Due Diligence

Happy New Year and welcome to 2023! We hope that you and your family had an enjoyable holiday season. We look forward to what this new year has to offer.

2022 was rough for investors, with many of the year’s events unforeseen and unfavorable. As we enter the new year, some challenges remain. One primary obstacle, the concern of elevated inflation, has recently looked a little less imposing, while another concern, a projected recession affecting countries around the globe, is still looming. Seasoned investors understand that part of the investment experience is taking a long-term approach and that means potential periods of downward movements. Our primary goal for the new year is to continue to help optimize your journey toward your financial goals. A key component to this is to identify items that you may anticipate needing our assistance with. In order to start the new year proactively, included in this communication is a 2023 Checklist to help you identify items you may want to address with us over the next year.

We enter 2023 with a service goal of exceeding your expectations and providing you with first-class service. We take pride in our ability to understand and effectively respond to your needs and enjoy providing timely information and holistic service to you.

We thank you for giving us the opportunity to help you work toward your financial goals and look forward to a great year!

In 2023, we will continue to offer the following services to our clients:Client review meetings.

• Quarterly economic updates.
• Tax reports to keep you updated on proactive tax saving opportunities and changes.
• Regularly scheduled live and online educational workshops on timely topics.
• Consistent and meaningful articles on topics that directly affect you.
• Client appreciation events and a special event for clients who support our “Growth Initiative.”

Looking Ahead to 2023

While there are many aspects to overall financial planning, the following are some specific areas we will continue to watch carefully as we head into the new year.

Interest Rates
Interest rate movements continue to be critical for investors. In 2022, the Federal Funds Rate rose from a range of 0 – 0.25% to a range of 4.25 – 4.50%. The Federal Reserve has announced they will continue to raise rates to around 5% in 2023 as a way to combat inflation.

Inflation
Inflationary concerns are important for investors. In the U.S. during 2022, results for inflation peaked in the fourth quarter and both headline and core Consumer Price Index (CPI) readings showed significant year-over-year declines to end the year. This was the data investors had long been waiting for, and they expressed their approval by sparking quick, but short-lived equity market relief rallies. This initial descent from the inflation summit can be encouraging, but it takes more than one data point to make a trend. Inflation numbers and fears need to be monitored as the 2023 data becomes available.

Recession
Risk A main obstacle for investors is that many analysts are suggesting a recession is inevitable. The shift from inflation risk to recession risk reflects the impact of aggressive monetary tightening by the world’s central banks, which have fixated on inflation-fighting at the expense of economic growth. Even with inflation starting to moderate (at least in the U.S.), there is no guarantee that central bank policy rates will follow suit. In fact, in November, Fed Chair Jerome Powell conveyed that rates are likely to remain “higher for longer,” which will bring continued challenges to the economy and investment markets. Economic recovery is still appearing to be affected by the overseas effects of Covid-19 and its variants. We will continue to stay apprised of the direction of recovery efforts and how they are affecting the economy.

Stock Market Valuations
Valuations are used as key predictors of equity returns. Many stock prices have fallen significantly from historical highs, but in tough times valuations become more challenging to estimate. While we cannot predict long- and short-term valuations, we can continue to help you identify your risk tolerance and time horizons. We will also guide you to use practical behavior during times of market volatility.

Your Personal Situation
Your personal situation is always our highest priority. We are here to help you with any financial moves or concerns you have throughout the year. We understand that each individual and household has different goals and needs. We will continue our tradition of keeping you informed of any changes that we think may affect your personal situation.

We enter 2023 with the continued mantra of “proceed with caution”. Having a solid foundation and strategy is critical to the outcome of your financial plans. Revisiting your plan and keeping it current is also a sound practice we feel should be conducted on a consistent basis. Our mission is to provide you with guidance and support on your journey toward your financial goals.

We believe the best client is an informed client. For this reason, throughout the year we provide our clients with a wealth of consistent and pertinent information on financial topics and markets conditions, including quarterly reports, tax reports, and articles. Our goal is to provide helpful, timely and meaningful information that is relevant to our clients’ personal situations. We also take pride in offering first-class service to our clients and are truly thankful for each and every one of our relationships.

2022 was a challenging year for investors. After over a decade of healthy returns, investors experienced declines in almost all areas of investments. As the holiday season arrives and the year ends, we like to shift our focus and share with you a message we feel is very important, especially in these times of volatility and uncertainty – two things the world has had its fill of this year. Our message for this article is gratitude.

Psychology Today says that, “Gratitude is the expression of appreciation for what one has. It is a recognition of value independent of monetary worth.” The publication also cites that, “Gratitude is a spontaneous feeling but, increasingly, research demonstrates its value as a practice—that is, making conscious efforts to count one’s blessings.” Studies show that people can deliberately cultivate gratitude—and there are important social and personal benefits to doing so. Each and every day we have an opportunity to embrace and share gratitude. Harnessing a feeling of gratitude and carrying it with you through the year – making it a habit – can be a powerful shield in times of difficulty. Remember – gratitude can help with happiness, and happiness matters!

What is Your Gratitude Strategy?

One way to elevate your gratitude strategy is to be aware of where you place your focus. Even in negative situations, you can always choose to focus on the positive side of every situation, commonly referred to as the “silver lining.” Even our greatest difficulties provide the seed for equal and greater opportunity. A setback can easily be viewed as a chance to make a comeback. Your greatest struggle can become your greatest victory, if you choose to focus on what good is happening around you rather than the bad. 

Many people start to realize when you change the way you look at things, the things you look at begin to change. Everyone understands that we cannot choose what happens to us, but we can always choose how we react. The only thing that we continuously have full control over is the power of our own minds.
For example, you can’t control the weather, just like you can’t control someone else’s attitude. However, you can choose how you react to situations and can choose to act with an attitude of gratitude. 
A plane is delayed due to inclement weather. There are two people at the airport. One chooses to get very angry and complain to the staff and other passengers. That person sits with their arms folded and focuses on all that’s wrong with this situation. Their meetings are going to either get cancelled or pushed back. Their ride from the airport is going to leave. Their evening plans are going to be missed. Taking an angry and rough outlook fuels anxiety and unnecessary stress within yourself and those around you.
Another passenger scheduled for that same flight smiles and pulls out their laptop. They use this as an opportunity to get ahead on some work. They thank the attendants as they scramble to make sure everyone is accommodated. They make phone calls and reschedule for when they are now expected to arrive. They think about the fact that it is much safer to wait. They acknowledge that flying, even in good weather, is never easy – and safety can be compromised during a storm. They see this as an inconvenience, but they have adopted an attitude of gratitude. 

The difference in these two passengers is not their situation. It is their attitude, their perspective, and their focus. Choose gratitude.

Can you be grateful during
tough times?
This was a tough year for investors. After many healthy years, equity markets and bond markets both saw declines. Gratitude can be helpful when you are trying to make wise financial decisions. We believe that focusing on longer-term investing provides more flexibility than attempting shorter-term horizons. Of course, even when investing long-term, there is no guarantee that market volatility will decrease, increase, or stabilize in any timeframe. A study that Psychology Sciences released revealed that participants who expressed gratitude were more likely to generate better results than those who looked for immediate gratification. The research found that those who expressed gratitude appeared to display more patience and happiness with their current situation. The study also revealed that those who had more feelings of gratitude were able to reduce impulse buying, due to more overall contentment, and were less reliant on the high that immediate gratification can provide. (www.forbes.com, 11/25/2019)
In terms of investing, gratification and patience can be useful when focusing on your time horizon, especially during times of volatility. Remember, equities are considered long-term investments. Historically, it’s not uncommon for equity markets to drop over 10% or more during a shorter period of time. Investing for the long-term can help investors stay on track during turbulent times to ride out market volatility, thus potentially achieving their original goals. Contentment is a result of gratification.

Securing your investments will help reduce panic and rushed decisions that may not be in the best interest of your portfolio. Our role as investment professionals is to help you understand your situation, because an educated client is our best client.

In the spirit of the season, we want to express our sincere gratitude for the trust you place in us as stewards of your wealth. As always, we are here to help and are available to review your situation. We will always consider your goals as well as your feelings about risk and the markets and review your unique financial situation when providing any recommendations.

