“Before you think about buying stocks, you ought to have made some basic decisions about the market, about how much you trust corporate America, about whether you are a short or long term investor, and about how you will react to sudden, unexpected and severe drops in price. It’s best to define your objectives and clarify your attitudes (do you really think stocks are riskier than bonds?) beforehand, because if you are undecided and lack conviction, then you are a potential market victim, who abandons all hope and reason at the worst moment and sells out at a loss. It is personal preparation as much as knowledge and research that distinguishes the successful investor from the chronic loser. Ultimately it is neither the stock market nor even the companies themselves that determine an investor’s fate. It is the investor”.
Peter Lynch
Peter Lynch is a legend in the investment management business, and this is my favorite passage from his many books. I don’t know that I’ve ever read a more accurate and concise description of what it takes to be a successful investor. Unlike most of the loud-mouths and showmen in today’s media, he wrote thoughtfully and intelligently about investing. He also separated himself from the wannabee crowd by backing his words up with excellent performance as a portfolio manager at Fidelity Investments. Peter Lynch’s message was particularly relevant in 2022 which was a nightmare year for almost every type of investment. Even bonds, which historically provide stability, suffered losses of over 10% (Source: Barron’s Bond Index).
One of the more interesting aspects of Mr. Lynch’s investment philosophy was he saw little value in economic forecasting. I think about this every year as the “experts” race to issue their predictions for the coming year. We do read a large amount of this material at our office because we believe it’s still important to stay well informed, and occasionally we do find a nugget of useful information. Similar to the old prospectors, we sift through a lot of junk to find a little gold every year.
I’m always fascinated by the amount of attention and media coverage the annual forecasts garner. Despite being written by smart people with access to the best data and resources, these predictions far more often than not turn out to be way off. Peter Lynch figured
out many years ago an investment strategy built on economic forecasts and reacting to current events is generally doomed to fail. Mark and I could not agree more with this philosophy. We believe you are much better served by having us spend our time preparing, and not predicting. If anything 2022 could serve as a proverbial poster child for the futility of trying to make 12 month economic and market forecasts. I don’t recall a single forecast which included this perfect storm:
• Russia would invade Ukraine and bring allout war and its disruptions back to Eastern Europe.
• Inflation would rise to levels in the U.S. not seen since the 1970’s.
• The Federal Reserve would begin its most aggressive campaign to increase interest rates in over three decades.
The toxic combination of these three events was enough to push both global stock and bond markets significantly lower last year. Recaps of a year with so many headwinds might be interesting but we don’t find it particularly helpful. We prefer to study and learn, and take away lessons which help us test our investment strategies and prepare for the future. These lessons, whether learned or reinforced, build our knowledge base. At the end of the day, intellectual capital is the most valuable resource we have to help you achieve your goals.
If I can use one golf analogy, last year was like playing 18 holes and every shot was into
the wind. Investing was no fun in 2022, but we believe it did provide at least one valuable lesson: Sometimes Nothing Works. Here is a summary of the major indexes: •
As you know, Mark and I are not market timers, but when appropriate last year we did take the following actions:
• Reduced allocations to US growth oriented companies and increased investments in value oriented US dividend focused sectors.
• Increased allocations to US Financial Services sector.
• Reduced exposure to longer term bonds and increased investments in shorter term fixed income securities, including money market funds and CD’s.
(Source: WSJ)
As investors, we are at least somewhat accustomed to stock indexes falling about 1 out of every 4 years. However, in those down years for stocks, bonds generally hold their value or even increase. Last year was only the fourth time since 1928 that stocks and bonds fell in the same year:
500 US 10 Year Treasury
These particular adjustments did not prevent losses, but they did help to reduce exposure to sectors which were hit the hardest in 2022. Our commitment to having you own only liquid and high quality investments (i.e. no crypto) was also helpful in 2022. I can sum this up by saying in an environment where everything is falling, we re-allocated to areas that fell less hard than others. There are years when this is the best we can hope to do.
(Source Barron’s Index)
The last time stocks and bonds fell in the same year (1969), quarterback Joe Namath led the New York Jets to the Super Bowl. That statement will either make you feel very old or very young!
Sometimes Nothing Works may not sound like much of an investment lesson, and it’s hard to prepare for or react to circumstances so rare that they only occur about 3% of the time historically. We’ve learned over time that in an environment when nothing is working, and all asset classes are falling, sometimes the best action is to try to minimize damages. In fact, last year was the most active we have been making adjustments to portfolios in many years.
I’m not much of a sailor, but I do know that eventually headwinds become tailwinds. At some point, hopefully not too far down the road, inflation will moderate enough for the Federal Reserve to back away from its current aggressive monetary policies. There will also be a day where Russia and Ukraine agree to begin some kind of peace talks, and a light will start to appear for the millions of people impacted by war in Eastern Europe. Peace will also help to ease pressure on commodity prices and other critical global resources.
We believe all or any combination of the above events will be very positive for financial markets. Mark and I wish we had dates and times for this turnaround but our world keeps getting more complex, and predicting the future is an exercise in futility. What we can assure you of is this: whatever the markets and economy throw at us, we will be here to meet with you, make adjustments as needed, and help plan and guide you through.
