advisor.

Find the next ETF myth here.

ETF Myths - Are All ETFs Passive?

10/18/2020

You can find last ETF myth discussion here.

Most ETFs track an index, such as the S&P 500® Index. These types of investments are considered "passively managed." Any purchases or sales of securities by the fund are made to keep the portfolio in line with the index it attempts to track.

"Smart beta" ETFs are a growing category of ETFs that are passively managed; however, they seek to either improve their return profile or change their risk profile, relative to a market benchmark. This is to say that smart beta ETFs are passively managed in that they attempt to replicate the exposures of a benchmark, but that the composition of the benchmark may not necessarily look like that of any market index, as it has been engineered to represent a targeted factor exposure. This is accomplished by tilting one or more factors of the corresponding benchmark, such as increasing or decreasing exposure to growth or value characteristics relative to a market index.

There are some ETFs that, by design, do not strictly track an index. Instead, they are actively managed with the goal being to outperform a benchmark like the S&P 500. The fund manager for an actively managed ETF may choose to hold different securities, and/or in different weights versus those of the index that the ETF seeks to outperform.

Keep reading the next ETF myth.

ETF Myths - Do ETFs Pay Dividends?

10/17/2020

If a stock is held in an ETF and that stock pays a dividend, then so does the ETF.

While some ETFs pay dividends as soon as they are received from each company that is held in the fund, most distribute dividends quarterly. Some ETFs hold the individual dividends in cash until the ETF’s payout date. Others reinvest the dividends back into the fund as they are received, and then distribute them as cash on the ETF’s payout date.

ETFs may provide the option of forgoing receiving cash in exchange for the purchase of new shares with the dividends received. And certain brokers, including Fidelity, might allow you to reinvest dividends commission-free. You can find out if and how an ETF pays a dividend by examining its prospectus.

Find the next ETF myth discussion here.

Is the Traditional 60/40 Portfolio Dead and What You Should Do?

10/9/2020

With interest rates making yet more new lows, does it still make sense to hold 40% of a portfolio in near-zero-yield bonds?

PIMCO economist Paul McCulley belives if the 60/40 portfolio keeps working from here, it means the system itself may be broken, as the 40-year run of the 60/40 portfolio has been driven heavily by a disinflationary environment that has occurred concomitant with a shift in the economy from labor to capital, driving up the value of income streams and leading to compounded returns since 1980 of 11.7% on stocks, 7.4% on bonds, and 10.4% on a 60/40 portfolio… in a way that can’t sustain and continue compounding in its current direction.

If you want to look beyond the 60/40 portfolio, assume the 40 bonds' function is risk-buffering to stock volatility – there are arguably other ways to create ‘resilient’ (not-necessarily-bond-based) portfolios, from using a wider range of equity diversification itself (e.g., more sectors, more countries, more exposure to private equity and venture capital in addition to publicly traded stocks), to the growing number of ‘alternative’ investment options. And while historically many ‘alts’ were only offered in high-priced vehicles, the rise of alts in ETFs, along with a broader push towards alts in general, is beginning to bring down at least some of the costs.

A Financial Planning Road Map For A Typical Family

10/2/2020

The starting point
The starting point is the current holdings and sources of funds and how they add up. In other words, a financial inventory that includes total income, tax rates, credit score, expenses, debt load, account balances, assets, real estate and total net worth.

The baseline
A financial plan must be based on reality to be successful. The baseline is an all-encompassing examination of actual spending, saving, and giving.

The next step
The next in a financial plan is to identify the destination. Here are some examples of financial destinations:

Debt free
College funds
Seasonal home
Retirement at a certain age
Charitable legacy

The process
The process of financial planning is applying known elements that have proven to be successful. These elements include:

Annual review of the financial plan
Establishment of an emergency fund
Systematic savings and investments
Diversification matched to risk tolerance
Dollar cost averaging
Discipline
Tax minimization
Protection against downside risks
Regular rebalancing
Insurance to prepare for the unexpected

Use Whole Life Insurance As a Hedge - Part B

9/30/2020

In last blogpost, we introduced whole life insurance as a perfect hedging tool. Whole life insurance is also perhaps one of the most tax-advantageous vehicles available.

