New Year, New Weather
Every New Year begins with resolutions, future predictions and forecasts, and a clean slate. As investors, we try to be aware of the daily gyrations of both the economy and the markets, as well as long-term trends. By comparison, a good meteorologist reports on the weather today and for the next five days. A great meteorologist is looking not only at what is currently happening, but also studying major potential trends, like climate change, and making decisions based on a long-term view. To be a great investor then, we believe that you need to combine the fundamental analysis of all current and historical data, with the curiosity and experience to make enduring, multi-year decisions, with a grounded anticipation of the future. Thanks to our friends at Wealthmanagement.com, we need to be cautious with what the financial media offers in the way of predictions. Based on a study by CXO Advisory Group, the so-called gurus were no better than a flip of the coin, they were worse. From 2005 to 2012, they reviewed 6,584 forecasts from 68 “experts” only to find that on average they were accurate less than 47% of the time. Only 5 of the 68 had an accuracy score above 60%. And no, Jim Cramer was not one of the five (he came in at 47%). Our key takeaways are these…First, any market related predictions for the short term are purely for entertainment purposes only. Secondly, we need to make calculated forecasts for our long-term investments, but we also need to build portfolios using concepts like diversity, income investments, risk management, etc. so that we can survive the short-term periods of market volatility that the breathless “talking heads” cannot seemingly get right. With that said, here is some of our insight as we head directly into 2024. Stocks managed to rebound quite nicely in 2023 and in mid-January 2024, the S&P 500 was able to regain all-time highs from 2 years ago. Even with relatively high US stock valuations, we believe that the economy is strong, strong enough to have a soft landing from recent rate hikes, and that the path of least resistance for equities may be higher for now. During the last quarter of 2023, the 10-year bond (risk free rate of return) had a dramatic fall in rate from a bit over 5% to 3.8%. As we closed out the year, the Fed appeared to be done lifting rates for the time being. While there will most likely be some rate cut by the Fed in 2024, we think just the “idea” of Fed cuts, will give some ballast to both bonds and stocks this year. As for volatility, world events and the upcoming election will most likely cause some market reactions. We again remind investors that Wall Street sometimes reacts counter to what the endless headlines might suggest. We look forward to working with everyone again this year and for many years to come. Our goal is to become a trusted financial planning and asset management partner that not only guides you, but also helps to manage against those things we cannot control. “Climate is what we expect, weather is what we get” Mark Twain. Thank you for your continued confidence in our firm.
Alone with My Thoughts – 12/26/23
We don’t know what AI is going to unleash in the future but in 2023 it saved the day. After a disastrous prior year, when the Fed began their interest rate hikes to the sea, excitement on Wall Street over AI has lifted tech stocks and the major averages. At the end of October though, the “magnificent seven” accounted for most or all of the gains for stocks. Then in early December, the Fed finally abruptly pivoted, rates went from 5% to less than 4%, and the markets broadly took off across the board. Instead of a Santa Claus rally, we can call this the Santa Claus Pivot. Enjoy the holiday season!
Alone With My Thoughts – 11/14/2023
Next time you are shopping for a birthday card, look at the lowest level of the rack. There you will find birthday cards for 100-year-olds. Think about it, birthday cards commemorating that huge milestone. In fact, ages 85 and older is considered the fastest growing segment of the US population by percentage, and those over 65 should double in number in less than 20 years. For investors, the idea of retiring and going completely into bonds is probably a risky strategy, when confronted with inflation. Stocks and growth assets may then be a bigger part of portfolios for a much longer period of time. Speaking of time, the best time to invest is today, releasing the exponential compounding to do its thing. Thanks to First Trust for the birthday wishes, even if they are jumping the gun.
Alone With My Thoughts – 11/1/2023
The Mendoza line is baseball jargon from the seventies for the supposed threshold for offensive futility of hitting at an average of .200. Players can be above or below the Mendoza line (named for major leaguer Mario Mendoza, a lifetime .215 hitter). There are several Mendoza lines on Wall Street currently…lines that when crossed get everyone’s attention. For example, the Mendoza line for the ten-year treasury appears to be 5%, above that and money flows from stocks to bonds. Gasoline has a Mendoza line at $4 per gallon, above $4 and the economy begins to slow. Bitcoin has seen somewhat of a Mendoza line at $26,000 and has made a recent significant rally to $34,000 plus. For stock traders, the 200-day weekly average is at $3,945, which is a line we do not want to see crossed.
Americans can now put a lot more in health savings accounts. Here’s how much they can invest.
