Due Diligence

In last week’s email on “….Boring is Beautiful: Part I,” we covered the railroad industry. This week we are covering well-run treasure hunt retailers.

When economic conditions become challenging, consumers may naturally become more careful about spending. Many shoppers shift their spending to discount merchants known as treasure hunt retailers. These stores offer clothing, personal care items and household products at relatively low prices, as well as some higher quality products at bargain prices.

“In a slowing economic environment, many people will be trading down to dollar stores,” says Capital Group’s portfolio manager Diana Wagner. “Such stores have held up well in past recessions.” Well-run treasure hunt retailers often have pricing power potential when inflation is rising.

For example, Dollar Tree, which offers a wide variety of items for $1, recently launched their “breaking the buck” strategy. The company initially offered a $5 category of goods, followed by a category for $1.25. “This same approach has helped other treasure hunt retailers generate multiple years of strong same-store sales growth and margin expansion,” Wagner says.

A change in senior management at the company could prove to be another tailwind. “Dollar Tree has been undermanaged relative to its competitor Dollar General,” Wagner observes. “But recently Rick Dreiling, the former CEO of Dollar General, was named chairman of Dollar Tree. I think this could be an important turning point for the company.

“In today’s environment, I look for companies that can improve their businesses and make their own growth happen regardless of what the economy does,” Wagner explains. “Dollar Tree could be one of those self-help stories.”

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Your weekly market update is here.

Source: Capital Ideas

After two solid years of strong returns, equity markets are currently experiencing a significant downfall in 2022. While it’s always possible equity markets could turn upward quickly, an equity downturn experience can leave an extensive impact on the psyche of even the most seasoned of investors and consequently impact how they manage their money. During downturns, some investors become too traumatized to put their cash to work in the markets. Others can react by aggressively day trading and making rash investment decisions.  Neither of these behaviors are beneficial for long-term financial success. For long term financial success, incorporating a proper process-oriented approach for managing investments is typically one of the better ways to avoid similar missteps.

Understanding the key factors that are contributing to 2022’s bumpy ride can be helpful. Surging inflation, rising interest rates, the Ukraine/Russia war, and continued COVID lockdowns in China that are restricting the supply chain are all influencing the volatility narrative for equity markets.

In early May, the Federal Reserve raised interest rates for the second time in 2022 to continue its daunting task of stopping the inflation snowball – without causing a recession. While the economy is still strong, recession rumors have investors worried about the future.

Staying the course and remaining invested could prove to be a wise decision during volatile times. Incorporating an appropriate process-oriented approach for managing investments and focusing on the long-term can typically prove to be one of the better ways to help buffer the effects of volatility. “It won’t be the economy that will do in investors; it will be the investors themselves. Uncertainty is actually the friend of the buyer of long-term values,” were the wise words of Warren Buffet. For knowledgeable investors, panic is not a plan. In fact, panic can lead to a costly mistake.

Please remember, market downturns are uncomfortable but not uncommon. Short-term investors are likely to feel the effects of recent market volatility more acutely than long-term investors. Historically, investors who stay in the market through volatile times come out significantly ahead of where they would have been should they pulled their money out. Short-term fluctuations typically right themselves and investments prove to be more fruitful than if they had been removed from equity markets in a downturn.

As the chart shows, drawdowns or market declines have been a part of history. Dating all the way back to 1972 (50 years), investors have experienced and survived market declines. Predicting the timing of the exact movement of equity markets is near impossible. While planning during a downturn can be a challenge, it is always prudent and recommended.

We suggest you consider the following to help guide your decisions now and in the future:

• Have a long-term mindset for your investments.

• Stay the course of your pre-determined plan especially during market volatility.

• Focus on saving, not spending. If you need to have large purchases, plan ahead and do the math to ensure your finances are adequate. With rising interest rates and inflation, in may be wise to hold off on large ticket items.

• Embrace diversification. While having a diversified portfolio won’t guarantee you gains, it is a strategy to help provide a balance between risk and reward.

• Avoid panic sell-offs and disregard media magnification. The media attracts our attention by inciting fear and anxiety. Limit your exposure to the news and social media and focus on your personal goals and plans.

• Be aware of any tax implications or tax efficiencies that any moves you make may have and discuss your plans with a financial professional prior to making any moves.

By rebalancing or adding new money to their equity portfolios during market downturns, investors can potentially generate better returns over the long run. Investors make money in equities typically when they buy low and sell high. If you have any questions about your portfolio, please call us prior to making any decisions and we can assist you in determining the best strategy for your unique situation.

There are many options and strategies out there for investors. However, the sound principals of successful financial planning remain constant. Build a well-devised plan with a qualified professional, stick with that plan, focus on the long-term, and be aware of any tax consequences of your actions.

Don’t forget, while you cannot control the direction of the financial environment or your returns, you do have control of three very important things:

1.Your risk tolerance.
2.Your time horizon.
3.Your behavior.

If you have a firm grasp of each of these, you should be able to maintain discipline and remain calm during these times of and market fluctuations arise.

For example, the decade after the crisis in June 2008 gave plentiful rewards to those who chose to stay invested – in fact, 147% worth of rewards. This is versus the 74% average return for those who pulled their monies out of the stock market during the fourth quarter of 2008 or first quarter of 2009. (fidelity.com, 4/27/22)

Conclusion

We firmly maintain a “proceed with caution” approach.

Our primary responsibility is to focus on our clients’ financial goals. As a wealth manager, we take all key elements, like risk tolerance and time horizon, into consideration when assessing financial pictures and determining a plan that we feel offers the best chance to achieve a client’s goals. As always, we are available to revisit your financial holdings to make sure they are still compatible with your timeline goals and risk tolerance.

We believe an educated client is the best client and will keep you apprised on issues we feel could affect your situation.

As a reminder, please keep us aware of any changes (such as health issues or changes in your retirement goals). The more knowledge we have about your unique financial situation the better equipped we will be to best advise you.

We pride ourselves in offering:

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

A skilled financial professional can help make your journey easier. Our goal is to understand our clients’ needs and then try to create an optimal plan to address them.

The past few years have proved the Greek philosopher Heraclitus right when he proclaimed that, “the only thing constant is change.” Just when a sense of normalcy seemed to be realized, during the first quarter of 2022 the world was thrown another hardship as Russia invaded the Ukraine. For investors, this added more fuel for market volatility. Combined with inflation and rising interest rates, the first three months of 2022 became a roller coaster ride, challenging even the steadiest investors.

The first quarter of 2022 can effectively be described as volatile. After experiencing its worst January since 2009, the S&P 500 hit correction territory in February. After several more drops, toward the end of the quarter, equity markets began to rally. In March, the S&P 500 rose more than 3% while the Dow Jones Industrial Average (DJIA) rose 2.2%. Even after that increase, both bellwether indexes did not reach the same values they were at the beginning of the quarter.