Included in this article is a brief form to help you evaluate what you define as “wealth.”

In the coming year, we will continue to provide you first-class service, including:

• regular client meetings, and
• consistent and effective communication,
• regular client meetings, and
• continuing education for members of our team on the issues that affect you.

We understand that having a good financial professional can help make your journey easier. As such, our commitment is to understand our clients’ needs and try to create plans to address those needs.
So, for 2023, let’s try to intentionally include gratitude! As always, we appreciate the opportunity to assist you with your financial matters.

Click here to download a PDF of this report.

“May you live in interesting times,” is an expression where someone ironically wishes an “interesting”
time to whomever they are speaking with. Although it may seem innocuous it’s really an insult. By saying this, you wish the person to live during times of uncertainty and disorder as opposed to peace and tranquility. Investors are currently living in interesting times. In 2022, we have seen portfolios fall in value. Also, buying power has been substantially eroded by rising inflation. As a result, the Federal Reserve is intentionally trying to slow the economy to curb inflation.

While doom and gloom have recently dominated the financial headlines, not all of 2022’s impact is bad. For example, if you own a home, it has likely appreciated substantially. If you are one of the 70 million people who are receiving Social Security retirement income, you will get an 8.7% raise starting in 2023. A side benefit of inflation is an increase in the standard deduction. Married taxpayers were entitled to a standard deduction of $25,900 in 2022 — that number is expected to jump to $27,700 in 2023. Single and married individuals filing separately will see the standard deduction rise to $13,850 from $12,950 in 2022. Because of inflation, tax bracket qualifying incomes are also going up. For couples filing jointly, in 2022 the 12% bracket ended at $83,550 and jumped to 22% after that. For 2023, the 12% tax bracket will extend to $89,450.

In 2023, taxpayers at all levels will be paying less income taxes on the same income as in 2022, but hopefully your income will increase. As a side note, the Social Security wage base is also going up from $147,000 in 2022 to $160,200 in 2023, which will increase Social Security taxes for employees who make more than $147,000. Challenging times bring with them both good and bad. This is an opportune time to remember how to be smart about some of your money decisions.

Money management, unfortunately, is not a skill set that is taught in school. It is also an expertise that is never too late to learn. Even the most disciplined person can forget or become complacent about
some of the foundational tools that help keep a sound financial situation. Let’s review some financial basics.

Keep a Budget

It is always a good time to create or review your budget. Budgeting and balancing your bank account is the best way of making sure what’s going out of your account each month isn’t exceeding what’s coming in. Winging it and hoping it all works out at the end of each month can lead to unnecessary bank fees and credit card debt. It can also prevent you from achieving your savings goals.

An easy activity to try is to review your statements for three to five months and then make a list of your average monthly income (after taxes), as well as your average monthly spending. It can be helpful if you categorize your spending into basic needs (e.g., rent, utilities, groceries) and discretionary spending (e.g., shopping, travel, eating out). To get a more detailed understanding of where your money is going, you may want to track your spending for a month or so, either with a diary or an app on your phone.

Once you see the typical inflow and outflow of money each month, you can determine if you’re overextending, staying even, or ideally, getting ahead by putting money into savings each month.

If you find you are unable to save each month, the ideal first step is to go through your budget and look for ways to cut back discretionary spending. Can you eat at home more instead of going out? Buy less clothing? Avoid impulse item purchases?

There are many budgeting apps that can help you with this process. Please note, there’s not necessarily one right way to budget. Instead, it’s about finding the strategy that works best for you.

Review and Understand Your Debt

Having debt can be a major stressor and a cause of anxiety and unhealthy strain on a person’s mental and emotional health, relationships, job performance, and daily life. Therefore, it is wise to have financial literacy and a good understanding of how debt can affect your situation.

“Debt” is often synonymous with “bad” but there are also ways of having “good” debt. Having a mortgage in good standing can increase your credit score and provide you with a home that has longterm investment benefits. The debt that we more often think of as “bad” is unnecessary credit card debt with a high annual interest rate.

The most common debt for Americans is in the form of a mortgage. The second most common is debt from credit cards. Assess your own debt and what kind you have. A quick rule of thumb is to always have a debt-to-income ratio (DTI) that is well below 36%. To calculate your DTI, take your total monthly debt payments and divide this by your gross monthly income.

Do you have too much debt for your comfort zone? Do you have any unnecessary debt? If so, then start reducing your debt by first removing the unnecessary debt that has the highest interest rates and hidden fees. Try to cut back on avoidable spending that you discovered when reviewing or creating your budget.

Having a firm grasp on your debt situation can help create a life with reduced stress and anxiety. With rising interest rates and an increased cost of living, now is a great time to review your debt, your comfort levels, and find ways to reduce any “bad” debt.

Have an Adequate Emergency Fund

As the last few years have clearly reminded us, anything is possible and no one can predict what the future holds. The coronavirus pandemic left the world in a state of confusion and many Americans found themselves either without jobs, closing their once thriving businesses, or just wondering how they were going to make ends meet. Coupled with the fastest rising rate of inflation in over 40 years
and rapidly rising interest rates, many households are feeling the pinch and finding it challenging to
stay ahead, let alone save for the future or unexpected emergencies.

Having an adequate emergency fund can prove to be a wise plan. A good rule of thumb is to have a minimum of 3 to 6 months worth of living expenses saved in an emergency fund. This emergency fund can be a helpful resource to use (and replenish) when, for example, you have unexpected car repairs or a medical emergency. With interest rates rising these emergency funds can also work for you when stored in a savings account with a decent yield.

How do you build your emergency fund? Determine your monthly expenses and multiply that by the number of months you want to have funds for. Then, calculate how much you can commit each month to put into your savings fund after you’ve paid all your bills. Many people get ahead of their timeline goal by setting aside a portion of their tax refund (if they get one) into their emergency fund. The most crucial step is the hardest for most – sticking with the plan. It’s easy to convince yourself that “nothing is going to happen” that will cause you to need those funds and sadly many people spend their extra cash on the latest impulse item or BOGO deal that arrives in their inbox. Once again, recent history reminded us that anything can happen.

Understand That Investments are Long-term Commitments

With the recent volatility in the market and the steady decline in equities in 2022, we need to be reminded that those having a long-term mindset when it comes to investing have historically been rewarded.

As one of the most successful investors of all time, Warren Buffet, said, “The most important quality for an investor is temperament, not intellect.” This mindset requires a disciplined approach to investing. It helps reduce anxiety over short-term fluctuations in the markets and instead focuses on long-term success. Rash decisions and panic moves have no place in a long-term investor’s plan. Equity markets are cyclical and while dips and rises are part of the investment experience, many still find themselves pulling out of the market during a downturn and missing out when the trajectory returns upward.

As your financial professionals, our goal is to find the right long-term plan and investments for your portfolio, while considering your time horizon and risk tolerance. We always recommend that prior to making any changes to your plan, that you contact us first. Many moves can have consequences that you may be unaware of, such as potential tax ramifications for you or your beneficiary(ies). If you are concerned because of the media’s headlines or want to have an assessment of your investment portfolio and overall financial picture, we can discuss this at your next review meeting, or you can
call us to schedule an appointment. Remember, investing in equities should be viewed as a longterm commitment!

Conduct a Year-end Assessment

The end of the year can be a very busy time, filled with festive parties, family gatherings, and travel. However, it is good practice to take some time to conduct a year-end financial assessment. This can be a quick look at how you managed your finances in the current year and then setting yourself up for success in the new year. To help make this easier for you, we have created a short year-end checklist. As your wealth managers, we enjoy providing you holistic assistance in all aspects of your financial life. As always, if you have any questions or concerns, please call us.

One of our main goals as holistic financial professionals is to help our clients recognize tax reduction opportunities within their investment portfolios and overall financial planning strategies. Staying current on the ever-changing tax environment is a key component to help our clients benefit from potential tax reduction strategies.

