Since the stock market bottomed in 2009 (during the Financial Crisis), the US stock market has enjoyed an unbelievable ride higher with very few major corrections. In fact, from the March 2009 bottom, the market is up over 700%. With such a great, “seat of your pants” type of ride over the last decade, it might make sense to take a step back and assess where we are now.  
 
To offer some perspective on the stock market - below are five measures that illustrate where market valuations currently stand:

1. S&P 500 Price to Earnings Ratio (P/E Ratio)
The S&P 500 P/E Ratio measures the combined price of all 500 Standard & Poor constituents against their aggregate earnings-per-share. Its latest reading is 25.39, which means investors are paying just over $25 for every dollar of earnings.
 
The P/E ratio has historically been below 20, so this would suggest that the market is currently over-valued. However, when we look at the forecasted P/E, it is currently 21.87 which is more inline with historical averages.

In addition to this: Lower interest rates can justify higher valuations, all else being equal - there is an inverse relationship between interest rates and valuations which I will write about in the future.   

Indicator Conclusion: Mildly Overvalued 

2. S&P 500 Cyclically Adjusted P/E Ratio (CAPE Ratio)
Similar to the P/E ratio, the CAPE ratio divides the S&P 500’s current price by its 10-year earnings, adjusted for inflation.
 
Why adjust the traditional P/E Ratio?
 
By using a 10-year period, this tends to smooth out year-to-year fluctuations in earnings which can be somewhat volatile over shorter periods of time. The idea is a higher CAPE ratio could reflect lower future returns, whereas a lower figure would indicate higher returns. The CAPE Ratio was developed by Noble prize winner Robert Shiller of Yale back in the 1990’s; however, this idea is not exactly new, Benjamin Graham (the father of value investing) and David Dodd recommended using 7-10 year averages in their seminal 1934 book Security Analysis when using valuation ratios.
 
There is some research that shows over long periods of time this ratio tends to predict future long-term returns fairly well.  However, the CAPE ratio isn’t expected to predict what the market might do over short periods of time. Having said that, large spikes in the CAPE ratio have often preceded recessions, and it’s important to realize that the metric is currently approaching its highest level on record.

The CAPE ratio currently stands at 38, which is 26% higher than its 5-year average, 40% higher than its 10-year average, and more than double its 100-year average. 

Indicator Conclusion: Significantly Overvalued 

3. The Buffett Indicator
In 2001 Warren Buffett said that US Market Capitalization as a percentage of GDP is “probably the best single measure of where valuations stand at any given moment,” The ratio measures the aggregate value of the US stock market relative to the country’s economic output.
 
Where is it now?
 
It is currently at its highest level ever.
 
Investors are paying over $2 for every dollar of US GDP, compared to a long-term average of $0.82. Buffett went on to say, "for me…if the percentage relationship falls to the 70% or 80% area, buying stocks is likely to work very well for you. If the ratio approaches 200%–as it did in 1999 and a part of 2000–you are playing with fire"
 
I’m not one to argue with Buffett’s thoughts, so this isn’t a great sign.

Indicator Conclusion: Significantly Overvalued

4. S&P 500 Dividend Yield
The dividend yield is the aggregate dividend of all the companies in the S&P 500 divided by the price of the S&P 500. Basically, this is how much the 500 largest US companies are paying investors in terms of dividends.  
 
All else being equal, a low or falling dividend yield means high or rising share prices. Currently the S&P 500 dividend yield is at a 20-year low. Over the last 10-years it has hovered between 1.75% - 2.25%, it’s currently at 1.26%. And there are only two ways for this number to increase, either dividends increase, or stock prices drop. I know which one I’d prefer.

Indicator Conclusion: Overvalued
 
5. The Yield Curve
Long-term treasury rates are almost always higher than those of shorter-term rates.
 
Why?
 
Because investors expect to be compensated for lending money over longer periods of time due to risk and the time value of money.
 
However, when shorter-term rates are higher than longer-term rates - the opposite of what is “normal”, it signals shaky confidence in the economy, and typically leads investors to shift from riskier assets to safer assets, in essence moving from stocks to bonds. This phenomenon, known as an inverted yield curve, has rather consistently foreshadowed recessions and market downturns.
 
A popular yield curve measure used by the market is the spread between the 10-year treasury vs. the 2-year treasury. Just before the last four recessions, the 10-2 spread went negative and the stock market turned negative shortly thereafter. The good news is currently the yield curve is “normal” with the 10-2 spread sitting right around its historical average.