For the quarter, U.S. stock markets closed their first losing quarter since March of 2020. The S&P 500 closed at 4,530.41, down 4.9% and the Dow Jones Industrial Average closed at 34,678.35, down 4.6%.
During the past three months, the cost of living saw a sizeable uptick as the consumer price index rose to its highest level since January of 1982. Due to the Russia/Ukraine war, consumers experienced an average 24% jump at the gas pump from February to March, which meant as much as a 53% increase over the past year. (Source: cnbc.com 3/10/222)

All eyes were on the Federal Reserve and interest rates as the Federal Open Market Committee (FOMC) met in March and raised their federal funds interest rates range for the first time since 2018. This move set the tone for anticipating several more rate hikes in 2022 and 2023, and at possibly higher basis points than expected.

In February, inflation rose 7.9% from 12 months earlier. This means that inflation is now at a 40-year high. Although there is no established formal inflation target, the Federal Reserve generally believes that an approximately 2% rate of inflation is acceptable.

It’s virtually impossible to avoid being affected by the current environment of inflationary pressure somewhere in your daily life. Whether it is at the gas pump or the grocery store, consumers are feeling squeezed and are looking for ways to cut costs and spending in their daily lives.

At the FOMC’s March meeting, Chairman Jerome Powell expressed the need to support a strong labor market. “We understand that high inflation imposes significant hardship, especially on those least able to meet the higher costs of essentials like food, housing, and transportation. We know that the best thing we can do to support a strong labor market is to promote a long expansion, and that is only possible in an environment of price stability. As we emphasize in our policy statement, with appropriate firming in the stance of monetary policy, we expect inflation to return to 2 percent while the labor market remains strong.” He also added that, “We will need to be nimble in responding to incoming data and the evolving outlook.” (Source: federalreserve.com 3/16/2022)

Stock markets can fall as an immediate response to rising interest rates. This time, markets defied conventional history and rallied. After an initial drop, the S&P 500 closed the day that the Fed announced the rate hike on a very strong note with the S&P 500 closing 2.2% higher than the day’s opening and the DJIA closed 1.6% higher. (Source: www.fortune.com 3/16/22)

There are always multiple factors in the economic environment 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 strive to keep an active eye on any issues, changes and activity that could directly affect you and your situation.

Inflation & Interest Rates

The much-anticipated rise in interest rates came in March, as the Federal Reserve raised the federal funds rate for the first time since 2018. The benchmark federal funds rate was increased by a quarter percentage point to between 0.25-0.5%.

Also in March, the Fed released new projections for interest rate increases. This past December, projections suggested three quarter percent increases in 2022. Now, officials are signaling there might be six more rate hikes this year, expecting to see the fed funds rate at nearly 2% by the end of this year. This will bring it just above pre-pandemic rates.

The Fed also suggested the percent of increase could rise as well, with half-percent (or 50 basis points) increases on the horizon to meet the near 2% target rate by the end of this year.

Federal Chairman Jerome Powell stated, “The labor market is very strong, and inflation is much too high. There is an obvious need to move expeditiously to return the stance of monetary policy to a more neutral level, and then to move to more restrictive levels if that is what is required to restore price stability.” He added that, “if we conclude that it is appropriate to move more aggressively by raising the federal funds rate by more than 25 basis points at a meeting or meetings, we will do so.” (www. Reuters.com, 3/21/2022)

With interest rates combating the rapid inflation uptick, the median federal funds projections show interest rates at or near 2.75% by the end of 2023, bringing it to its highest rates since 2008. (Source. Wsj.com 3/17/22)

These new projections are a product of the larger than expected rising of inflation. Additionally, COVID-19 is still playing a role in supply chain disruptions which are contributing to a sharp rise in the cost of goods. Add in Russia’s war on Ukraine and the sharp increase in the price of oil and you have an unhealthy inflation environment. While United States oil prices have increased, many people may not know that the U.S. is currently one of the largest oil producers in the world and has been able to stave off drastic oil shock better than it has in the past. (www.Reuters.com, 3/21/2022)

As your financial professional, we are committed to keeping a watchful eye on the economy and how interest rate hikes and the trajectory of inflation affects our clients. If you are concerned about how these key items could affect you, please connect with us to discuss possible hedges against inflation and rising rates.

The Bond Market and Treasury Yields

Bonds and interest rates move in the opposite direction. When interest rates rise, existing bond prices tend to fall, and conversely, when interest rates decline, existing bond prices tend to rise.

Recent times have not been very beneficial for bond holders. Bonds are many times considered to be more stable than equities for investors. This quarter, volatility in the bond market was high and U.S. bonds had their worst quarter in over 40 years. As an example, the Bloomberg U.S. Aggregate bond index, which includes mostly U.S. Treasurys, corporate bonds, and mortgage-backed securities, had a -6% return in the first quarter – its biggest quarter loss since 1980. Short- and mid-term bond yields also experienced rate increases this quarter. The 10-year Treasury yield finished the quarter at 2.35%. This is a significant jump from the 1.5% yield that 10-year bond holders had at the end of 2021. (Source: wsj.com 3/31/22)

Interest rates are rising and investors are expecting short-term yields to reach 3% in 2023, significantly higher than the current near 0.5%.

This is a good time for any bond investors to review their holdings. (Source: wsj.com 3/31/22)

In addition to rising interest rates, “quantitative tightening” could affect bonds. The Fed is beginning its task of reducing its $9 trillion balance sheet in part created by its bond buying program – or quantitative easing that helped stimulate the economy during the pandemic. The Fed stopped purchasing bonds this quarter. The impact of “quantitate tightening” on bonds will depend on how much and how quickly the Fed moves.

David Sekera, Morningstar’s Chief U.S. market Strategist stated, “Based on how much and how fast the Fed decides to unwind the balance sheet could have a significant impact on the supply-demand characteristics of the bond markets.” (Source: Morningstar.com 3/23/2022)

Eddy Vataru, Lead Portfolio Manager of the Osterweis Total Returns Fund, believes that Treasuries, which are typically viewed as “safer” investments, are also being impacted by the “calamity that’s driving inflation through the roof and trumping the flight-to-quality nature of the asset class.” (Source: Morningstar.com 3/23/2022)

Remember, bonds typically can be a key component to a diversified portfolio and can provide a good shield from equity volatility. However, please keep in mind that investors who placed a large percentage of their portfolio in bonds with the expectation of generating stable returns could have seen lackluster results. If you’d like to explore any exposure you have to bonds and whether or not they are still a good fit for your personal goals, please contact us. We are monitoring how the Fed’s movements and rising interest rates are affecting bond yields.

Investor’s Outlook

What does this all mean for investors?

As we continue on to the second quarter of 2022, many factors could complicate equity market performance and the speed and direction of the economy, including Russia’s war on the Ukraine and Covid-19 variants. Savers may need to become more disciplined and focused. Volatility isn’t likely to go away in the coming months, so investors need to be prepared.

Interest rates will continue to be at the forefront of our watch list. They can be complex and affect investors differently depending on their goals and timelines.

These five items are usually partnered with rising interest rates:

• Mortgage rates increase;
• Interest rates increase on savings accounts and Certificate of Deposits (CD);
• Existing bond prices decrease;
• Commodity prices decrease; and
• Equity markets may become more volatile.

The FOMC is set to meet again the first week of May. It is widely anticipated that they will approve another rate increase. With interest rate hikes on the horizon, we suggest you consider:

• reviewing all income-producing investments.
• locking in your mortgage rates.
• maintaining liquidity for all near-term needs.
• contacting us to review your personal financial plan, including risk management, diversification, and time horizons.