Now we will list all the benefits of whole life insurance below -

Death benefits protection for your loved ones.
Cash value accumulation over time with a combination of guaranteed cash value growth and potential annual dividend payments.
Tax free policy loans
Guaranteed income tax free death benefit
Tax deferred cash value growth
Tax free withdrawals of basis
Protected from creditors
The risk due to the sequence of returns of a portfolio can be mitigated with whole life insurance.
Can be structured in a trust for minors and distributed later
Can serve as a dual-purpose asset for children (i.e. cash accumulation and death benefit)
Can be pledged as a collateral

Use Whole Life Insurance As a Hedge - Part A

9/29/2020

While we cannot control the ups and downs of the market, we can reduce the overall impact of market volatility by using other financial tools that with low or non-correlations with the market, and whole life is a a strong hedge tool to serve this need.

From an individual market perspective, the risk due to the sequence of returns against a portfolio can be the difference between leaving a legacy and running out of money in retirement.

If, during retirement, you are drawing down your investment portfolio through a market downturn, you are leaving fewer dollars to work when market rebound. Using a stable account to draw during market downturn can be of tremendous value. The same holds true during years of high run-ups in the market, quite often the year following a downturn. Withdrawal from the portfolio stunts growth.

If you are looking for a solution to mitigate potential rate hikes, political issues or global conflicts that may impact your portfolios today or in the future, a whole life insurance hedging strategy can help reduce risk and allow you to rest easier during stock market adjustments, large or small. Also, it can provide an attractive and steady stream of income regardless of market activity.

In next blogpost, we will discuss the specific benefits of a whole life insurance policy.

A New Stock Exchange for Stocks for the Long Term

9/26/2020

A new stock exchange has been open for business since early 2020 - the "Long Term Stock Exchange" (LTSE). It's a idea from Silicon Valley entrepreneur and founder of the ‘Lean Startup’ movement Eric Ries who is also the CEO of LTSE.

The new “Long Term Stock Exchange” (LTSE) was built around five core principles of staying long-term focused on strategy, stakeholders, compensation, boards, and investors. The rise of the LTSE comes as companies in general are becoming more wary of public markets and IPOs, from more and more companies staying private before they go public, recent direct listings from Spotify and Slack, and the rise of the Special Purpose Acquisition Vehicle (SPAC) that facilitates IPOs via a merger.

It will be interesting to see if LTSE could attract some interesting firms to list or dual list in it.

How to Dodge a Nasty December Tax Surprise?

9/19/2020

If you a person who plans ahead, you know waiting until year end to factor in portfolio volatility is risky business.

In this Financial-Planning.com article, it explains the need and how to prepare in order to dodge a nasty December tax surprise. Although it is an article for financial advisors, it is a good read for consumers who want to take charge of this matter themselves.

Do Active Funds Do Better in Bear Markets?

9/8/2020

One of the longstanding claims of those who advocate for active management is that it’s hard to beat the indices in a raging bull market (where the investors who are most rewarded are usually the ones who just throw caution to the wind and dial up the risk), but when the bear market comes, prudence and (active) risk management will be rewarded.

The recent pandemic volatility and March/April bear market sell-off provides a perfect situation to test this claim.

in its midyear installment of the Morningstar Active/Passive Barometer report, 51% of active funds that were around at the beginning of the year survived and outperformed their average index peer during the first half of the year… which means active funds were not categorically better than passive funds during the market volatility (though they were not worse, either).

Notably, though, there was some variability within fund categories, as only 48% of active U.S. stock funds beat their passive peers, but nearly 60% of foreign stock funds did, yet only 40% of active intermediate core, corporate, and high-yield bond funds managed to do so. On a longer-term 10-year basis – which includes the bull market of the 2010s and the bear market that started the 2020s – the results are generally worse, as even amongst lower-cost funds with only 19% of large-growth funds outperforming (and just 3% of high-cost funds in that category) and 36% of foreign large-stock funds outperforming (and only 19% of high-cost). Although 54% of low-cost emerging markets funds did outperform, along with 60% of low-cost global real estate, and 63% of low-cost high-yield. And ironically, the Morningstar research finds that on average, investors do tend to pick above-average (and lower-cost) fund managers than the rest, but often still end out underperforming passive peers simply because their timing of when they buy active managers is still not good.

The New Definition of Accredited Investor by SEC

9/7/2020

The SEC has issued new guidance on the Accredited Investor rules, expanding the Accredited Investor definitions to be based not only on income or net worth, but also on alternative measures of “financial sophistication”.

Specifically, the income and net worth thresholds – earning $200,000/year (or $300,000/year of combined income if married) for at least the last two years, or having a net worth of $1M outside the value of the primary residence – were not altered,

However, there is a new category - financial advisors holding either the Series 7, Series 65, or Series 82 (for offering private securities), will qualify as Accredited Investors, as will Registered Investment Advisers themselves.