Indicator Conclusion: Normal


​Is a Market Correction Coming?
 
The short answer is yes.
 
Why?
 
Because corrections happen somewhat regularly. Since the Financial Crisis there have been 4 corrections of 15% or greater, with 1 of these 4 corrections being the Covid correction of over 30%.
 
Not only can corrections occur by prices dropping, but corrections can also come from prices staying flat (for years) despite company growth—rising earnings, sales, book value, among others without price increases (think the 1970’s). Either way, the market has always ebbed and flowed over time, oscillating between overvaluation and corrections, but the long-term trend is positive if you have the time.
 
While I don’t advise dancing in and out of the market based upon headline news. I do think it’s prudent to have some understanding of where we might be in terms of the economic cycle and market valuations.
 
Why is this prudent?

This gives you a good reason to take some time to thoroughly review what you own, why you own it, and what the future might realistically hold for your portfolio. Having realistic expectations is fundamental to successful investing. With valuations where they are currently, it would be well-advised to use this to temper your future return expectations.  
 
If you have a well-thought out, well-designed portfolio coupled with a rock-solid financial plan then you shouldn’t be overly concerned with market fluctuations.

​Although, that’s a big “if.”
 

-Paul R. Rossi, CFA
 
​
 

I’m a huge proponent of self-improvement and growth. The idea of making small improvements compounds over time and can become extremely meaningful.

Let me give you an example:
​Most people would agree that typically making a 1% improvement isn’t much of an improvement. And I would agree. On the other end of the spectrum, a 100% or 200% or even 1,000% improvement is quite substantial.

However, what if you are able to make many 1% improvements over time, this is where things get quite interesting. Assume you are able to make a 1% improvement everyday for just 1 year. How much do you think you would improve?

50%
100%
365%

These would all be great improvements, but the actual answer would be a 3,788% improvement. At the end of a year you would be over 37 times better than you were when you started. All from just a 1% improvement every day. The formula is: (1 + 0.01) ^ 365

This is an example of the power of compound growth. Einstein has been attributed to saying, “compound interest (growth) is the 8th wonder of the world.” And even if he didn’t say it, I’m sure he would agree with this idea.

Compound growth is incredibly powerful and is quite possibly under appreciated by most people outside of mathematicians and athletes. One such person who I’m confident understands the power of continuous improvement is Wayne Gretzky.

It truly is hard to comprehend just how great Wayne Gretzky was on the ice. He made the All-National Hockey League First-Team 8 times, holds the record for most points all-time, most points in a season, most all-time assists, youngest player to score 50 points, most game winning goals in play-offs, and the list goes on and on. He retired in 1999 and STILL holds 60 records in the NHL. And if you can’t remember all his amazing records, you can just call him by his moniker, “The Great One.”

He understood the idea of continuous improvement, hard work, and living a fulfilled life. Here are some of his own words on these subjects.

• Only one thing is ever guaranteed, that is that you will definitely not achieve the goal if you don't take the shot.
• No matter who you are, we're creatures of habit. The better your habits are, the better they will be in pressure situations.
• The highest compliment that you can pay me is to say that I work hard every day, that I never dog it.
• Not doing it is certainly the best way to not getting it.
• I skate to where the puck is going to be, not where it has been.
• The day I stop learning is the day I stop growing.
• It's kind of ironic when I broke in at 17, I was told I was too small, too slow and I wouldn't make the NHL
• A good hockey player plays where the puck is. A great hockey player plays where the puck is going to be.
• Procrastination is one of the most common and deadliest of diseases and its toll on success and happiness is heavy.
• You'll never catch me bragging about goals, but I'll talk all you want about my assists.
• I missed 100% of the shots I didn't take
• Maybe it wasn't the talent the Lord gave me-maybe it was the passion.
• One hundred percent of shots not taken don't go in.
• I couldn't beat people with my strength; I don't have a hard shot; I'm not the quickest skater in the league. My eyes and my mind have to do most of the work.
• The Power of WHO provides great lessons about how to succeed in business and in life. If you surround yourself with quality people and great friends, the sky's the limit.
• It's easier to lose than to win.
• It doesn't matter what I think. It doesn't matter what other people think. You have to get on the ice and participate and play and the best team wins.
• Sometimes people ask, 'Are hockey fights real?' I say, 'If they weren't, I'd get in more of them.
• I think that from the time you start playing sports as a child you see that your responsibility to your team is to play the best that you can play as an individual... and yet, not take anything away from being part of a team.
• When I was 5 and playing against 11-year-olds, who were bigger, stronger, faster, I just had to figure out a way to play with them.
• Everything I did in hockey, I worked for.