While bonds typically are directly affected by interest rates, stocks are not directly affected. However, they can be indirectly affected when interest rates rise and banks increase their rates for consumer and business loans. Reduced consumer and business spending could lower the value of many companies’ stocks.

Borrowing has become more expensive with the rise of interest rates. According to Jacob Channel, Senior Economic Analyst at LendingTree, the average 30-year fix mortgage rate is now 4% and likely to increase. This reflects a sharp spike from 3.85% to 4.16% the day after the Fed increased the fed funds rates and shared news of more rate hikes. (Source: www.cbnc.com 3/16/22)

Interest rate changes are far from done and the Fed is expecting to make several more moves this year and in 2023. Combined with a lower unemployment rate and better supply chain movement, the Fed is hopeful that the increase in interest rates will help quell rising inflation. Fed officials are estimating that as energy prices ease and supply chains return to more normal operations, we may see inflation drop down to 2.6% by the end of 2022. (Source: fidelity.com 3/10/22)

The good news is that historically, after an initial reaction, U.S. equity markets have risen during a period of rising interest rates. This is due to the fact that interest rates typically rise in a healthy economy.

According to a Deutsche Bank study of 13 interest rate increase cycles, the S&P 500 returned an average of 7.7% in the first year the Fed raised rates. An analysis by Truist Advisory Services of 12 rate hike cycles showed the S&P 500 posting a total return average of 9.4% with 11 out of those 12 periods having positive returns. (Source: www.reuters.com 3/16/22)

Moving forward, we still stand by our mantra of “Proceed with Caution.”

There is currently a lot of noise that can distract an investor. Equity market volatility; interest rate increases; inflation; global unrest; and pandemics; have all given the media, analysts, and economists much to talk about. Recently, two words that have been widely used are “stagflation” (high inflation, high unemployment, and slow or no economic growth) and “recession” (recognized as two consecutive quarters of economic decline). However, irrespective of what is presented, it is wise not to try predicting the future, but instead focus on your long-term goals and objectives.

Now is an ideal time for a proactive approach to your financial goals. Having a solid investment strategy is an integral part of a well-devised, holistic financial plan. Staying disciplined and following that strategy during times of volatility is equally important. As your financial professional, we are here to help you pursue your goals. 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 via telephone or email with any concerns or questions you may have.

For the past 22 years, I have had the privilege of assisting individuals who sought investment and retirement council. Through that time, we’ve witnessed countless success stories, but not without speed bumps. 2022 has presented a moment that could cause havoc for individual investors. Let’s take a look at five big mistakes investors make.

Evaluating Your Temperature for Risk
This is the most common trap. It’s easy to sit on a diversified market portfolio when things are going great. The question is, what happens when we are in a down turn? Look in the past… How have you handled past market downturns? Are you looking at the accounts daily? Do you feel stress any time a negative number shows up on your account view? Knowing yourself is important, but the mistake can be on either end of the candle. Some people invest more aggressive than their temperament can handle while others go far too conservative. Leading into the 2020 internet crash, I found MANY investors got far more aggressive than their tolerance permitted. This led to tremendous losses when the downturn came. If you find yourself timing the market, pushing large positions in, and out based on feelings and stress, it may be time for a little coaching.

To read the full article HERE.
 

Tax planning should always be a key focus when reviewing your personal financial situation. One of our goals as financial professionals is to identify as many tax savings opportunities and strategies as possible for our clients. We believe that a proactive approach to looking at your tax situation can lead to better results than a reactive approach. We hope you find this report helpful.

Please note: your state income tax laws could be different from federal income tax laws. Visit https://tax.findlaw.com

Income tax is a large revenue source for the United States government. While tax rates have changed many times, since the 1860’s, the United States has used a “progressive” tax code. A progressive tax code means that people who make more money are taxed at a higher rate than those who make less money. Our progressive tax system works by placing earners through different brackets according to how much money they make. The dollar amounts define your tax brackets and there are differing tables depending on your filing status (single, married, etc.). This matters in determining your marginal tax rate.

Understanding Marginal Tax Rates

Determining your tax bracket is not as simple as just adding up your total income and checking a tax table. Taxpayers need to calculate their taxable income (which can be sometimes referred to as their “adjusted gross income”) and then adjust their income for any deductions, adjustments and exemptions they are allowed to find their final taxable amount.

Once you determine your final taxable income amount, it is critical to know that not all of your income was taxed at the same rate. For example, if you are married filing jointly, your first $19,900 is taxed at 10%. If these same tax filers have a final taxable income of $95,000, then these taxpayers are in a “marginal tax bracket” of 22%. The key thing to note is that in this example, the last dollar earned is taxed at that 22% tax rate.

2021 Tax Law Updates

2021 was a busy year for tax legislation. While there is time to look into tax planning ideas for your 2022 taxes, here are some items that 2021 tax filers should review.

• Tax brackets have been slightly adjusted.
• The standard deductions have slightly increased.
• There are still caps to state and local tax (SALT) deductions.
• Long-term capital gains are still at favorable rates.
• There is still a 3.8% Medicare Investment Tax.
• Charitable donations are still deductible.
• You might still be able to contribute to retirement plans.
• Medical expense deductions are at 7.5% of AGI for 2021.

2021 Tax Tables and Tax Rates

There are still seven federal income tax brackets for 2021. The lowest of the seven tax rates is 10% and the top tax rate is still 37%. The income that falls into each is scheduled to be adjusted in 2022 for inflation. For 2021, use the chart in this report to see what bracket your final income falls into.

TAX TIP: If you are not sure how best to file, ask your tax preparer or review IRS Publication 17, Your Federal Income Tax, which is a complete tax resource. It contains helpful information such as whether you need to file a tax return and how to choose your filing status.

2021 Standard Deduction Amounts

Most taxpayers claim the standard deduction. For 2021, the standard deduction has slightly increased. The amounts are now $12,550 for single filers and $25,100 for those filing jointly ($18,800 for head of household filers). If you are filing as a married couple, an additional $1,350 is added to the standard deduction for each person age 65 and older. If you are single and age 65 or older, an additional deduction of $1,700 can be made.

Recovery Rebates

To help counteract the financial impact of the Coronavirus pandemic on Americans, the U.S. government issued three Economic Impact Payments. Most eligible individuals have received these stimulus payments and will not be eligible to claim a Recovery Rebate Credit. However, for individuals eligible to receive these stimulus payments and who have not received all three, or got less than the full amount, these individuals may be able to claim a Recovery Rebate Credits on their 2021 tax return. If you received a rebate, please alert your tax preparer.

Increased Child Tax Credit

The American Rescue Plan Act (ARPA) expended the Child Tax Credit (CTC) for the tax year of 2021 only. For 2021, the child tax credit for children under 6 years old is $3,600, and for children 6-17, it is $3,000. This is an increase from the maximum child tax credit of $2,000 per qualifying child. The maximum benefit would go to individuals making up to $75,000 and couples filing jointly making up to $150,000. This money is fully refundable.

Those who make up to $200,000 individually or $400,000 jointly are still eligible for the maximum $2,000 tax credit.