Other than some IRS inflation adjustments, calendar year 2022 has brought limited changes in tax laws for individuals. Many of the provisions that were passed in bills like, The Inflation Reduction Act of 2022, affected corporations, such as the corporate minimum tax of 15% for corporations with adjusted federal income over $1 billion dollars. While President Biden has offered some personal income tax and estate planning tax changes in his proposed 2022 budget and tax plans, many experts feel that it is very unlikely that any changes, if approved, will take affect this calendar year. This report focuses on information that could be helpful for individuals in conjunction with tax planning for calendar year 2022. It also has a section that shares some key details from President Biden’s suggested American Families Plan and some noteworthy proposals included in the budget and green book from Biden’s recent 2022 Budget Plan.

Remember, the Tax Cuts and Jobs Act (TCJA) enacted in 2017 brought many changes to the tax code. The Tax Cuts and Jobs Act included many provisions for individuals that took effect in 2018 but are currently set to expire after 2025. One big uncertainty for all taxpayers is what will happen to the tax code after 2025.

As financial professionals, we try to be proactive when it makes sense. The objective of this report is to share strategies that could be effective if considered and implemented before year-end. Please note that this report is not a substitute for using a tax professional. In addition, many states do not follow the same rules and computations as the federal income tax rules. Make sure you check with your tax preparer to see what tax rates and rules apply for your particular state.

Income Tax Rates for 2022

For 2022 there are still seven tax rates.  They are 10%, 12%, 22%, 24%, 32%, 35%, and 37%. Under current law this seven-rate structure will phase out on January 1, 2026.

Year-end Tax Planning for 2022

One of our primary goals is to help our clients try to optimize their tax situations. This report offers many suggestions and reviews strategies that can be useful to achieve this goal.

Everyone’s situation is unique but it is wise for every taxpayer to begin their final year-end planning now! Choosing the appropriate tactics will depend on your income as well as a number of other personal circumstances. As you read through this report it could be helpful to note those strategies that you feel may apply to your situation so you can discuss them with your tax preparer.

Some items to consider include:

Evaluate the use of itemized deductions versus the standard deduction.

For 2022 tax returns, the standard deduction amounts will increase to $12,950 for individuals and married couples filing separately, $19,400 for heads of household, and $25,900 for married couples filing jointly and surviving spouses.

As a reminder, the Tax Cuts and Jobs Act roughly doubled the standard deduction. Its goal was to decrease tax payments for many of those who typically claim this standard deduction. Although personal exemption deductions are no longer available, the larger standard deduction, combined with lower tax rates and an increased child tax credit, could result in less tax. You should consider running the numbers to assess the impact on your situation before deciding to take itemized deductions.
The TCJA still eliminates or limits many of the previous laws concerning itemized deductions. An example is the state and local tax deduction (SALT), which is still currently capped at $10,000 per year, or $5,000 for a married taxpayer filing separately.

Consider bunching charitable contributions or using a donor-advised fund.

For those taxpayers who are charitably inclined it makes sense to think about a plan. One way to utilize the tax advantages of charitable contributions is through a strategy referred to as “bunching”. Bunching is the consolidation of donations and other deductions into targeted years so that in those years, the deduction amount will exceed the standard deduction amount.

Another strategy is to consider using a donor-advised fund. A donor-advised fund, or DAF, is a philanthropic vehicle established at a public charity. It allows donors to make a charitable contribution, receive an immediate tax benefit and then recommend grants from the fund over time. Taxpayers can take advantage of the charitable deduction when they’re at a higher marginal tax rate while actual payouts from the fund can be deferred until later. It can be a win-win situation. If you are charitably inclined and need some guidance, please call us and we can assist you.

Review your home equity debt interest.

For mortgages taken out after October 13, 1987, and before December 16, 2017 (i.e., enters into a binding contract by that date), mortgage interest is fully deductible up to the first $1,000,000 of mortgage debt incurred to acquire or improve a qualified residence. The TCJA lowered the threshold to $750,000 or $375,000 (married filing separately) for homes purchased after December 15, 2017, but before January 1, 2026. All interest paid on any mortgage taken out before October 13, 1987, is fully deductible regardless of your mortgage amount (“grandfathered debt”). Many mortgage holders refinanced for lower rates or to cash out in the last few years, so remember, to the extent debt increases the interest might not be deductible.

Interest on home equity lines of credit (HELOCs) and cash-out refinancings may be deductible as well if the funds were used to improve the home that secures the loan (or if the proceeds were invested). Please share with your tax preparer how the proceeds of your home equity loan were used. If you used the cash to pay off credit cards or other personal debts, the interest isn’t deductible, but that may change when the TCJA sunsets at the end of 2025.

Revisit the use of qualified tuition plans.

Qualified tuition plans, also named 529 plans, are a great way to tax efficiently plan the financial burden of paying tuition for children or grandchildren to attend elementary or secondary schools. Earnings in a 529 plan originally could be withdrawn tax-free only when used for qualified higher education at colleges, universities, vocational schools or other post-secondary schools. However, they changed that so 529 plans can now be used to pay for tuition at an elementary or secondary public, private or religious school, up to $10,000 per year. Unlike IRAs, there are no annual contribution limits for 529 plans. Instead, there are maximum aggregate limits, which vary by plan. Under federal law, 529 plan balances cannot exceed the expected cost of the beneficiary’s qualified higher education expenses. Limits vary by state. Some states even offer a state tax credit or deduction up to a certain amount.

Contributions to a 529 plan are considered completed gifts for federal tax purposes, and in 2022 up to $16,000 per donor, per beneficiary, qualifies for the annual gift tax exclusion. Excess contributions above $16,000 must be reported on IRS Form 709 and will count against the taxpayer’s lifetime estate and gift tax exemption amount ($12.06 million in 2022).

There is also an option to make a larger tax-free 529 plan contribution, if the contribution is treated as if it were spread evenly over a 5-year period. For example, a $80,000 lump sum contribution to a 529 plan can be applied as though it were $16,000 per year, as long as no other gifts are made to the same beneficiary over the next 5 years. Grandparents sometimes use this 5-year gift-tax averaging as an estate planning strategy. If you want to explore setting up a 529 plan, call us and we would be happy to assist you.

Maximize your qualified business income deduction (if applicable).

One of the most talked about changes from the Tax Cuts and Jobs Act enacted in 2017 is the qualified business income deduction under Section 199A. Current proposals want to change this deduction, but for 2022, taxpayers who own interests in a sole proprietorship, partnership, LLC, or S corporation may be able to deduct up to 20% of their qualified business income. Please be careful because this deduction is subject to various rules and limitations.

There are planning strategies to consider for business owners. For example, business owners can adjust their business’s W-2 wages to maximize the deduction. Also, it may be beneficial for business owners to convert their independent contractors to employees where possible, but before doing so, please make sure the benefit of the deduction outweighs the increased payroll tax burden and cost of providing employee benefits. Other planning strategies can include investing in short-lived depreciable assets, restructuring the business, and leasing or selling property between businesses. This piece of the tax code is complicated and would take an entire report to discuss, so we recommend that if you are a business owner, you should talk with a qualified tax professional about how this new Section 199A could potentially work for you.

Consider All of Your Retirement Savings Options for 2022

If you have earned income or are working, you should consider contributing to retirement plans. This is an ideal time to make sure you maximize your intended use of retirement plans for 2022 and start thinking about your strategy for 2023. For many investors, retirement contributions represent one of the smarter tax moves that they can make. Here are some retirement plan strategies we’d like to highlight.

401(k) contribution limits increased. The elective deferral (contribution) limit for employees under the age of 50 who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan is $20,500. The catch-up contribution limit for employees aged 50 and over who participate in 401(k), 403(b), most 457 plans, and the federal government’s Thrift Savings Plan remains the same at $6,500 ($27,000 total). As a reminder, these contributions must be made in 2022.

IRA contribution limits unchanged. The limit on annual contributions to an Individual Retirement Account (IRA) remains at $6,000 for 2022.  The additional catch-up contribution limit for individuals aged 50 and over is not subject to an annual cost-of-living adjustment and remains $1,000 (for a total of $7,000). IRA contributions for 2022 can be made all the way up to the April 17, 2023, filing deadline.