We all can't be Wayne Gretzky, but we can strive to take his ideas and incorporate them in our lives.


-Paul R. Rossi, CFA

It wasn't easy, but here's a list of some of my favorite Warren Buffett quotes I compiled.

What made this so hard?

Choosing just 25 made it hard, I could have easily come up with a list of several hundred. 

How did I come up with this list?

I went through several books I have about him and numerous shareholder letter's he's written over the years and used quotes that gave a broad range of invaluable insights to living a happy healthy life. A person would be hard pressed to not do well if they lived by his way of thinking. Some of my thoughts are in italics. 

So here they are:

The 25 Greatest Quotes of Warren Buffett

1. You only have to do a very few things right in your life, so long as you don’t do too many things wrong.
2. I will tell you how to become rich. Close the doors. Be fearful when other are greedy. Be greedy when others are fearful.
3. Overall, we’ve done better by avoiding dragons than by slaying them. 
4. A truly great business must have an enduring “moat” that protects excellent returns on invested capital. Business history is filled with “Roman Candles,” companies whose moats prove illusory and were soon crossed. Capitalism is fierce, very few companies have enduring moats. 
5. Never invest in a business you can’t understand. Read number #4 again.
6. Time is the friend of a wonderful company, the enemy of the mediocre.
7. The immediate future is uncertain. America has faced the unknown since 1776. It’s just that sometimes people focus on the myriad of uncertainties that always exist while at other times they ignore them (usually because the recent past as been uneventful).
8. Tomorrow is always uncertain. Don't let that reality spook you. Throughout my lifetime politicians and pundits have constantly moaned about terrifying problems facing America. Yet our citizens now live an astonishing six times better than when I was born. The prophets of doom have overlooked the all-important factor that is certain: Human potential is far from exhausted, and the American system for unleashing that potential - a system that has worked wonders for over two centuries despite frequent interruptions four recessions and even a civil war remains alive and effective.
9. What the wise do in the beginning, fools do in the end. 
10. We will continue to ignore political and economic forecasts, which are an expensive distraction for many investors and businesspeople.
11. Turnarounds seldom turn.  
12. You can’t make a good deal with a bad person. 
13. We will have another bubble, but usually you don’t get it the same way you got it before. As the Boy Scouts say, "Always be prepared."
14. When people get fearful, they get fearful en masse. Confidence comes back one at a time. When they get greedy, they get greedy en masse.
15. The fact that people will be full of greed, fear, or folly is predictable. The sequence is not predictable.
16. There are many parts of the game that we don’t understand, so we don’t play them. Knowing your strengths and weaknesses is critical to avoiding big mistakes and capitalizing on opportunities. 
17. Never risk what you have and need, for what you don’t have and don’t need.
18. Stop trying to predict the direction of the stock market, the economy, interest rates, or elections.
19. I always knew I was going to be rich. I don’t think I ever doubted if for a minute. Warren always had confidence in himself, an important attribute to living your ideal life. 
20. I think the worst mistake you can make in stocks is buy or sell based on current headlines. Instead use the headlines to your advantage. 
21. The lower prices go, as long as you know the company you’re investing in, the better it is for a buyer. Down days always make me feel good. For many this is a hard concept.
22. Do not save what is left after spending, but spend what is left after saving.
23. I bought a company in the mid-90’s called Dexter Shoe and paid $400 million for it. And it went to zero. And I gave about $400 million of Berkshire stock (to buy the company), which is probably now worth $400 billion. But I’ve made lots of dumb decisions. That’s part of the game. Warren is the first to admit his mistakes. He also stresses the importance of learning from them. 
24. The happiest people do not necessarily have the best things. They simply appreciate the things they have.
25. Love is the greatest advantage a parent can give.

 
 
 -Paul R. Rossi, CFA

It’s easy to get a bit mixed up by the many moving parts and features of Medicare. This article hopes to help you make sense of the alphabet soup which is known as Medicare.