State and Local Tax (SALT) Deduction

Under the 2017 Tax Cuts and Jobs Act (TCJA) state and local tax deductions (SALT) remain at a combined total of $10,000 (or $5,000 for married taxpayers filing separately) for state income and property taxes. This deduction amount is set to remain through 2025.

Medical Expense Deduction

The 2021 threshold for deducting medical expenses is 7.5% of AGI. The adjusted-gross-income threshold was slated to jump from 7.5% to 10% after 2018, but Coronavirus-related relief legislation in 2020 made permanent the 7.5% figure. The IRS website, www.IRS.gov, provides a long list of expenses that qualify as “medical expenses” so it can be a good idea to keep track of yours if you think they may qualify.

Investment Income

Long-term capital gains are taxed at more favorable rates compared to ordinary income. For qualified dividends, investors will continue to be taxed at 0, 15% or 20%.

One tax strategy is to review your investments that have unrealized long-term capital gains and sell enough of the appreciated investments in order to generate enough long-term capital gains to push you to the top of your federal income tax bracket. This strategy could be helpful if you are in the 0% capital gains bracket and do not have to pay any federal taxes on this gain. Then, if you want, you can buy back your investment the same day, increasing your cost basis in those investments. If you sell them in the future, the increased cost basis will help reduce long-term capital gains. You do not have to wait 30 days before you buy back this investment—the 30-day rule only applies to losses, not gains.

Note: This non-taxable capital gain for federal income taxes might not apply to your state.

TAX TIP: Remember that marginal tax rates on long-term capital gains and dividends can be higher than expected. The 3.8% surtax can raise the effective rate to 18.8% for single filers with income from $200,000 to $445,850 and 23.8% for single filers with income above $445,850. It can raise the effective rate to 18.8% for married taxpayers filing jointly with income from $250,000 to $501,600 and to 23.8% for married taxpayers filing jointly with income above $501,600.

Calculating Capital Gains and Losses

With all of the different tax rates for different types of gains and losses in your marketable securities portfolio, it is probably a good idea to familiarize yourself with some of the rules:

• Short-term capital losses must first be used to offset short-term capital gains.
• If there are net short-term losses, they can be used to offset net long-term capital gains.
• Long-term capital losses are similarly first applied against long-term capital gains, with any excess applied against short-term capital gains.
• Net long-term capital losses in any rate category are first applied against the highest tax rate long-term capital gains.
• Capital losses in excess of capital gains can be used to offset up to $3,000 ($1,500 if married filing separately) of ordinary income.
• Remaining unused capital losses can be carried forward and used in the same manner as described above.

TAX TIP: Please remember to look at your 2020 income tax return Schedule D (page 2) to see if you have any capital loss carryover for 2021. This is often overlooked, especially if you are changing tax preparers.

Please double-check your capital gains or losses. If you sold an asset outside of a qualified account during 2021, you most likely incurred a capital gain or loss. Sales of securities showing the transaction date and sale price are listed on the 1099 generated by the financial institution.

However, your 1099 might not show the correct cost basis or realized gain or loss for each sale. You will need to know the full cost basis for each investment sold outside of your qualified accounts, which is usually what you paid for it, but this is not always the case.

3.8% Medicare Investment Tax

The year 2021 is the ninth year of the net investment income tax of 3.8%. It is also known as the Medicare surtax. If you earn more than $200,000 as a single or head of household taxpayer, $125,000 as married taxpayers filing separately or $250,000 as married joint return filers, then this tax applies to either your modified adjusted gross income or net investment income (including interest, dividends, capital gains, rentals, and royalty income), whichever is lower. This 3.8% tax is in addition to capital gains or any other tax you already pay on investment income.

It is helpful to pay attention to timing, especially if your income fluctuates from year to year or is close to the $200,000 or $250,000 amount. Consider realizing capital gains in years when you are under these limits. The inclusion limits may penalize married couples, so realizing investment gains before you tie the knot may help in some circumstances. This tax makes the use of depreciation, installment sales, and other tax deferment strategies suddenly more attractive.

Medicare Health Insurance Tax on Wages

If you earn more than $200,000 in wages, compensation, and self-employment income ($250,000 if filing jointly, or $125,000 if married and filing separately), the Affordable Care Act levies a special additional 0.9% tax on your wages and other earned income. You’ll pay this all year as your employer withholds the additional Medicare Tax from your paycheck. If you’re self-employed, plan for this tax when you calculate your estimated taxes.
If you’re employed, there’s little you can do to reduce the bite of this tax. Requesting non-cash benefits in lieu of wages won’t help—they’re included in the taxable amount. If you’re self-employed, you may want to take special care in timing income and expenses (especially depreciation) to avoid the limit.

Charitable Gifts and Donations

The Coronavirus Aid, Relief, and Economic Security (CARES Act) created a new charitable deduction available to taxpayers who do not itemize their deductions. This new benefit known as a universal deduction, allows for an above the line charitable deduction of up to $300 (this increases to up to $600 for those married filing jointly in 2021). To qualify, the charitable gift must be cash (or cash equivalent) made to a qualified charity (501(c)(3)). To qualify, this contribution should have been made on or before December 31, 2021.

For those who are itemizing, in 2021 you can take deductions up to 100% of your 2021 AGI (up from 60% under the Tax Cuts and Jobs Act) for cash contributions to qualified charities.
When preparing your list of charitable gifts, remember to review your bank account so you do not leave any out. Everyone remembers to count the monetary gifts they make to their favorite charities, but you should count noncash donations as well. Make it a priority to always get a receipt for every gift. Keep your receipts. If your contribution totals more than $250, you will also need an acknowledgement from the charity documenting the support you provided. Remember that you will have to itemize to claim this deduction, but when filing, the expenses incurred while doing charitable work often is not included on tax returns.

You can’t deduct the value of your time spent volunteering, but if you buy supplies for a group, the cost of that material is deductible as an itemized charitable donation. You can also claim a charitable deduction for the use of your vehicle for charitable purposes, such as delivering meals to the homebound in your community or taking your child’s Scout troop on an outing. For 2021, the IRS will let you deduct that travel at .14 cents per mile.

Child and Dependent Care Credit

Millions of parents claim the child and dependent care credit each year to help cover the costs of after-school daycare while working. Some parents overlook claiming the tax credit for childcare costs during the summer. This tax break can also apply to summer day camp costs. The key is that for deduction purposes, the camp can only be a day camp, not an overnight camp. In 2021, if you paid a daycare center, babysitter, summer camp, or other care provider to care for a qualifying child under age 13 or a disabled dependent of any age, depending on your income, you may qualify for a tax credit of up to 50% of qualifying expenses of $8,000 (up from 35% of $3,000) for one child or dependent, or up to $16,000 (up from $6,000) for two or more children.

Contribute to Retirement Accounts

The SECURE Act allowed people with earned income to make contributions to Traditional IRAs past the age of 70½ starting in 2020.
If you have not already funded your retirement account for 2021, consider doing so by April 18, 2022. That’s the deadline for contributions to a traditional IRA (deductible or not) and a Roth IRA. However, if you have a Keogh or SEP and you get a filing extension to October 15, 2022, you can wait until then to put 2021 contributions into those accounts. To start tax-advantaged growth potential as quickly as possible, however, try not to delay in making contributions. If eligible, a deductible contribution will help you lower your tax bill for 2021 and your contributions can grow tax deferred.