Why Markets Don’t Seem to Care If the EconomyStinks

8/15/2020

So many of the most battered industries don’t matter much because of the way stock indexes are structured.

August 4, 2020, 6:00 AM EDT
By Barry Ritholz

The stock market has been on a tear, yet the economy is in the dumps. So why do so many people believe -- undoubtedly incorrectly -- that the stock market has decoupled from reality?

The economy many people experience, while bleak, is local, personal and, for the most part, either not publicly traded or plays only a small part in the stock market’s moves. To explain why these personal experiences have so little effect on equity markets, we must look more closely at the market role of the weakest industry sectors.

The surprising conclusion: The most visible and economically vulnerable industries are also among the smallest, based on their market-capitalization weight in major indexes such as the S&P 500. Markets, it turns out, are not especially vulnerable to highly visible but relatively tiny industries. The 30 most economically damaged industry categories could be de-listed before tomorrow’s market open, and it would hardly shave more than a few percentage points off the S&P 500.

This is so despite the worst U.S. economic collapse since the Great Depression. All of the economic data is so bad that figures on gross domestic product, unemployment and initial jobless claims must be re-scaled to even fit on charts.

But the U.S. economy is not the stock market and vice versa. As we discussed before, ignoring overseas strength is a major oversight. The so-called FAANGs (along with Microsoft) derive about half -- and in some cases even more -- of their revenue from abroad. Beyond that, the pandemic lockdown in the U.S. has benefited the giant tech companies’ sales and profits. No wonder the Nasdaq Composite 100 Index, which is dominated by big tech companies, is up about 26% this year.

But a reasonable person might argue that GDP fell by about a third in the second quarter and the S&P 500 should be in synch with that. What’s more, of the 500 companies in the S&P 500, about 450 of them are doing terribly. Industries such as retail, travel, energy, entertainment, dining have seen sales evaporate. Bankruptcies are piling up -- legendary retailer Lord & Taylor is just the latest -- and more are surely coming. Yet, the S&P 500, after a huge plunge in March, is up 2% this year.

Market capitalization explains why.

Start with some of 2020’s worst-performing industries: Year-to-date (as of the end of July), these include department stores, down 62.6%; airlines, off 55%; travel services, down 51.4%; oil and gas equipment and services, down 50.5%; resorts and casinos, down 45.4%; and hotel and motel real estate investment trusts, off 41.9%. The next 15 industry sectors in the index are down between 30.5% and 41.7%. And that’s four months after the market rebounded from the lows of late March.

These are highly visible industries, with companies that are well-covered by the news media with household names known to many consumers. Retailers are everywhere we go. Gas stations, chain restaurants and hotels are ubiquitous in cities and suburbs across the country.

So although high visibility industries may be of considerable significance to the economy, they are not very significant to the capitalization-weighted stock market indexes.

Consider how little these beaten-up sectors mentioned above affect the indexes. Department stores may have fallen 62.3%, but on a market-cap basis they are a mere 0.01% of the S&P 500. Airlines are larger, but not much: They weigh in at 0.18% of the index. The story is the same for travel services, hotel and motel REITs, and resorts and casinos.

The market is telling us that these industries just don’t matter very much to stock market performance. And the sectors that do matter? Consider just four industry group -- internet content, software infrastructure, consumer electronics and internet retailers -- account for more than $8 trillion in market value, or almost a quarter of total U.S. stock market value of about $35 trillion. Take the 10 biggest technology companies in the S&P 500 and weight them equally, and they would be up more than 37% for the year. Do the same for the next 490 names in the index, and they are down about 7.7%. That shows just how much a few giants matter to the index.

On some level, it’s completely understandable why many people believe that markets are no longer tethered to reality because the performance doesn’t correspond to their personal experience, which is one of job loss, economic hardship and personal despair. But what’s important to understand is that indexes based on market-cap weighting can be -- as they are
now -- driven by the gains of just a handful of companies.

We can argue about whether the way the market reacts is good or bad and never reach a satisfying conclusion. But one thing the market isn’t is irrational or disconnected from is the reality of market capitalization, and its impact on stock indexes.

How to Harvesting Investment Tax Losses - Part G

8/8/2020

In last blogpost, we discussed the importance of keeping tax loss harvesting in mind when develop your investment strategies. Now we will discuss the cost basis for tax loss calculation.

Select the most advantageous cost basis method
Finally, take a look at how the cost basis on your investments is calculated. Cost basis is simply the price you paid for a security, plus any brokerage costs or commissions.