Quick note: At the bottom of this article, I've included a 2-page PDF tear sheet that can be downloaded, printed off for future use, or worst case, on those nights you are having difficulty falling asleep, it can be used as a sleeping aid.

The information below provides some information on the major coverage options, called parts A, B, C, D, and some of their more significant aspects. Use it to help you think about what level and combination of coverage suits you and your family the best.

Medicare Part A (hospital coverage): Part A is the portion of Medicare that pays hospital costs. Part A also includes some benefits for skilled home care, hospice care, and the first 100 days of skilled nursing care. You probably won’t have to pay any premiums for Part A, because you already paid for it with payroll taxes while you were working. In 2021, you have to pay the first $1,484 of the cost of each hospital stay. Part A covers the rest for the first 60 days, and then you pay the first $371 per day for days 61–90. After that, there are “lifetime reserve” days (you have a total of 60 days to use in your lifetime, and then they are done), for which you pay the first $742 per day. You are responsible for the full cost of any additional days.

Medicare Part B (medical coverage): Part B is the portion of Medicare that covers outpatient health care visits such as doctors, outpatient surgery, diagnostic testing, durable medical equipment, and ambulance services. Part B is not free. You’ll pay premiums ($148.50 per month in 2021)—and if your income is over a certain amount, your premiums are subject to surcharges. These surcharges are based upon your modified adjusted gross income as reported on your IRS tax return from 2 years ago, which can be as much as $504.90 per month for income above $500,000.

Under Part B, you are responsible for the first $203 of covered medical services. Once that deductible is met each year, you will typically owe 20% of the cost of such services, although you may also owe “excess charges” for some providers.

Medicare Part C (Medicare Advantage): Part C plans are private plans that contract with Medicare to provide Medicare A and B benefits. Many of these bundled plans are available for only the cost of the standard Part B premium. More than 60% of Medicare Advantage enrollees are in HMO plans, with the vast majority of the rest in PPO plans.

Medicare Part D (prescription drug coverage): Part D plans are optional prescription drug plans available to everyone who has Medicare. These private plans contract with Medicare to provide at least a standard level of prescription coverage. They are available both as stand-alone plans and as part of Part C (Medicare Advantage) plans. Premiums vary, and there are surcharges for those with higher incomes, but as of 2021, they ranged from $12.30 to $77.10 per month.

​*Medicare Supplemental Insurance (Medigap). Medigap policies are private policies designed to cover expenses not covered under Part A or Part B (above). To make things confusing they follow standardized forms, designated with letters A through N. Medigap policies add to the “alphabet soup” confusion. Example: Medicare Part A and Medigap Plan A are not the same thing. Any Medigap policy designated with a particular letter provides a specific set of benefits, regardless of which company issues it.

It's important when approaching 65 years of age that you do your research to determine what is best for you and your family.

Action Item
Generally when you turn 65, this is called your Initial Enrollment Period. It lasts for 7 months, starting 3 months before you turn 65, and ending 3 months after the month you turn 65. 

If you miss your 7-month Initial Enrollment Period, you may have to wait to sign up and pay a monthly late enrollment penalty for as long as you have Part B coverage. The penalty goes up the longer you wait. You may also have to pay a penalty if you have to pay a Part A premium, also called “Premium-Part A.” 

Regardless of which Medicare option you choose, you need to do it in a timely manner. Otherwise, you could encounter periods of time when you,

1. Don’t have coverage, AND
2. May face premium penalties that can last for your entire lifetime.

​
This is something you don't want to miss, put a reminder in your phone. In fact, I would recommend a full 6-months before you turn 65, you start your Medicare research so by the time you are in the 7-month Initial Enrollment Period you can sign up and you'll will know exactly what options you'd like and you'll have a good idea of all the costs. 

To do your research and for a more complete description of costs, what is and is not covered visit www.medicare.gov


- Paul R. Rossi, CFA

As Warren Buffett's quote above refers to, risk is not knowing or understanding what you are doing.

To help combat this "risk," I’ve put together a list of some important measures to consider when evaluating your investment portfolio.

These metrics can be used to measure individual stocks, ETFs, and mutual funds.
 
Underlying Holdings: Probably the single most important information to know. This is the driver of how your portfolio (or the fund) has performed in the past and how it will perform in the future. Know what you own and why.