To qualify for the full annual IRA deduction in 2021, you must either: 1) not be eligible to participate in a company retirement plan, or 2) if you are eligible, there is a phase-out from $66,000 to $76,000 of MAGI for singles and from $105,000 to $125,000 for married taxpayers filing jointly. If you are not eligible for a company plan but your spouse is, your traditional IRA contribution is fully-deductible as long as your combined gross income does not exceed $197,000. For 2021, the maximum IRA contribution you can make is $6,000 ($7,000 if you are age 50 or older by the end of the calendar year). For self-employed persons, the maximum annual addition to SEPs and Keoghs for 2021 is $58,000.
Although contributing to a Roth IRA instead of a traditional IRA will not reduce your 2021 tax bill (Roth contributions are not deductible), it could be the better choice because all qualified withdrawals from a Roth can be tax-free in retirement. Withdrawals from a traditional IRA are fully taxable in retirement. To contribute the full $6,000 ($7,000 if you are age 50 or older by the end of 2021) to a Roth IRA, you must have MAGI of $125,000 or less a year if you are single or $197,000 if you are married and file a joint return. If you have any questions on retirement contributions, please call us.

Roth IRA Conversions

A Roth IRA conversion is when you convert part or all of your traditional IRA into a Roth IRA. This is a taxable event. The amount you converted is subject to ordinary income tax. It might also cause your income to increase, thereby subjecting you to the Medicare surtax. Roth IRAs grow tax-free and qualified withdrawals are tax-free in the future, a time when tax rates might be higher.
Whether to convert part or all of your traditional IRA to a Roth IRA depends on your particular situation. It is best to prepare a tax projection and calculate the appropriate amount to convert. Remember—you do not have to convert all of your IRA to a Roth. Roth IRA conversions are not subject to the pre-age 59½ penalty of 10%.

Many 401(k) plan participants (if their plan allows) can convert the pre-tax money in their 401(k) plan to a Roth 401(k) plan without leaving the job or reaching age 59½. There are a number of pros and cons to making this change. Please call us to see if this makes sense for you.

Required Minimum Distributions (RMD)

The SECURE Act increased the age for Required Minimum Distributions (RMD) starting January 1, 2020, to age 72. (This change only applies to account owners who turn 70½ after 2019.) Under previous law, participants were generally required to begin taking distributions from their retirement plan at age 70½.

Other Overlooked Tax Items and Deductions

Reinvested Dividends – This is not a tax deduction, but it is an important calculation that can save investors a bundle. Former IRS commissioner Fred Goldberg told Kiplinger magazine for their annual overlooked deduction article that missing this break costs millions of taxpayers a lot in overpaid taxes.

Many investors have mutual fund dividends that are automatically used to buy extra shares. Remember that each reinvestment increases your tax basis in that fund. That will, in turn, reduce the taxable capital gain (or increases the tax-saving loss) when you redeem shares. Please keep good records. Forgetting to include reinvested dividends in your basis results in double taxation of the dividends—once in the year when they were paid out and immediately reinvested and later when they are included in the proceeds of the sale.

If you are not sure what your basis is, ask the fund or us for help. Funds often report to investors the tax basis of shares redeemed during the year. Regulators currently require that for the sale of shares purchased, financial institutions must report the basis to investors and to the IRS.
Student-Loan Interest Paid by Parents – Generally, you can deduct interest only if you are legally required to repay the debt. But if parents pay back a child’s student loans, the IRS treats the transactions as if the money were given to the child, who then paid the debt. So as long as the child is no longer claimed as a dependent, the child can deduct up to $2,500 of student-loan interest paid by their parents each year and is subject to income limitations. (The parents can’t claim the interest deduction even though they actually foot the bill because they are not liable for the debt).

Helpful Tax Time Strategies

1. Write down expenses or keep all receipts you think are even possibly tax-deductible. Sometimes, taxpayers assume that various expenses are not deductible and therefore do not mention them to their tax preparer. Don’t assume anything—give your tax preparer the chance to tell you whether something is or is not deductible.

2. Be careful not to overpay Social Security taxes. If you received a paycheck from two or more employers and earned more than $142,800 in 2021 you may be able to file a claim on your return for the excess Social Security tax withholding.

3. Don’t forget items carried over from prior years because you exceeded annual limits, such as capital losses, passive losses, charitable contributions and alternative minimum tax credits.

4. Check your 2020 tax return to see if there was a refund from 2020 applied to 2021 estimated taxes.

5. Calculate your estimated tax payments for 2022 very carefully. Many computer tax programs will automatically assume that your income tax liability for the current year is the same as the prior year. This is done to avoid paying penalties for underpayment of estimated income taxes. However, in some cases this might not be a correct assumption, especially if 2021 was an unusual income tax year due to the sale of a business, unusual capital gains, the exercise of stock options, or even winning the lottery! A qualified tax professional should be able to help you with a tax projection for 2022.

6. Remember that IRS.gov could be a valuable online resource for tax information.

7. Always double check your math where possible and remember it is always wise to consult a tax preparer before filing.

Conclusion

Filing your 2021 taxes will continue to include the new tax rates set forth with the Tax Cuts and Jobs Act (TCJA) enacted in 2018 (currently set to expire after 2025). An essential part of maintaining your overall financial health is attempting to keep your tax liability to a minimum.

One of our primary goals is to keep you informed of the changes that will be affecting investors like you. We believe that taking a proactive approach is better than a reactive approach—especially regarding income tax strategies!

Baseball legend Yogi Berra once said, “It’s tough to make predictions, especially about the future.” This holds true when it comes to timing the stock market. Investment markets have recently experienced a few years of very strong returns, but market volatility has returned in early 2022 in a big way. Veteran investors understand that market volatility is a part of the investment experience.

Stock market volatility is the frequency and magnitude of price movements, up or down. The bigger and more frequent the price swings, the more volatile the market is said to be. For example, when the stock market rises and falls more than one percent over a sustained period of time, it is called a “volatile” market.

Beyond the market as a whole, individual stocks can be considered volatile as well. You can calculate volatility by looking at how much an asset’s price varies from its average price. Standard deviation is the statistical measure commonly used to represent volatility. During volatile times, some stocks are more volatile than others. Shares of an established large blue-chip company may not make very big price swings, while shares of a high flying and newer tech company may do so often.

Stock market volatility can speed up when external events create uncertainty. Currently, the potential conflict overseas, the Federal Reserve’s shift in policy and the resurgence of inflation have all been noted as contributing factors to the recent equity market volatility.
Volatility doesn’t mean that stocks are headed for a down or long lasting bear market. Even when there are market declines along the way, an investor can still experience reasonable returns over a long period of time.

Why is volatility important?

By understanding how volatility works, you can put yourself in a better position to evaluate stock market conditions as a whole. You can analyze the risk involved with any particular security, and construct a stock portfolio that is a great fit for your growth objectives and risk tolerance.