If you have acquired multiple lots of the same security over time, either through new purchases or dividend reinvestments, your cost basis can be calculated either as a per-share average of all the purchases (the average-cost method) or by keeping track of the actual-cost of each lot of shares (the actual cost method).

For tax-loss harvesting, the actual-cost method has the advantage of enabling you to designate specific, higher-cost shares to sell, thus increasing the amount of the realized loss.

How to Harvesting Investment Tax Losses - Part F

8/7/2020

In last blogpost, we discussed wash sales and tax loss harvesting. Now we will discuss how to make tax loss harvesting part of your year round tax and investing strategies.

Make tax-loss harvesting part of your year-round tax and investing strategies
The best way to maximize the value of tax-loss harvesting is to incorporate it into your year-round tax planning and investing strategy.

In managing the asset allocation for your taxable portfolio, don't use big pieces like a large cap fund of funds. Instead, use more individual investments pieces that can help you create tax efficiency. For example, invest in individual large cap value, core and growth funds. This allows you the opportunity to tax loss harvest as individual securities and styles go in and out of favor.

Tax-loss harvesting and portfolio rebalancing are also a natural fit. In addition to keeping your portfolio aligned with your goals, a periodic rebalancing provides an opportunity to reexamine lagging investments that could be candidates for tax-loss harvesting.

In next blogpost, we will discuss which cost basis to choose.

How to Harvesting Investment Tax Losses - Part D

8/5/2020

In last blogpost, we discussed gains and losses in mutual funds. Now we will discuss tax loss harvesting details.

Harvest losses to maximize your tax savings
What to look for?
When looking for tax-loss selling candidates, consider investments that no longer fit your strategy, have poor prospects for future growth, or can be easily replaced by other investments that fill a similar role in your portfolio.

When you're looking for tax losses, focusing on short-term losses provides the greatest benefit because they are first used to offset short-term gains—and short-term gains are taxed at a higher marginal rate.

According to the tax code, short- and long-term losses must be used first to offset gains of the same type. But if your losses of one type exceed your gains of the same type, then you can apply the excess to the other type. For example, if you were to sell a long-term investment at a $15,000 loss but had only $5,000 in long-term gains for the year, you could apply the remaining $10,000 excess to any short-term gains.

What to avoid?
If you have harvested short-term losses but have only unrealized long-term gains, you may want to consider saving them for the future. The least effective use of harvested short-term losses would be to apply them to long-term capital gains. But, depending on the circumstances, that may still be preferable to paying the long-term capital gains tax.

Also, keep in mind that realizing a capital loss can be effective even if you didn't realize capital gains this year, thanks to the capital loss tax deduction and carryover provisions. The tax code allows you to apply up to $3,000 a year in capital losses to reduce ordinary income, which is taxed at the same rate as short-term capital gains.

If you still have capital losses after applying them first to capital gains and then to ordinary income, you can carry them forward for use in future years.

In next blogpost, we will discuss wash sale and tax loss harvesting.

How to Harvesting Investment Tax Losses - Part C

8/4/2020

In last blogpost, we discussed the important differences between short term and long term losses. Now we will discuss the gains and losses in mutual funds.

Gains and losses in mutual funds
If you're a mutual fund investor, your short- and long-term gains may be in the form of mutual fund distributions. Keep a close eye on your funds' projected distribution dates for capital gains. Harvested losses can be used to offset these gains.

Short-term capital gains distributions from mutual funds are treated as ordinary income for tax purposes. Unlike short-term capital gains resulting from the sale of securities held directly, the investor cannot offset them with capital losses.

In next blogpost, we will discuss how to harvest losses to maximize your tax savings.

How to Harvesting Investment Tax Losses - Part B

8/3/2020

In last blogpost, we discussed what is investment tax loss harvesting, now we will discuss some details.

Short-term vs Long-term gains and losses
There are 2 types of gains and losses: short-term and long-term.

Short-term capital gains and losses are those realized from the sale of investments that you have owned for 1 year or less.
Long-term capital gains and losses are realized after selling investments held longer than 1 year.

The key difference between short- and long-term gains is the rate at which they are taxed.

Short-term capital gains are taxed at your marginal tax rate on ordinary income. The top marginal federal tax rate on ordinary income is 37%.

For those subject to the net investment income tax (NIIT), which is 3.8%, the effective rate can be as high as 40.8%. And with state and local income taxes added in, the rates can be even higher.

But for long-term capital gains, the capital-gains tax rate applies, and it's significantly lower.

In next blogpost, we will discuss gains and losses in Mutual Funds.

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