Geographic Exposure: Measures where in the world are the funds’ largest holdings located geographically. Where are these companies based? Are they located in U.S., European, or in Asia? Why is this important? Different countries have different accounting standards, regulatory requirements, and governmental intervention. 

Weighted Average PE Ratio: Measures what the weighed average price/earnings ratio is of the funds’ underlying holdings. The higher the number, the more investors are paying for every dollar of earnings. All else being equal, lower is better.

Valuation Percentage: The valuation percentage shows how far above or below its current price the stocks or funds historical valuation is. This factors a long-term average of the Price to Sales Ratio and Price to Earnings Ratio and mathematically determines whether the current price is high or low relative to those historic valuation multiples. A negative value indicates the current price is above the historical valuation while a positive value indicates it is currently trading at a discount to the historical valuation. This is NOT a measurement of how the stock's price relates to its "intrinsic value” but is instead a measurement of how the market is valuing the stock or fund relative to how it was valued historically.

Return on Equity (ROE): Measures the rate of return on the money invested by stock owners. ROE shows how well a company uses investment funds to generate income and growth. Return on equity is useful for comparing companies within a sector and industry. It’s also useful at the fund and portfolio level. Return on Equity = Net Income / Average Common Shareholder's Equity. All else being equal, higher is better.

Dividend Yield (and Current Yield): The sum of all dividends paid (and interest paid), divided by current share price; a higher dividend yield (and current yield) indicates a larger payout.

Dividend Payout Ratio: The percentage of company net income paid as dividends to shareholders. Typically, investors who want income from their investments favor a higher dividend payout ratio.

Dividend Growth: Period over period growth of dividends paid, usually expressed as trailing 12-month (TTM) growth. Growth in dividends can be a sign of strong financial health.

Dividend Consistency: The track record of paying dividends to shareholders at a regular interval, usually quarterly, over a given lookback period; a company cutting or canceling a dividend payment is a negative event.

Total Returns: Unlike price return, total return includes dividends and interest in addition to price appreciation; a higher total return is better. It’s important to look over various time periods and under various market conditions (Bull markets, Bear markets, and sideways markets). As I’m sure you’ve heard before, “past returns are no guarantee of future returns.”

Sharpe Ratio: The Sharpe Ratio measures the risk-adjusted return of a security. This is a useful metric for analyzing the return you are receiving on a security in comparison to the amount of volatility expected. Sharpe Ratio is measured as annualized return on Lookback Period - Risk-Free Rate) / Historical Annualized Standard Deviation of Monthly Price Returns.

Benchmark: For a security, a fund, or a portfolio, a benchmark is used to track against. Generally, the benchmark is an index or weighted return stream of multiple indices that help give an idea of what your investment should strive to match or beat. Measuring against the proper benchmark is critical to properly understanding performance and risk. Benchmarks are also used to calculate risk metrics like Alpha, Sharpe Ratio, and Beta for securities and portfolios.

Upside/Downside Capture Ratio: The upside/downside capture ratio measures the ratio of the upside and downside of an investment vs a benchmark. This ratio explains how an investment typically performs in relation to their benchmark index. An upside/downside ratio of 100 means that the investment typically performs the same as the benchmark, regardless of if it is rising or falling. If the benchmark increases by 10%, the investment increases by 10%. If the benchmark decreases by 5%, the investment decreases by 5%. Sometimes, an investment may rise 15% when their benchmark rises by 10% but falls 12% when the market falls 10%. In this case, we calculate the upside/downside capture ratio by dividing the investment's upside return and dividing by the downside return: (.15/.10)/(.12/.10) = 1.25. Multiplying this by 100 gives us an upside/downside capture ratio of 125 for this investment. All else being equal, higher is better.

Expense Ratio: The percentage of fund assets that shareholders pay as management fees and operating expenses. A lower expense ratio means less fees. All else being equal, lower is better.
​
Market Cap Allocation: The percentage of fund assets invested in large-cap, mid-cap, and small-cap stocks.
 
Understanding what you own and why is critically important. What I argue is even more important is understanding that having 100% accuracy to what the future holds is impossible, so taking measured risks is really what investors are doing when they invest.
 
As Napoleon said, "Nothing is more difficult, and therefore more precious, than to be able to decide."
 