It’s important for investors to be aware that volatility and risk are not the same thing. For stock traders who look to buy low and sell high every trading day, volatility and risk are deeply intertwined. Volatility also matters for those who may need to sell their equities in a short time-frame, such as those who are older and closer to retirement.

For long-term investors who tend to hold equities for many years, the day-to-day movements of those equities should not affect their long-term plan`. Volatility is part of the noise that could come while you are allowing your investments to compound long into the future.

Long-term investing still involves risks, but those risks, are most of the time, related to being wrong about a company’s growth prospects or paying too high a price for that growth — not volatility.

A quick review of some market terms.

Oftentimes, we hear the wrong words used in the wrong context. For educational purposes, we feel it is important to clarify some stock market words and their definitions.

“Dip” –  a short-lived downturn from a sustained longer-term uptrend.
Example: Equity markets increased by 5% and maintained that level and then dipped back down to 3% all within a few days or weeks.

“Correction” –  a 10% drop in the market from recent highs. Historically corrections occur an average of about every eight to 12 months and last about 54 days. (thebalance.com 3/9/20)
Example: On December 17, 2018, both the DJIA and the S&P 500 dropped over 10% and declines continued into early January.

“Bear Market” – a long, sustained decline in the stock market. If the market declines 20% from its recent high, this is considered the start of a bark market.
Example: On Wednesday, March 11, 2020, The DJIA dropped 5.9%, for a total decline of 20.2% from a record high on February 12, 2020.

“Crash” –  a sudden and dramatic drop in stock prices, often on a single day or week. Crashes are rare, but typically happen after a long-term uptrend in the market.
Example: In 1929 the market crashed when it lost 48% in less than two months, ushering in the Great Depression.

Four things an investor should know about a volatile market.

One of the main reasons investors can get high returns over the long run is because occasionally they experienced and lived through downturns in the short run.  Please note that:

1. Volatile times can create market drops that can be UNCOMFORTABLE, but they are not UNFAMILIAR. Downturns are a part of the investment experience.

2. Equity markets always offer Exit and Entry points. Over long periods of time, down markets are many times the best entry point for for new or additional monies.

3. You make money in equities, when you BUY LOW and SELL HIGH. A bad emotional decision can lose an investor more money than any market correction.

4. Call us if you are concerned. We are here for you!

Position yourself to best navigate market volatility.

Market declines happen and therefore, no matter what equity markets are doing, your plan should align itself with these three items.

1.Your investing goals,
2.Your financial timeline, and
3.Your risk tolerance.

Your Investing Goals
Every investor has unique goals they would like to attain. Knowing what your goals are is the first step to creating a path to achieve them. Your goals will determine your time horizon and risk tolerance.

Your Financial Timeline
Focus on your personal timeline instead of trying to time the market. During downturns, it may be tempting to pull out of the market, but you may miss out on a healthy recovery. Try to plan for your equity investments to maintain a long-term horizon and ignore the short-term fluctuations.
Remember, short-term movements of the market are unpredictable and do not abide by any average. For many long-term investors there is no reason to even subject themselves to daily market headlines. If you have a long-term investment horizon for your equity holdings of at least five years, chances are the current volatility will pass – possibly in a couple of weeks, months or at the most, a few years.
According to a JP Morgan analysis, even missing a few days of a market recovery can be costly. This analysis looked at the S&P 500 over a 20-year period (January 2000 to December 2019). Investors who stayed fully invested would have earned more than 6% annually. However, those investors who missed just ten of the days with the highest daily returns would have earned only 3% annually. During those 20 years, six out of the ten best days occurred within two weeks of one of the worst 10 days.

Your Risk Tolerance
Risk tolerance is the level of uncertainty you are willing to accept in order to reap potentially greater rewards. Knowing what your risk tolerance is, or risk awareness, should be part of your financial plan. As your financial professional, one of our primary goals is to help you create a plan that considers your risk tolerance. If you are not sure what your risk tolerance is, please call us and we and help you assess and determine this for you.

What should an investor do in a volatile market?

First, make sure you know what not to do – and that is panic. In times of market volatility, investors tend to become unnerved and anxious. This is not the best mindset to make rational decisions.

When equity markets experience unsettling fluctuations, we suggest you ask yourself three questions:

1.Have my financial timelines changed?
2.Have my financial goals changed?
3.Has my risk tolerance changed?

If you can answer “YES” to any of these questions, we highly suggest that you discuss these changes with us. As an investor, you need a plan that includes risk awareness. One of our primary responsibilities as your financial advisor is to help you create a plan with risk awareness. We know that an integral part of this is to consistently keep in touch with you and monitor your situation.
If you have concerns, some questions to ask us include:

-Can we review my financial plan?
-Can we revisit my risk tolerance?
-Are my investments diversified?
-Has the volatility presented any good opportunities?

Regardless of whether or not equities are rising or falling, investors should always put their main focus on their own personal objectives. This includes:

1.Making sure you are comfortable with your time horizons.
2.Re-assessing your risk tolerance.
3. Re-confirming your investments are compatible with both your time horizon and risk tolerance.
4.Maintaining liquidity for all short-term and near-term needs.
Market volatility should cause concern, but panic is not a plan. Market downturns do happen and so do recoveries. It is always healthy to confirm that you fully understand your time horizons, goals, and risk tolerances. Looking at your entire picture can be a helpful exercise in determining your strategy.

It is always helpful to make sure you are comfortable with your investments. Equity markets will always have the potential to move up and down. Even if your time horizons are long you could see some short-term downward movements in your portfolios. Make sure your investing plan is centered on your personal goals and timelines. Peaks and valleys have always been a part of financial markets and it is highly likely that trend will continue.

Discuss any concerns with us!

We are always available to revisit your financial holdings to make sure they are still in line with your timeline goals and risk tolerance.

As a reminder, please keep us apprised of any changes, such as health issues or changes in your retirement goals. The more knowledge we have about your unique financial situation, the better equipped we will be to best advise you.

To discuss your situation with us please address it at our next meeting or call our office.

2021 closed as a banner year for many investors. Although the year ended with both winners and losers, in retrospect, the sudden recession created by the COVID pandemic in 2020 lasted for investors for only two months. Although history will record the Covid pandemic for causing one of the sharpest recessions ever felt by the global economy, the rebound that investors continue to see nearly two years later has been just as remarkable. Post-pandemic equity markets in 2021 saw the S&P 500 create 70 record closes, the last one on Wednesday, December 29. The DJIA also realized 45 record closes in 2021. (Source: Barron’s 12/31/21)

The S&P 500 closed the quarter at 4,766.18, ending the year up 27%. 2021 will mark the indexes third consecutive year of double-digit gains. The Dow Jones Industrial Average (DJIA) closed at 36,338.30 ending the year up 19%. (Source: Barron’s 12/31/21)

Stock valuations have soared in large part due to ultra-low interest rates and a healthy economic recovery. With a few exceptions like some bonds and gold, almost every asset class produced gains in 2021. (Source: Barron’s 12/17/21)

Throughout the year equity markets showed perseverance and resilience against many potentially detrimental events and rewarded investors with notable gains, but investors still face continued variables that could affect the uptick of the economy and its recovery.
As we enter 2022, there are several areas that should play a key role in the economy and how it may affect investors. These include:

• The trajectory of the COVID-19 pandemic recovery – hopefully we will not experience any newer emerging COVID variants and we will see a reduction of new cases. The emergence of new variants and their severity could keep many investors anxious and Covid aftershocks could still play a major role in determining the direction of the market.