Higher IRA income limits. The deduction for taxpayers making contributions to a traditional IRA is phased out for singles and heads of household who are covered by a workplace retirement plan and have modified adjusted gross incomes (MAGI) of $68,000 and $78,000 for 2022.  For married couples filing jointly, in which the spouse who makes the IRA contribution is covered by a workplace retirement plan, the income phase-out range is $109,000 to $129,000.  For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the deduction is phased out in 2022 as the couple’s income reaches $204,000 and completely at $214,000. For a married individual filing a separate return who is covered by a workplace retirement plan, the phase-out range remains at $0 to $10,000 for 2022. Please keep in mind, if your earned income is less than your eligible contribution amount, your maximum contribution amount equals your earned income.

Increased Roth IRA income cutoffs. The MAGI phase-out range for taxpayers making contributions to a Roth IRA is $204,000 – $214,000 for married couples filing jointly in 2022. For singles and heads of household, the income phase-out range is $129,000 – $144,000.  For a married individual filing a separate return, the phase-out range remains at $0 to $10,000. Please keep in mind, if your earned income is less than your eligible contribution amount, your maximum contribution amount equals your earned income.

Larger saver’s credit threshold. The MAGI limit for the saver’s credit (also known as the Retirement Savings Contribution Credit) for low- and moderate-income workers is $68,000 for married couples filing jointly in 2022, $51,000 for heads of household and $34,000 for all other filers.

Be careful of the IRA one rollover rule. Investors are limited to only one rollover from all of their IRAs to another in any 12-month period. A second IRA-to-IRA rollover in a single year could result in income tax becoming due on the rollover, a 10% early withdrawal penalty, and a 6% per year excess contributions tax as long as that rollover remains in the IRA. Individuals can only make one IRA rollover during any 1-year period, but there is no limit on trustee-to-trustee transfers. Multiple trustee-to-trustee transfers between IRAs and conversions from traditional IRAs to Roth IRAs are allowed in the same year. If you are rolling over an IRA or have any questions on IRAs, please call us.

Roth IRA Conversions

In 2022, some IRA owners may want to consider converting part or all of their traditional IRAs to a Roth IRA. This is never a simple or easy decision. Roth IRA conversions can be helpful, but they can also create immediate tax consequences and can bring additional rules and potential penalties. Under the current laws, you can no longer unwind a Roth conversion by re-characterizing it. It is best to run the numbers with a qualified professional and calculate the most appropriate strategy for your situation. Call us if you would like to review your Roth IRA conversion options.

Capital Gains and Losses

Looking at your investment portfolio can reveal a number of different tax saving opportunities. Start by reviewing the various sales you have realized so far this year on stocks, bonds and other investments. Then review what’s left and determine whether these investments have an unrealized gain or loss. (Unrealized means you still own the investment, versus realized, which means you’ve actually sold the investment.)

Know your basis. In order to determine if you have unrealized gains or losses, you must know the tax basis of your investments, which is usually the cost of the investment when you bought it. However, it gets trickier with investments that allow you to reinvest your dividends and/or capital gain distributions. We will be glad to help you calculate your cost basis.

Consider loss harvesting. If your capital gains are larger than your losses, you might want to do some “loss harvesting.” This means selling certain investments that will generate a loss. You can use an unlimited amount of capital losses to offset capital gains. However, you are limited to only $3,000 ($1,500 if married filing separately) of net capital losses that can offset other income, such as wages, interest and dividends. Any remaining unused capital losses can be carried forward into future years indefinitely.

Be aware of the “wash sale” rule. If you sell an investment at a loss and then buy it right back, the IRS disallows the deduction. The “wash sale” rule says you must wait at least 30 days before buying back the same security in order to be able to claim the original loss as a deduction. The deduction is also disallowed if you bought the same security within 30 days before the sale. However, while you cannot immediately buy a substantially identical security to replace the one you sold, you can buy a similar security, perhaps a different stock, in the same sector. This strategy allows you to maintain your general market position while utilizing a tax break.

Always double-check brokerage firm reports. If you sold a security in 2022, the brokerage firm reports the basis on an IRS Form 1099-B in early 2023. Unfortunately, sometimes there could be problems when reporting your information, so we suggest you double-check these numbers to make sure that the basis is calculated correctly and does not result in a higher amount of tax than you need to pay.

Long-term Capital Gains Tax Rates

Tax rates on long-term capital gains and qualified dividends changed for 2022. You may qualify for a 0% capital gains tax rate for some or all of your long-term capital gains realized in 2022. In 2022, the 0% rate applies for individual taxpayers with taxable income up to $41,675 on single returns, $55,800 for head-of-household filers and $83,350 for joint returns. If this is the case, then the strategy is to figure out how much long-term capital gains you might be able to recognize to take advantage of this tax break.

The 3.8% surtax on net investment income stays the same for 2022. It starts for single people with modified AGI over $200,000 and for joint filers with modified AGI over $250,000.

NOTE: The 0%, 15% and 20% long-term capital gains tax rates only apply to “capital assets” (such as marketable securities) held longer than one year. Anything held one year or less is considered a “short-term capital gain” and those are taxed at ordinary income tax rates.

Some Notable and Continuing Tax Changes for 2022

Some previous itemized deductions are still affected in 2022 under the tax laws. They include:

The floor for deductible medical expenses is still at 7.5%. The 2022 threshold for deducting medical expenses on Schedule A is 7.5% of your 2022 adjusted gross income (AGI). The IRS on IRS.gov provides a long list of expenses that qualify as “medical expenses,” so it can be a good idea to keep keeping track of yours if you think you may qualify.

State and local income, sales, and real and personal property taxes (SALT) are still limited to $10,000.

The deduction for casualty and theft losses is currently allowed only for presidentially declared disaster areas.

Alimony deductions.  For divorce and separation instruments executed or modified after December 31, 2018, alimony and separate maintenance payments are not deductible by the payor-spouse, nor includible in the income of the payee-spouse.

Education Planning

Education benefits.  The student loan interest deduction, education credits, exclusion for savings bond interest, tuition waivers for graduate students, and the educational assistance fringe benefit are all still available in 2022. 529 plan funds can be used to pay for fees, books, supplies and equipment for certain apprenticeship programs. In addition, up to $10,000 in total (not annually) can now be withdrawn from 529 plans to pay off student loans.

The 2022 lifetime learning credit, allows you to claim 20% of your out-of-pocket costs for tuition, fees and books, for a total of $2,000 as a tax credit. It phases out for couples from $118,00 to $138,00 and from $59,000 to $69,000 for singles.

Charitable Giving

This is a great time of year to clean your garage or house and give your items to charity. Please remember that you can only write off donations to a charitable organization if you itemize your deductions. Sometimes your donations can be difficult to value. You can find estimated values for your donated items through a value guide offered by Goodwill at https://goodwillnne.org/donate/donation-value-guide/

Send cash donations to your favorite charity by December 31, 2022. Be sure to hold on to your cancelled check or credit card receipt as proof of your donation. If you contribute $250 or more, you also need a written acknowledgement from the charity. If you plan to make a significant gift to charity this year, consider gifting appreciated stocks or other investments that you have owned for more than one year. Doing so boosts the savings on your tax returns. Your charitable contribution deduction is the fair market value of the securities on the date of the gift, not the amount you paid for the asset and therefore you avoid having to pay taxes on the profit.

Do not donate investments that have lost value. It is best to sell the asset with the loss first and then donate the proceeds, allowing you to take both the charitable contribution deduction and the capital loss. Also remember, if you give appreciated property to charity, the unrealized gain must be long-term capital gains in order for the entire fair market value to be deductible. (The amount of the charitable deduction must be reduced by any unrealized ordinary income, depreciation recapture and/or short-term gain.)

The law allowing taxpayers age 70½ and older to make a Qualified Charitable Distribution (QCD) in the form of a direct transfer of up to $100,000 directly from their IRA over to a charity, including all or part of the required minimum distribution (RMD) was made permanent in 2015. If you meet the qualifications to utilize this strategy, the funds must come out of your IRA by December 31, 2022. Please call us if this is a strategy you are interested in considering.