Contributions to health savings accounts increase at steepest level since HSAs were first rolled out in 2004 People who have health savings accounts are getting a big opportunity next year — a shot to contribute much more to these tax-advantaged savings accounts. It’s a win for families trying to defray medical expenses as inflation rates slowly come off their pricey perch, observers say. It’s also a win for people who can afford to turn the accounts into a long-term wealth building vehicle. Health savings accounts are used to offset the pain of high-deductible health-care plans. With high-deductible plans, customers pay a lower premium, but they pay more for their medical services. With HSAs, pretax dollars are used to pay out-of-pocket health-care expenses. Money deposited in HSAs can roll over from year to year, and may be invested in a wide range of mutual funds. Many people, however, do not have access to these accounts through their health-insurance plan. For 2024, a person can contribute up to $4,150 in an HSA, up from $3,850 this year. The contributions for a family account have risen to $8,300 next year, up from $7,750 in 2023 For 2024, a person can contribute up to $4,150 in an HSA, up from $3,850 this year, the IRS said this week. The contributions for a family account have risen to $8,300 next year, up from $7,750 in 2023, the tax agency said. The maximum catch-up contributions for people 55 and above stays at $1,000. So a couple above the age of 55 can sock away $10,300 next year. For 2024, a high deductible plan, among other things, has to have a deductible that’s at least $1,600 for individual coverage and $3,200 for family coverage, the IRS said. These accounts get three types of tax breaks: there’s a tax deduction for money that goes in, tax-free growth and then tax-free distributions for qualified medical expenses on the way out. That even counts for medical expenses they incurred years ago, so long as they have the receipts. The annual increases usually ranged around 1% to 3%, according to the Employment Benefit Research Institute’s compilation of contribution limits through the years. The 2024 contribution increases are the steepest year-over-year increases since people could start putting money into these accounts beginning in 2004. The 2023 contribution limits for individuals grew more than 5% from the prior year, and they grew more than 6% for families. Meanwhile, the 2024 contribution limits for individuals and families will increase more than 7% from their maximums this year. Like certain other parts of the tax code — including the standard deduction and income tax brackets — the tax rules surrounding health savings accounts are indexed with inflation rates, said Jake Spiegel, research associate, health and wealth research at the Employment Benefit Research Institute, a nonprofit organization based in Washington, D.C. “Inflation is hitting us all,” but higher HSA contribution limits could let people “stretch their health-care dollars a little,” Spiegel said. “The upshot here is that you are able to save more than you otherwise could.” How HSAs differ from FSAs Despite their many advantages, many people don’t have HSAs. Only one quarter of workers within an HSA-eligible plan were enrolled in the accounts, according to a 2022 employer health benefit survey from KFF, an organization focused on public health. Just over one-third of workers, 35%, had access to these accounts last year, according to the Bureau of Labor Statistics — even though access to the accounts didn’t necessarily mean these workers actually used the accounts. These accounts are different than flexible spending accounts (FSAs), which also let people put aside money to defray costs. For starters, FSAs account holders cannot invest the money and if the employer allows FSA money to roll over from one year to the next, the carryover amount is capped at $610 in 2023. Even when people are enrolled in HSAs, many aren’t using it as much as they could, Spiegel said. The average account balance was just over $4,300 at the end of 2021 and individuals contributed an average $1,880 that year, according to EBRI’s research of a database with more than 13 million accounts. Unlike HSAs, flexible spending account holders cannot invest the money, and if the employer allows FSA money to roll over from one year to the next, the carryover amount is capped at $610 in 2023. Very few account holders use the money sitting in their HSA for investments, Spiegel said. Within the database, 12% of the accounts were invested in assets other than cash, he noted. Of course, there may be good reasons why most people keep their HSA money away from the stock market. “If you don’t have the cash flow to pay out of pocket, you might not want to subject your HSA to market risk,” he said. But the preferential tax treatment is a powerful reason to use HSAs to grow a portfolio, financial experts said. That puts extra significance on the new contribution limits, they add. “Especially in a high-inflation environment where there is an increasing cost of living, it is helpful to have the opportunity to put more into the HSA and take advantage of the tax-efficient investment opportunity to accumulate growth,” said Kristy Jiayi Xu, founder of Global Wealth Harbor. The HSA is “a really great planning tool for a high-income earner who doesn’t have the ability to make Roth [IRA] contributions,” said Nicole Webb, senior vice president and financial advisor at Wealth Enhancement Group. Traditional IRAs are funded with before-tax money, and are taxed upon withdrawal. Roth IRAs are funded with after-tax money and withdrawals are made tax-free. Tax rules allow people to deduct contributions to traditional IRAs so long as they meet certain conditions, pegged to issues like coverage through a workplace retirement plan and annual income. Above phase-out ranges, deductions don’t apply if a person or their spouse has a retirement plan through work. For individuals, the phase out ends at an annual income