• The Federal Reserve’s tapering and ultimate goal of ending the monetary stimulus that they have been infusing into the economy to stave off the effects of the pandemic-induced recession.

• The slowing down of global economic growth, particularly in China – the world’s second largest economy.

• The current high valuations of stocks and real estate.

• Rising interest rates. The Fed announced in December their intention is to begin raising interest rates in 2022. Currently, the Fed is forecasting three rate hikes in 2022, followed by three more in 2023.

• Inflation rates that could remain elevated, particularly due to the continuation of broken supply chains and labor shortages, and the residual effects of the pandemic. The results of the Fed’s efforts to fight inflation is yet to be seen.

These and any other economic factors could complicate equity market performance in 2022, so investors need to be prepared.

Inflation & Interest Rates

Interest rates and inflation concerns continue to be at the forefront of the economic news, especially after the Fed announced in December it will speed up its timeline for tapering down its stimulus.

In November, inflation statistics rose 6.8% versus the preceding twelve months. This was the fastest rise in inflation since 1982. The consumer price index also soared and settled at a 6.8% pace, also the fastest since 1982. Headliners for price increases were gasoline, up 58.1% since November 2020, food prices, which were up 6.1% and used vehicle prices, which were up 31.4%, year over year. Housing prices increased 3.8%, the highest since 2007. (Source: cnbc.com 12/10/2021)

Several factors have contributed to a swift elevation of inflation, including the imbalance of the supply and demand chain and the reopening of the economy. The Fed expects that supply chain bottlenecks and shortages will continue well into 2022.

Due to elevated labor market and inflation pressures, the Fed decided to “speed up the reduction of their asset purchases.” The Committee agreed to double the pace of reductions of asset purchases and beginning in mid-January, it will reduce its monthly pace of net asset purchases of $120 billion. The reduction proposed will see $10 billion less in Treasurys and $5 billion less in mortgage-backed securities a month. Chairman Jerome Powell states the Fed’s goal would be to cease any increase of securities holdings by mid-March 2022, instead of November 2022, which they had originally anticipated.

Powell expressed that this was all predicated on the forward movement of the economy and would be “prepared to adjust the pace of purchases” if warranted.

With the annual consumer price index rising faster than ever since the early 1980s, high inflation can pose significant hardships for many individuals and families. According to Labor Department statistics, even though gross pay has increased 4.8% over the past twelve months, average hourly earnings accounting for inflation have actually decreased by 1.9%. (Source: cnbc.com 12/10/2021)

The Federal Open Market Committee (FOMC) stressed that it is “committed to our price stability goal” and is ready to use “tools both to support the economy and a strong labor market and to prevent higher inflation from becoming entrenched.”
Interest rates and tapering are currently closely connected. Even though 2022, is forecasted to bring slightly higher rates, at the conclusion of the Federal Reserve’s meeting in December, the Federal Open Market Committee (FOMC) kept the federal funds rate at or near zero (0 – 0.25%). The median forecast of FOMC members is three quarter-point rate increases in 2022 and three more in 2023, which would raise rates to 2.1% at the end of 2024.

What does this mean for investors? While these rate ranges are still low, the possibility of new volatility, less robust equity returns, and negative returns on bonds (when you factor in inflation) has investors wary and some have their selling finger on the trigger.

Remember, interest rates and tapering are closely connected and the Fed will consider many factors, including the labor market and the course of COVID variants before it makes a move to increase interest rates.

As your financial professional, we are committed to keeping a watchful eye on the economy and how interest rate hikes and the trajectory of inflation affects our clients. If you are concerned about how these key items could affect you, please connect with us to discuss possible hedges against inflation and rising rates.

Treasury Yields

2021 was not the best year for bond holders. While today’s interest rates are still historically low, as we said earlier, the Fed is expecting to raise interest rates several times in the next two years. When interest rates rise, the demand for bonds typically falls, reducing their prices and raising their yields. Thus, 2022 may see a slightly better performance from bonds.
The Fed does not expect to raise rates sharply, and as mentioned, they are currently projecting that the Federal Fund rate could rise to only 2.1% at the end of 2024. How much and when the Fed moves to increase rates is not set in stone and thus, neither is the extent to how it will affect bonds.
The 10-year Treasury yield finished the quarter at 1.52%. According to Russell Investment’s research, a 1.5% to 2.0% yield on 10-year U.S. Treasuries is expected by the end of 2022. (Source: russellinvestments.com 12/1/2021)

We are monitoring interest rates movements and their effect of bond yields. Investors should remember that bonds can be a critical component to a diversified portfolio. Bonds can be a good shield from volatility in equities and provide income. However, investors who put a high percentage of their portfolios in bonds with the hopes of producing stable returns could see minimal results.

Investor’s Outlook

As the calendar turns to 2022, it provides an opportune time to reflect on longer-term horizons, your risk appetite, and adjustments in your cash flow needs.
Rising interest rates and the course of inflation will be at the top of analyst’s and investor’s watch lists. The Fed’s expectation of raising interest rates several times next year and tapering off the pandemic stimulus, combined with other variables, including the potential decline in corporate earnings, supply chain issues, and continued concern over COVID variants, could lead to increased volatility in equity markets.

Investors are not out of the woods from COVID and its effects on the economy. Omicron introduced itself to the world in late November and equity markets reminded us that they are still vulnerable to coronavirus. The DJIA responded with its worst day since October 2020 and the S&P500 had its worst performance since February 2021. However, the markets quickly rebounded.

Monetary policy also could alter equity markets. The Build Back Better Act, which was not passed in 2021 is still proposing to bring some changes to tax laws that could also affect investors in 2022 and beyond. How the Fed’s elimination of the $1.4 trillion of annual stimulus they have been pumping into the economy within a short time period will impact equity markets is uncertain.

Even though the equity markets have been rewarding, complacency should not settle into investor’s attitudes toward their investment strategies. We still stand by our mantra of “Proceed with Caution.”
As you can see from the over 40-year chart, part of the investment experience is pullbacks and downturns. Having a long-term plan, being properly invested, diversified, and staying the course toward your investment goals can assist in helping you ride out volatility in the market.

Remember, market pullbacks are not uncommon and can offer a healthy “reset” for high stock valuations. Often times, pullbacks can provide opportunities for entry points, not exit points. Staying away from emotional investing decisions can help investors ride the pullback waves and stay on track toward their financial goals.

With interest rates hikes on the horizon, we suggest you consider:

Many economists are still looking at continued favorable returns in 2022, but in more moderation. We favor longer-term investment horizons as short-term movements of the market are unpredictable and do not abide by any average. Although historically, stocks have provided higher long-term returns than bonds or short-term investments, stock prices do not move in a straight line.