Additional Year-end Tax Strategies and Ideas

Make use of the annual gift tax exclusion. You may gift up to $16,000 tax-free to each donee in 2022. These “annual exclusion gifts” do not reduce your $12.06 million lifetime gift tax exemption. This annual exclusion gift is doubled to $32,000 per donee for gifts made by married couples of jointly held property or when one spouse consents to “gift-splitting” for gifts made by the other spouse.

Help someone with medical or education expenses. There are opportunities to give unlimited tax-free gifts when you pay the provider of the services directly. The medical expenses must meet the definition of deductible medical expenses. Qualified education expenses are tuition, books, fees, and related expenses, but not room and board. You can find the detailed qualifications in IRS Publications 950 and the instructions for IRS Form 709 at www.irs.gov.

Make gifts to trusts. These gifts often qualify as annual exclusion gifts ($16,000 in 2022) if the gift is direct and immediate. A gift that meets all the requirements removes the property from your estate. The annual exclusion gift can be contributed for each beneficiary of a trust. We are happy to review the details with your estate planning attorney.

Estate, Gift, and Generation-Skipping Tax Changes

Exemption amounts for gift, estate, and generation-skipping taxes are another issue that proposals are trying to change. For 2022 the limits are at $12.06 million ($24.12 million for married couples) and the income tax basis step up/down to fair market value at death is in place. Any amount over that is subject to 40% Federal taxes. This high amount provides high net worth individuals a significant planning window to make gifts and set up irrevocable trusts.

As a reminder, as of now, in 2026, the estate tax exclusion is due to revert to pre-2018 levels (adjusted for inflation, which we project will be $6-7 million under current law).

In 2019, the Treasury Department and the Internal Revenue Service issued final regulations under IR-2019-189 confirming that individuals who take advantage of the increased gift tax exclusion or portability amounts in effect from 2018 to 2025 will not be adversely impacted when TCJA sunsets on January 1, 2026. Claiming the portable exemption will remain an important discussion topic for decedents with large estates. For those who have large estates, please call us to discuss your situation.

Tax Law Proposals
On March 28, 2022, the Biden Administration released the Fiscal Year 2023 Budget, and the “General Explanations of the Administration’s Fiscal Year 2023 Revenue Proposals,” which is commonly referred to as the “Green Book.”  The Green Book summarizes the Administration’s tax proposals contained in the Budget. The Green Book is not a proposed legislation and each of the proposals will have to be introduced and passed by Congress.

Some of the Green Book’s Significant Proposed Changes to Current Law:

Business taxation

• Increase the corporate income tax rate from 21% to 28%

Individual taxation

• Impose a 20% minimum tax on individuals who have more than $100 million in assets–   A taxpayer subject to the minimum tax would make two calculations:  Their “normal” tax liability under our current realization system, and the “minimum” tax under the proposal. Tax would be paid on the greater of the two.
• Treat death as a realization event

Taxation of investments in real property

• Restrict deferral of gain for like-kind exchanges under section 1031
• Treat 100% of depreciation recapture on the sale of section 1250 property as ordinary income

Cryptocurrency taxation

• Apply securities loan rules to digital assets
• Apply the mark-to-market rules to digital asset dealers and traders
• Require information reporting for digital asset transactions

Passing legislation takes time and even if any legislation is passed, it’s very likely that all proposed changes will not take effect for 2022. Retroactive tax increases are very rare and unusual. However, it’s wise to be informed of potential changes. Also as mentioned earlier in this report, many tax laws are set to sunset on December 31, 2025, and change for 2026, even if no legislation is passed.

Our goal is to keep clients updated when tax laws change so that they can proactively plan. If you would like to discuss any of these potential tax law changes with us, please feel free to contact us and we’d be happy to assess your unique financial situation.

Conclusion

One of our primary goals is to keep clients aware of tax law changes and updates. This report is not a substitute for using a tax professional. Please note that many states do not follow the same rules and computations as the federal income tax rules. Make sure you check with your tax preparer to see what tax rates and rules apply for your particular state.

There are many other additional tax reduction strategies that will vary depending on your financial picture. We encourage you to come in so that we can review your particular situation and hopefully take advantage of those tax rules that apply to you. We will try to monitor impactful changes and as always, we appreciate the opportunity to assist you in addressing your financial matters and look forward to seeing you soon!

Click here to download a PDF of this report.

Like many other savers and investors, you may be worried that we are headed toward more challenging economic times. Successful savers and investors are usually more prepared to handle difficult financial periods because they understand some key foundational information. Maximizing a financially savvy lifestyle includes having proficiency in several areas. Understanding the basics of your income and expenditures, having credit and debt sense, and knowing how to invest and save your hard-earned dollars are just a few. An overall grasp on how to develop and maintain a healthy financial standing is vital to making the most of a financially savvy lifestyle. Your success can be enhanced with proper knowledge, planning, and a commitment to a well-devised plan. While there are many strategies that could help you reach the financial goals you have set for yourself, we feel that everyone, no matter what their age, work status, or income, will benefit from a good grasp of these following eight fundamental tips.

1. Equity investing is a long-term commitment.

Most people invest in equity markets to build wealth in either their retirement or their personal portfolios. Regardless of your goal, investing in equities should always be thought of as a long-term commitment. Historically, equities have rewarded long term investors. Seasoned investors understand that “investing” is more of a “long-term” activity, while “trading” is a more intensive, higher risk activity.

Having a long-term mindset helps experienced investors handle the stress of an unpredictable market’s ups and downs. In today’s highly volatile market, investors who have a long-term mindset and are tuning out or not being affected by the nightly news, endure much less stress and anxiety than investors with a short-term approach to their investments. Investing for the long-term means understanding that market turbulence is normal. Not reacting to media magnification can help you maintain a laser-like focus on your personal financial goals.

As the iconic long-term investor Warren Buffet said, “Nobody buys a farm based on whether they think it is going to rain the next year. They buy it because they think it is a good investment over 10 or 20 years.”

2. Have a personal budget.

Many successful savers were first introduced to this concept when they were given their first dollar of allowance. While this may seem obvious and rudimentary, this is one of the financial principles that is most often forgotten or not followed. How many hopeful savers have devised a budget at the beginning of the year only to see it fall by the wayside before the first quarter of the year even ended?

Devising and following a spending plan that accounts for current and future income and expenses seems easy, right? Perhaps not. In a recent study conducted by The Penny Hoarder, over 55% of Americans don’t use a budget to manage their money. In this same study, it was also discovered that 56% don’t know how much money they spend each month.

Keeping a budget takes the guesswork out of spending and saving. It will help you plan for future purchases, determine what you need to put aside to reach savings goals, and what money you need to allocate toward daily living expenses.

Do you have a vacation or event you need to plan for in the next 12 months? Having a personal budget will help you determine how much and at what frequency you’ll need to put funds aside for that trip or event. Seeing these figures in a tangible way can help make the decision whether or not to buy that unnecessary but certainly shiny new pair of shoes or impulse item easier. In creating your budget, you may discover many adverse spending habits that you didn’t even know you had!

A budget will also help keep you from spending money that you don’t have. Which ties into our third tip, only using debt wisely.

3. Use personal debt wisely.

Now more than ever, it’s very easy to spend imaginary money with the click of a button or swipe of a card. It used to be easy with checks, but now with credit cards and a multitude of digital wallets like Venmo or Applepay, it can take only seconds to rack up thousands of dollars of unnecessary debt.

While some debt can be necessary and even provide some beneficial tax advantages, like a mortgage (of course, with a reasonable mortgage interest rate), possessing other types of debt or taking loans with higher interest rates can be one of the quickest ways to slow down or even stall your forward progress toward your financial goals. Avoiding any unnecessary or non-essential debt is critical for preventing financial headaches that immediate gratification of even the best item cannot solve.

4. Try to maintain a three- to six-month emergency fund.

While income, necessary monthly expenditures, dependents, and lifestyles can differ, a good strategy for every saver is to aim for having at least three to six months’ worth of expenses earmarked in case of an emergency.