Sincerely,
SECURE ACT 2.0
On December 23, 2022, the House of Representatives provided Americans with a few early Christmas presents illustrated in the middle of the 4,000+ page document known as the Consolidated Appropriations Act of 2023. Rest assured I did not read all 4,000 pages; however, I have read many articles by those who have and pinpointed the pieces that most pertain to our clients from the long-awaited retirement bill known as the SECURE ACT 2.0. We’ll cover just three of the many new provisions.
Provision #1: Required Minimum Distributions (RMDs) Pushed Back Again
Normally you wait until the end for the biggest present, but in this case, we’ll unpack it first. As the headline states, the House of Representatives decided to delay the requirement to distribute money from your pre-tax retirement accounts, usually a taxable distribution. These account types include IRAs, SEP IRAs, SIMPLE IRAs, SARSEPs, 401(k) plans, 403(b) plans & 457(b) plans and profitsharing plans.
The following table summarizes the ages at which RMDs are generally required to begin under SECURE ACT 2.0:
You may recall in the original SECURE ACT, Congress delayed RMDs from age 70.5 to 72. By allowing the continued delayed distributions, it allows for retirees to keep money working for them inside the tax-deferred retirement accounts and, in some cases, complete strategic tax planning during these delayed years.
Provision #1a: No Change to Qualified Charitable Distribution (QCDs) Starting
Age or Limit Amount
A QCD is a tax-free transfer from an IRA to a qualified charity (501c3) and is limited to $100,000 per calendar year. For those clients who utilize QCDs from their IRA, SECURE ACT 2.0 did not change the QCDs starting age of 70.5. If you give to a 501c3 charity and you’re over the age of 70.5, please contact our office before you cut a check to the charity. You are likely much better off having Raymond James cut the check directly from your IRA. We have many clients already taking advantage of QCDs.
Provision #2: Roth Option Available for Employer Contributions
Employers now have the option to allow employees to decide whether to take employer matching on a Roth after-tax or pre-tax basis. The employer may deduct Roth contributions, but employees must then take contributions as income. Earnings will be subject to normal Roth rules thereafter.
If you or someone you know participates in a 401K plan that offers a Roth option, this is great news especially for younger employees. It allows all retirement savings tax to be paid up front by the employee, thus allowing the full contribution to grow and never be taxed again. The impact of this is incredible. We will see many people in this country over the coming
decades with $1,000,000+ Roth retirement accounts who will not need to share any of it with the IRS. Congress is trying to encourage young employees to save for retirement – what a powerful way to do it!
Provision #3: 529-to-Roth IRA Transfers Allowed After 15 Years
Beginning in 2024, a brand new pathway will allow 529 education plan money to be moved directly into a Roth IRA. Before you get too excited (because I sure did!), there are a number of conditions that must be satisfied for the transfer to be valid. The conditions include:
• The Roth IRA receiving the funds must be in the name of the beneficiary of the 529 plan.
• The 529 plan must have been in existence for 15 years or longer.
• Any contributions within the last five years (and earnings of those contributions) are ineligible to be moved to a Roth IRA.
• The annual limit contribution amount remains the same either from 529 plans or “regular” contributions. In other words, no doubling up. If the limit is $6,500, like it is in 2023, then this is the max you can put into a Roth IRA.
• The maximum amount that can be moved from a 529 plan to a Roth IRA during an individual’s lifetime is $35,000.
This provision greatly helps with the “What if they don’t go to college?” concern of many parents. I’ve always recommended not to overfund 529 education accounts because if the funds are not used for education purposes, you must pay federal income tax and a 10% penalty on the earnings. Now, Congress is providing some much-appreciated flexibility.
Overall, SECURE ACT 2.0 was a positive for Americans in regards to retirement. Also, many other provisions not mentioned above could come into play for you. I tried to highlight the most relevant. If you have any questions on the above provisions or any others, please feel free to reach out to Jeff or me. We’re always here to help guide you through these and other financial decisions.
by Steve Kemper
Even if you’ve seen every movie and read every book about Pearl Harbor, this is worth reading. How two countries could completely misread one another and ignore their ambassadors is unbelievable.
December is always a busy month at our office, and the highlight is our annual holiday party at Assumption Cultural Center. Just like every year, old friendships are rediscovered, and new friendships begin. Tony and his team at Marchiori Catering once again delivered great food and service.
One of the core values at our office is generosity. Thanks to the donations of so many wonderful clients, we were once again able to collect a bumper crop of Christmas presents for Toys for Tots.
For the first time we partnered with Bundled, a local small business, for our party gift. Bundled is the kind of company we love to support. They specialize in gifting products of other small businesses in Michigan. All the bundles are hand packed by a team of individuals with disabilities. We expect to expand our relationship with Bundled and partner with them for years to come.
Thispast year was certainly an interesting one, and we have no doubt that 2023 will find its own unique way of surprising, disappointing and delighting us. We look forward to experiencing and working through whatever may come your way.
Thank you for taking the time to read our newsletter and for your continued trust and confidence.
Jeff & MarkTeam Updates
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