Wall Street Economist Ed Yardeni believes that “Consumer and capital spending will continue to drive the economy next year, but we’ll return to a more normal growth rate.” Yardeni forecasts a 3.3% increase in the U.S. Gross Domestic Product in 2022, down from this year’s expected growth rate of over 5%. (Source: Barron’s 12/17/21)

Regardless of how equities are performing, investors should always focus on their personal objectives and long-term goals. Even when investing for the long-term, there is no guarantee that market volatility will decrease, stabilize, or increase over any timeframe.

While investors enjoyed an overall strong return in 2021, as the monthly S&P 500 returns chart shows, monthly returns were very inconsistent. The past few years have been an excellent reminder for investors to be prepared for anything that could affect the economic environment and their own personal situation. Having a solid investment strategy is an integral part of a well-devised, holistic financial plan. Staying disciplined and following that strategy during times of volatility is equally important. As your financial professional, we are here to help you pursue your goals. We treat each client as an individual case with unique goals and circumstances. 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.

Now is a good time to revisit your specific holdings, your time horizons, and risk tolerance. Please call our office to discuss any concerns or ideas you have or bring them up at your next scheduled meeting. As always, please feel free to connect with us with via telephone or email with any concerns or questions you may have.

Happy New Year and welcome to 2022! We hope that you and your family had an enjoyable holiday season. We look forward to what this new year has to offer.

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 2022 Checklist to help you identify items you may want to address with us over the next year.

In 2022, 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 2022

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. While the federal funds rate is ending 2021 at a range of 0 – 0.25%, the Federal Reserve has announced they will eliminate their taper in early 2022 and expect to make multiple interest rate hikes through the year.

Inflation
Inflationary concerns are important for investors. Rising inflation rates have escalated many prices for consumers in 2021. The Labor Department reported in December that although consumer prices in 2021 rose at their fastest pace in 39 years, they are expecting 2022’s rise to be lower.

COVID-19
Economic recovery is still appearing to run parallel to the course 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.

Monetary Policy
2021 saw its share of tax law changes. We are carefully tracking any changes that could affect our client’s personal situation and will continue to keep them apprised of those changes if and should they happen.

Stock Market Valuations
Valuations are used as key predictors of equity returns. Many stock prices are near historical highs and so are their valuations. 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
First and foremost, your personal situation is 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 2022 with the continued mantra of “proceed with caution”. Having a solid foundation and strategy is critical to the outcome of your financial plans. Revisiting those plans and keeping them 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 the road to your financial goals. We are staying updated on the issues that may affect your personal situation.

Throughout the year, our goal is to provide our clients a wealth of consistent and pertinent information on financial markets and economic topics. We believe the best client is an informed client. We hope you find the information we provide helpful, timely and meaningful for your personal financial situation. We take pride in offering first-class service to our clients and are truly thankful for each and every one of our relationships.

As 2021 comes to a close, we’d like to take a pause in financial and economic topics and share with you a message we feel is very important and critical, especially in these times of volatility and uncertainty – two things the world has had its fill of in the past two years. Our message is about gratitude

The Merriam-Webster dictionary defines the essential meaning of gratitude to be a “feeling of appreciation or thanks”. During the year-end holiday season, there is a universal theme of being thankful for the blessings the past year bestowed upon us. However, each and every day we have an opportunity to embrace and share gratitude. Harnessing this feeling and carrying it with you through the year – making it a habit – can be a powerful shield in times of difficulty. Remember – gratitude can be an attitude!.

From an investor standpoint, there are many things to be grateful for this year. Back in February 2020, the stock market plummeted and the world changed forever. In March of 2020, we saw three of the worst equity market point drops in U.S. history. The New York Stock Exchange was actually shut down several times during these massive drops. March 16th 2020, had the biggest drop, when the Dow Jones Industrial Average (DJIA) fell nearly 3,000 points, losing 12.9% of its value. (Source: forbes.com, 2/11/21)

Since the pandemic-driven stock market decline, equity markets rebounded incredibly well. Most investors who stayed the course and followed their long-term plans have seen rewards for their patience and consistency. In 2021, the S&P 500 and DJIA made several all-time highs and championed through volatility. Continued COVID-19 concerns, a change in administration, inflation worries, and signs of rising interest rates, all triggers for volatility, did not seem to deter the upward path of the stock market.

As we end 2021, the U.S. economy seems to be improved. Many sectors that directly affect the economy like unemployment rates are rebounding from their 2020 low points. New cases of COVID-19 are nowhere near peak levels, and most homeowners have seen a significant rise in their equity.

Sounds like many things to grateful for!

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 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 feeling 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 could be useful when adhering to your time horizon, especially during times of volatility. Remember, stocks are considered long-term investments. Historically, it’s not uncommon for equity markets to drop 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.

Being happy with what you have now will help reduce panic and rush decisions that may not be in the best interest of your investment portfolio. Contentment helps you stave off the temptation of unnecessary greed, or in other words, the feeling of never being satisfied even though you’ve achieved an objective, hit a target, or succeeded in a goal. For example, if you achieve a financial savings milestone, then you should savor this milestone. However, if you do so, but then you quickly start feeling your savings are inadequate, discontentment quickly can set in. There is nothing wrong with raising your goals or being ambitious, but when it turns into a constant state of discontent and it consumes your daily life, it’s healthy to step back, assess all the things you’ve been able to achieve and recapture that feeling of thankfulness and gratitude for having the ability to even achieve the goals in the first place.

The past few years have brought much difficultly and heartache for many. From sickness to the loss of jobs, which for some led to loss of homes and possessions, to the temporary closure of businesses which ultimately resulted in the permanent closure of many businesses. While we are primarily in the business of preserving your wealth and cultivating your financial goals, keep in mind that your first wealth is always your health. Being “wealthy” can have different meaning to many people. The end of the year is a good time to think about what wealth is to you and reflect back on if you focused on those items in the past year or not. This can help you define your priorities and goals for the upcoming year. We’ve included in this article a brief graphic to help you assess what you define as “wealth.”

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. We are always 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.

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

• consistent and strong 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 then try to create plans to address those needs.

So, for 2022, let gratitude be your attitude! As always, we appreciate the opportunity to assist you and your financial matters.

Make 2022 a Year of Gratitude!

We are grateful to have clients that value our expertise.

Our goal in 2022 is to continue to service our clients at the highest levels possible. We are also grateful for the opportunity to offer our services to other people just like you! Many of our best relationships have come from introductions from our clients.

If you know someone you feel could benefit from our services, please call Jessica Hansen at (714) 547-8787 ext. 102 and we would be happy to add them to our mailing list or arrange a complimentary financial check-up with them.

How do you define and then cultivate “wealth”?

What constitutes wealth to you? There are many ways to quantify “wealth” including your physical, emotional, mental, and financial wealth. What areas will you choose to focus on in 2022? Here are a few examples of how you can cultivate each area.

Health Wealth

• Be more active.
• Join a fitness club or group.
• Make better eating choices.

Emotional Wealth

• Embrace an attitude of gratitude.
• Reduce your exposure to toxic people and media magnifications.

Mental Wealth

• Practice activities that exercise the brain, such as reading.
• Engage in self-care activities like starting a new hobby.

Financial Wealth

• Meet with us at least annually for a financial check-up.
• Review and proactive tax planning ideas with us or a tax professional.

What will you do to make 2022 a year of gratitude? If you need us, we are always available to help!