These funds should be dedicated to assist you in the case of unplanned expenses or financial emergencies. For example, the loss of a job, unexpected home repairs, or emergency medical bills. You may be tempted, but remember, these funds are not for travel excursions or for an impulsive purchase!
Setting aside an allotted percentage of your paycheck each month into this emergency fund or if you received one, setting aside a portion of your tax refund, can help you maximize your emergency funds in an efficient and calculated manner.

5.Properly plan for any future large expenses and have a strategy to pay for them that does not force you to liquidate equities.

Do you anticipate buying a new car in the near future? Are you hoping to pay cash for this car? Do you have a trip or vacation planned? Are you doing some remodeling in your home?
Planning to have appropriate cash reserves for these larger expenditures is more strategic than keeping your fingers crossed that your investments will rise and be the best source of funds the day you need them. Liquidating your investments at the wrong time can prove to be costly. Successful investors try to be intentional when it comes to large expenditures.

6.Live within your means.

Great savers typically live within their means. In tune with keeping a budget and not going into unnecessary debt, living within your means is easier said than done.
A good exercise is to write down your must-have expenses, such as housing, food, gas, medications and electricity. Don’t forget to add a line for your savings and emergency fund. Then write down your non-negotiable “want but don’t necessarily need” items, such as newest and latest electronics or streaming subscriptions. Ideally, the total cost of your necessary items should leave you some savings and breathing room. If you’re finding yourself putting more and more on your credit cards and unable to pay them off every month, you’re not living within your means. Best savers and investors monitor their spending habits and think about the future.

7. Enjoy your life!

Yes, Benjamin Franklin coined the famous phrase, “A penny saved is a penny earned.” But don’t forget that your hard-earned money should be enjoyed! Being diligent is important, but after you have accumulated a reasonable amount of savings, try not to eliminate all personal enjoyments just so you can squirrel away a few extra pennies. For some, this means taking that bucket list vacation or doing their favorite activity. For others, this could mean helping their children go to college or spoiling their grandchildren. For others, philanthropic work could be their passion. Remember, money allows you freedom, choices, and opportunities to enjoy your life.

8.Keep your complete financial future in view.

Don’t lose track of your financial goals. The most critical step is to have a strategy and plan. The next step is sticking to it. As the steward of your wealth, we are here to help you on your financial journey.

If you’d like to have an assessment of your investment portfolio and overall financial picture, we can discuss this at your next review meeting or you can call us to set up an appointment. We understand that each client has a unique financial situation and will consider your distinctive needs and goals when providing any recommendations.

We pride ourselves in offering:

• consistent and strong communication,
• a schedule of regular client meetings, and
• continuing education for members of our team on the issues that affect our clients.

Our goal is to understand our clients’ needs and then create plans to address those needs. While we cannot control financial markets, inflation, or interest rates, we keep a watchful eye on them. As always, we appreciate the opportunity to assist you and your financial matters.

The first half of 2022 has been a nightmare for even the most seasoned of investors. When looking back, from the March 2020 lows until January 2022, investors were treated to a 21-month bull market that saw equity markets more than double.  Since then, the S&P 500 has dropped 20.6%, its worst first six months of a year since 1970. The Dow Jones Industrial Average’s 15.3% first-half drop is its worst since 1962, while declines of 29.5% from the NASDAQ Composite and 23.9% from the Russell 2000 are both indexes’ worst first halves on record. The Bloomberg U.S. Aggregate, a broad index of fixed-income securities, fell 10.7% since the start of 2022. That’s also its worst first half on record, based on data going back to 1975.

Although equity markets are still higher than they were during pandemic lows, mid-year investment statements could make even the most patient of investors uncomfortable. As Warren Buffett has said, “The stock market is a device which transfers money from the impatient to the patient.” Investors now more than ever are going to remember that equities are for their long-term dollars.

On June 13, when the S&P 500 closed near 22% below its record high on January 3, it officially put the S&P 500 into a bear market. A “bear market” is defined as a decline of 20% of an index’s recent high. This marks the first bear market for this index in over two years, the last one triggered by the selloff in early 2020 due to the pandemic-driven lockdowns that stunted economic activity. Even with this downturn, the S&P 500 is still up nearly 70% from the 2020 low. (Source: wsj.com; 6/13/22)

The S&P 500 ended the quarter down 16.4% while the DJIA was only down 11.3%. The second quarter continued this year’s theme of heavy volatility: high inflation rates; rising interest rates and forewarnings of more rate hikes in the near future; elevated gas prices; and continued global unrest.

The annual inflation rate for the U.S. was 8.6% for the 12 months that ended this May. According to the U.S. Labor Department, this was the largest increase in over 40 years. Food, energy, and shelter, the three areas that make up about 54% of the consumer price index (CPI), continue to be high priced items, and many forecasters do not expect these main staples to simmer down any time soon.

Fuel oil was up 106.7% over the past year, and shelter costs rose at the fastest rates in over 31 years. With these increases, this means the average worker lost a whopping 3% income over the last 12 months. (Source: cnbc.om; 6/10/2022)

In this current economic environment, discussions of a recession are at the forefront of financial news headlines. Despite debate and rumors, we are not currently in a recession. The word recession is a harsh word and the media conjures up images and instills feelings that many people have reserved for events like the Great Depression. The last recession the U.S. experienced was recent but short as it only lasted from February 2020 to April 2020. While possible, a number of experts believe we will not see a recession in the near future. The U.S. Department of Labor statistics show unemployment at 3.6% in May, the lowest since the pandemic, and consumers spending is still strong despite inflation. Equity markets are still well above pandemic-drive declines. Please remember, that even if we do go into a recession, this does not mean that investors will get wiped out!

There are two schools of thought in today’s economic environment. While many investors are seeing crisis, others are looking at the dip in equity markets as an opportunity to buy stocks “on sale.”
There are always multiple factors that need to be watched because they can directly affect equity markets. With an excessive number of media sources nowadays, investors are being barraged with data and news making it difficult to keep up with the facts and information that may affect their personal situation. As your financial professional, we want to help you sort through the confusion and keep you apprised of changes and activity that could directly affect you and your situation.

Inflation & Interest Rates

The last decade has offered historically low interest rates. Now, interest rates hovering near zero are a thing of the past. Although increased rates were much anticipated, the rate at which the Feds are doing so is sending shock waves in Wall Street and the general U.S. public.

Standing by its commitment to fight inflation, on June 15, the Federal Reserve again raised interest rates, this time by 75 basis points, or 0.75%, the biggest single rate hike since 1994. Add that to the 0.75% increase already implemented this year, this brings the Federal Funds Rate to a target range of 1.50 – 1.75%. Wall Street responded with selloffs, taking the S&P 500 officially into a bear market. In late June, the DJIA dropped below 30,000 for the first time since January 2021.

Most analysts are expecting another 0.75% interest rate increase in July and economic projections are suggesting that 2022 will end with the Fed funds rate near 3.4%.
The Fed is making these moves in an effort to quell inflation for Americans. “At the Fed, we understand the hardship high inflation is causing. We are strongly committed to bringing inflation back down, and we are moving expeditiously to do so,” Fed Chairman Powell stated in the Senate Banking Committee meeting. (Source: cnbc.om 6/22/22)

A growing group of analysts fear that aggressive interest rate hikes could trigger a recession. Fed Chairman Powell stated at his Senate Banking Committee in June that while, “it is not our intended outcome at all, it’s certainly a possibility.” He continued, “We are not trying to provoke and do not think we will need to provoke a recession to bring down inflation.” (Source: fortune.com 6/22/22)
The Federal Reserve’s goal is to create a soft landing for the U.S. economy but it is finding this task challenging. “Frankly, the events of the last few months around the world have made it more difficult for us to achieve what we want, which is 2% inflation and a strong labor market.” Fed Chairman Powell stated. (Source:cnbc.com 6/22/22)

The Fed will need to see strong evidence that the inflation rate is slowing down to assess how quickly and at what rate they will adjust interest rates. “Over coming months, we will be looking for compelling evidence that inflation is moving down, consistent with inflation returning to 2%,” Powell said. “We anticipate that ongoing rate increases will be appropriate; the pace of those changes will continue to depend on the incoming data and the evolving outlook for the economy.” (Source: cnbc.om 6/22/22)

What does this mean for you? Don’t plan on seeing rate increases stagnate or go away in the near future. With continued expectations of more rate increases, we suggest you: proactively pay off all non-essential interest-bearing debt, maintain liquidity for any short-term purchases, and if you have a mortgage, if you haven’t already, look into locking in your rate. If you have bonds in your portfolio, understand the duration of them. Also, for clients we are reviewing all income-producing investments.

As your financial professional, we are committed to keeping a vigilant eye on all aspects of financial planning that may affect you. Interest rates will continue to be near the top of our watchlist. If you are concerned about how interest rate increases may affect your portfolio, please connect with us to discuss any possible strategies that may help combat the effect on your personal situation.

The Bond Market and Treasury Yields

It’s been a while since investors have seen bonds paying decent yields. Bond prices and interest rates move in the opposite direction. The historically low interest rates we saw since the pandemic-driven global crisis did not make bonds very favorable. Now, with the Fed raising interest rates this past quarter, bond prices were lowered and yields rose. For many investors, bonds are starting to look more attractive than they have in the past few years.

Investors seeking a safer alternative to equities amidst market volatility, rising interest rates, and tightening financial conditions, often look at bonds. At the opening of the week after the Fed announced the interest rate increase, the benchmark 10-year Treasury note yield was 3.3% and the 30-year Treasury note yield was 3.37%. These yields are helping bonds become more favorable as key components to a diversified portfolio. Please remember, while diversification in your portfolio can help you reach your goals, it does not ensure a profit or guarantee against loss.
Should a recession happen, the Fed may feel they will need to cut interest rates to stimulate the economy and get us back out of that recession. If this happens, the opportunity to take advantage of favorable bond yields could be brief. In short, bond investing can be tricky. If you’d like to explore how bonds could fit into your retirement income strategy, please contact us. We are monitoring how the Fed’s movements and rising interest rates are affecting bond yields.

Investor’s Outlook

The current economic environment is most certainly testing the discipline of even the savviest of investors. There is currently a lot in play that can justifiably make any investor worried. Some investors panic and jump ship during choppy waters, and some ride it out and wait for calmer waters. Which mindset do you have?

The cycle of emotional investing is a theory every investor should understand. Preparing a plan to react to each cycle before it happens can help you make the best, non-emotional and non-hasty decisions.

The term “bear market” can scare a lot of investors. However, let’s take a look at some facts about bear markets that may help put them in perspective.

• Bear markets are normal. As we have mentioned, market downturns are uncomfortable, but not uncommon. Since its inception in the late 1920s, the modern S&P 500 has seen 26 bear markets. Keep in mind that there have also been 27 bull markets. During these bear markets, stocks on average lost 36%. However, stocks have gained an average of 114% during the bull markets, thus rewarding long-term investors.
• The long-term average frequency between bear markets is 3.6 years. This means an investor could see about 14 bear markets in a 50-year investment window. Since 1930, the market has been bearish for a total time period equal to 20.6 years. This means that stocks have been on the rise the other 71.4 years!
• Bear markets last for significantly less time than bull markets. Bears last on average 9.6 months to 2.7 years on average for bulls.
• Does a bear market mean a recession is coming? Not necessarily. Of the 26 bear markets, a little more than half came with a recession. Keep in mind that a bear market means the decline in the value of stocks. A recession means something entirely different. A recession is the overall decline in the country’s production of goods and services and is considered active when we experience this decline over the course of two consecutive quarters. (Source: cnbc.com; 6/13/22)

Investors have seen multiple record highs over the last few years in the stock market. At some point, a market correction or larger downturn for equity markets was inevitable. Please remember, a normal part of investing is experiencing the ups and downs of the market.

We feel that volatility isn’t likely to go away in the coming months, so investors need to be prepared. However, remember, if you have a well-diversified, long-term financial plan, abandoning ship is almost certainly not in your best interest. Not reacting to the fear-mongering news headlines, keeping perspective of market fluctuations, and focusing on your long-term goals can help you stay on course toward your financial objectives.

Investors have yet to see if the Fed’s attempts to fight inflation will work effectively and without driving the U.S. economy into a recession. We are still not near the Fed’s long term target inflation rate of 2%. Please keep in mind that the cost of borrowing is up, so, as mentioned previously, maintain liquidity for any larger purchase you know or think you will have in the near future. We are keeping a watchful eye as the Fed continues their moves on interest rates.

Many other variables could affect the speed and direction of the economy. The last few years have reminded us that “anything can happen.” COVID is still an issue, especially when it comes to commodities that are manufactured in China, the second largest world economy that is still committed to a “ZERO-COVID” policy that enforces mass quarantine and closures. Additionally, we are experiencing geopolitical unrest, particularly the war in Ukraine; and, who knows what the upcoming months will present to us. That is why we always abide by our mantra of “proceed with caution.”

It is never prudent to try to find equity market tops and bottoms. It will prove to be a futile task. Instead, focus on your time in the market, not trying to time the market. It can be very tempting to sell to avoid any losses, but if you do sell and still find yourself out of the market during a recovery, you can miss out on significant gains. Just like you, we don’t like to see equity markets go down but we understand that it is part of the process. We do not have predictive powers but we understand that equity investors can attempt to best meet their goals over long periods of time. Historically, investors with a long-term plan that stayed the course and remaining invested were rewarded.

Investors who are disciplined and strategic with their finances know that panic is not a plan. As your financial professional, our strategy is to devise a plan that includes how you will react to the ups and downs, including your time horizon, tax implications, liquidity needs, risk tolerance, and your overall personal objectives. Having a long-term plan is important and sticking to it is equally as important.

These are challenging times for investors and we want you to be comfortable knowing that we are staying apprised of any situations that may affect you. Having a proactive approach to your financial goals and a solid investment strategy is part of the holistic offerings we provide our clients.

Please call our office to discuss any concerns or ideas you have or bring them up at your next scheduled meeting. Prior to making any financial decisions, we highly recommend you contact us so we can help determine the best strategy. There are often other factors to consider, including tax ramifications, increased risk, and time horizon fluctuations when changing anything in your financial plan.

As always, please feel free to connect with us with any concerns or questions you may have.

Remember, investing in equities should be viewed as a long-term commitment!

Click here to download a PDF of this report.

During the last few years, borrowers and spenders have enjoyed historically low interest rates. However, analysts all agreed that at the Federal Reserve’s June meeting, interest rates were going to be increased. Although rising interest rates have been anticipated, many Americans aren’t feeling prepared for the effects of these new rates. Combined with today’s exorbitant gas prices, the continued forward push of inflation rates, and supply chain/inventory issues, many households are feeling the effects of interest rate increases.

On June 15, the Federal Reserve raised interest rates again by 75 basis points, or 0.75%, the biggest single rate hike since 1994. This is in addition to the 0.75% increase already initiated this year, bringing the Federal Funds Rate to a target range of 1.50% – 1.75%. At the press conference following the decision, Fed Chairman Jerome Powell said the move was, “an unusually large one.” He also added that he expected another 50 or 75 basis point move in July.

The Federal Open Market Committee has four more meetings scheduled for 2022. Economic projections suggest that interest rates will increase to near 3.4% by the end of the year, thus increasing it by another 1.75% spread across the four remaining meetings. (Source: finance.yahoo.com 6/15/2022)

Are you well positioned to minimize the impact that rising interest rates has on your personal financial situation?

At a Wall Street Journal conference, Chairperson Powell stated, “What we need to see is inflation coming down in a clear and convincing way. And we’re going to keep pushing until we see that.” (Source: www.apnews.com, 5/17/22)

He continued that the Fed needed to see, “evidence that inflation pressures are abating and inflation is coming down. And if we don’t see that, then we’ll have to consider moving more aggressively. If we do see that, then we can consider moving to a slower pace.”

Although the Fed does not set interest rates on credit cards, mortgages, or personal loans, when the Federal Funds rate rises, consumer interest rates also rise. With an economic outlook that is uncertain, it is very important to revisit your financial situation to see if you have considered any potential moves that can help shield you against the effects of rising interest rates.

Your finances will more than likely be affected in one way or another. Overall, here are some major areas that are being affected by rising interest rates.

Bond yields will likely increase; thus, bond prices will more than likely fall.

Bond prices and interest rates move in the opposite direction. Bonds can be a good option for a conservative, balanced portfolio, as they are considered more stable than stocks. Interest rate increases help new bond investors but hurt existing bond holders. On June 14, 10-year Treasury yield rates reached an 11-year high of 3.48% and 30-year Treasury yields reached 3.45%.

During periods of rising rates, those considering bonds often consider shorter term bonds, because they are less sensitive to interest rate increases.

Credit cards, variable rate loans, and anything with an interest rate tied to it will increase.

We’ve all heard the saying, “cash is king” and this especially applies when interest rates rise. Paying off any credit cards or loans that charge variable rates of interest is a very prudent exercise that should be practiced regularly.

In times of rising interest rates, it can be wise to maintain liquidity for all short-term needs. Think about any major expenses you may incur over the next few years and consider keeping a larger than typical liquid pool of assets for these purchases.

Mortgage rates are increasing which could also cause housing prices to level out or decrease.

While the Federal Reserve does not set mortgage rates, it influences them. Mortgage rates are typically determined by considering many factors including the inflation rate, economic growth, and the Federal Reserve’s monetary policy. Although there is no federal mortgage rate, the rate that is used for Federal Funds is considered when lending institutions set their rates for long-term loans, including mortgages. Many potential homebuyers may consider pushing the pause button on purchasing a home. Even if home prices stagnate or potentially decrease, prices in many markets are still high. Many prospective homebuyers might reconsider their purchase of a home with both high prices and high mortgage rates. In June, the average 30-year fixed mortgage rate hovered in the low 6% range. This reflects an over 50% increase in just six months.

The good news for prospective home buyers is that a recent housing market forecast report anticipates that the home growth price in the U.S. will fall back closer to the historical average toward the end of 2022.

College will be more costly.

Have family members planning on going to college? For the 2022-2023 academic year, effective July 1, interest rates for new undergraduate federal student loans are set to increase to nearly 5%. That’s up from 3.73% last year and 2.75% in the 2020-2021 academic year. Graduate loans are set to be even higher, increasing to 6.54% for graduate direct loans. (Source: Nerd Wallet, 5/24/2022)

Savings rates will rise.

Rising interest rates have some positive aspects. Investors and savers with savings accounts and certificate of deposits (CDs) can benefit from better returns because of higher interest rates.

Be prepared: volatility in equity markets is expected to continue.

Inflation reports in May 2022 showed some of the highest increases in 40 years. That is one of the driving factors towards the Federal Reserve’s aggressive path to raising interest rates. Immediately during Chairperson Powell’s rate increase announcement, equity prices dropped, but they finished the day’s session at higher levels. Whether a rebound in stocks, if at all, is anything more than temporary, is unknown, as fears of slower economic growth continue to pressure equity markets. Making emotional decisions that are not in alignment with your long-term goals during market declines can be costly. One of our primary goals is to help clients avoid that.

This is a good time to review your financial plan. As the stewards of your wealth, we strive to keep your portfolio in sync with your timelines, risk tolerance and personal financial goals. Please remember – market volatility is uncomfortable, but not uncommon. Market fluctuations are expected and are a part of the investment experience. Developing your strategy to weather these fluctuations is a key factor when reviewing your overall financial plan.

Conclusion

Interest rates can be a multifaceted subject for many investors. As your financial professional, one of our goals is to keep a watchful eye on any interest rate changes that could affect your situation. We stay apprised of any moves the Fed makes so we can adjust your portfolio as needed in a timely and educated manner.

Here are seven items we feel you should review to help minimize the impact of rising interest rates:

1.Pay off all non-essential interest-bearing debt.
2.Forecast any short-term purchases (2 years) and plan for these purchases.
3.Review the duration of your bond portfolios.
4.Consider locking in fixed mortgage rates.
5.Review all income-producing investments.
6.Review your portfolio periodically, not obsessively.
7.If you have questions about your situation or plan, schedule a meeting with us.

As always, we are here to help! We are available to review your investment portfolio and overall financial picture with you. We understand that each client has a unique financial situation and will consider your distinctive needs and goals when providing any recommendations.

We pride ourselves in offering:

• consistent and strong communication,
• a schedule of regular client meetings, and
• continuing education for members of our team on the issues that affect our clients.

A good financial professional can help make your journey easier. Our goal is to understand our clients’ needs and then try to create plans to address those needs. While we cannot control financial markets, inflation, or interest rates, we keep a watchful eye on them. We can discuss your specific situation at your next review meeting or you can call to schedule an appointment. As always, we appreciate the opportunity to assist you and your financial matters.

[Orange, CA] — [May, 2022] – Daniel S. Romero, CFP® of Romero Wealth Management was recently ranked No. 60 in California in Forbes’ 2022 Best-In-State Wealth Advisors list.

According to Forbes, the annual ranking spotlights the nation’s top-performing advisors, evaluated based on criteria* that includes industry experience, client retention and assets under management. View the full Forbes list.

“On behalf of LPL, I’m thrilled to congratulate Daniel S. Romero, CFP® for this distinguished industry recognition from Forbes,” said Angela Xavier, LPL executive vice president, Independent Advisor Services. “With more than 25 years in the financial service industry, Daniel has become an experienced source of knowledge and support for their clients. As a top advisor in California, Daniel is harnessing the value of the independent model to provide a differentiated client experience and most importantly, help make a meaningful impact on the lives of his clients.”

Daniel S. Romero, CFP® is based in Orange, CA and provides a full range of financial services, including retirement and financial planning, individual money management, individual stocks and bonds, mutual funds, annuities and more.

Romero is a financial advisor affiliated with LPL Financial, a leading** retail investment advisory firm, independent broker-dealer and registered investment advisor (RIA) custodian, providing resources, tools and technology that support advisors in their work to enrich their clients’ financial lives.

About LPL Financial
LPL Financial (Nasdaq: LPLA) was founded on the principle that the firm should work for the advisor, and not the other way around. Today, LPL is a leader in the markets we serve,** supporting nearly 20,000 financial advisors, and approximately 800 institution-based investment programs and 500 independent RIA firms nationwide. We are steadfast in our commitment to the advisor-centered model and the belief that Americans deserve access to personalized guidance from a financial advisor. At LPL, independence means that advisors have the freedom they deserve to choose the business model, services, and technology resources that allow them to run their perfect practice. And they have the freedom to manage their client relationships, because they know their clients best. Simply put, we take care of our advisors, so they can take care of their clients.

**Top RIA custodian (Cerulli Associates, 2020 U.S. RIA Marketplace Report); No. 1 Independent Broker-Dealer in the U.S (Based on total revenues, Financial Planning magazine 1996-2021); No. 1 provider of third-party brokerage services to banks and credit unions (2020-2021 Kehrer Bielan Research & Consulting Annual TPM Report); Fortune 500 Company as of June 2021. LPL and its affiliated companies provide financial services only from the United States.

Securities and advisory services offered through LPL Financial LLC, an SEC-registered broker-dealer and investment advisor. Member FINRA/SIPC.

Throughout this communication, the terms “financial advisors” and “advisors” are used to refer to registered representatives and/or investment advisor representatives affiliated with LPL Financial LLC. We routinely disclose information that may be important to shareholders in the “Investor Relations” or “Press Releases” section of our website.

LPL Financial, Forbes and Romero Wealth Management are all separate entities.

*The Forbes Best-In-State Wealth Advisor ranking, developed by SHOOK Research, is based on in-person and telephone due diligence meetings and a ranking algorithm that includes: client retention, industry experience, review of compliance records, firm nominations; and quantitative criteria, including: assets under management and revenue generated for their firms. Portfolio performance is not a criterion due to varying client objectives and lack of audited data. Neither Forbes nor SHOOK Research receives a fee in exchange for rankings.