-Paul R. Rossi, CFA

​​
​What is Portfolio Rebalancing?
​
Portfolio rebalancing is the systematic process of periodically realigning an investment portfolio’s actual allocations with the allocation percentages that were originally planned. This is accomplished by reducing positions that have become an outsized percentage of the portfolio (due to relative outperformance) or increasing positions that make up a lesser-than ideal percentage of total holdings (due to relative underperformance).
 
Why is this done? Typically, it’s done to ensure the portfolio matches an investors risk tolerance, time horizon, and goals.

Some things to consider when rebalancing:

• Rebalancing can Potentially Increase or Decrease Portfolio Performance
• What is the Optimal Rebalancing Frequency?
• Taxes Implications
• Monitoring Challenges
• Changes in Goals and Risk Tolerance

The two most commonly used rebalancing policies are based on:

1. Frequency (quarterly or annual rebalancing), or
2. Portfolio drift (rebalancing only when allocations move beyond a certain threshold relative to target levels).

So which strategy is best for managing risk and maximizing performance?

A research platform I use within my own financial planning business has recently done a deep dive into this particularly important question that I thought was interesting.

The research was conducted using 6 different rebalancing strategies, each beginning with a broad based 60% equity (stock) and 40% fixed income (bond) portfolio.

1. Monthly Rebalancing
2. Quarterly Rebalancing
3. Annual Rebalancing
4. 5% Drift Rebalance
5. 10% Drift Rebalance
6. Never Rebalance

​Key Findings

• On a cumulative basis, rebalancing strategies that rely on the triggering of drift thresholds and portfolios that never rebalance outperform those with rebalancing strategies based on calendar frequencies.
• While more frequent rebalancing keeps actual portfolio allocations more in-line with target allocations, the risk-management benefits diminish when a portfolio is rebalanced too frequently.
• The optimal rebalancing strategy fluctuates based on bullish and bearish market conditions, with considerable consequences.
• Investors must factor in the hard costs of rebalancing, such as time and labor, and taxes when deciding on the best strategy for them and their clients.

 
Conclusion
On a cumulative basis, rebalancing strategies that rely on the triggering of drift thresholds outperform those with rebalancing strategies based on calendar frequencies. And while portfolios that never rebalance do perform relatively well over time, such a strategy can miss out on secular growth if only a small percentage is allocated to asset classes that eventually become market leaders, even if only temporarily. While more frequent rebalancing keeps actual portfolio allocations more in line with target allocations, the risk-management benefits diminish when a portfolio is rebalanced too frequently.

The optimal rebalancing strategy for managing risk, maximizing performance, and minimizing costs will change over time, based in part on market conditions. However, more important than any of these factors is your comfort level with the chosen rebalancing strategy and your comprehensive financial plan.

​As is often said, "peace of mind can be priceless."


-Paul R. Rossi, CFA

​
​

​Probably and Potentially Quite a Bit - read on

Below are some questions that you should review as Biden's proposed tax plan might have dramatic implications for you and your family.

Do you make pre-tax contributions to traditional retirement accounts (e.g., a 401(k) or IRA)?

• Current law, your contributions are deductible, dollar for dollar, up to your annual limit.
• Under Biden's tax plan, you would instead receive a flat credit for contributions, capped at a rate of 26%. This hurts people in higher tax brackets. For example: A taxpayer in the 37% tax bracket would only receive an equivalent deduction at a 20.5% marginal tax rate, rather than a deduction at a 37% marginal tax rate they receive under current law.

Do you hold appreciated assets with a low cost basis (excluding pre-tax assets such as IRAs, most annuities, and other items of income in respect of a decedent)?

• Current law, if you hold the assets until your death, they will receive a step-up in basis to the FMV on your date of death. This effectively eliminates the unrecognized capital gains.
• Under Biden's tax plan, the step-up in basis would be eliminated. This could result in your heirs taking carryover basis, or a recognition event at death.

Do you earn wages in excess of $400,000?

• Current law, wages up to the taxable maximum ($142,800 in 2021) are subject to Social Security payroll tax. This tax is 12.4% total, typically split evenly by you and your employer.
• Under Biden's tax plan, the taxable maximum would remain in place; however, when wages exceed $400,000, they would again become subject to Social Security payroll tax. This creates a “donut hole” in the payroll tax scheme (wages between the taxable maximum and $400,000 would not be subject to Social Security payroll tax). So those above $400,000 are then subject to Social Security Tax.

Does your household income exceed $400,000?

• You would be in a new tax bracket, with increased rates. The top rate would revert to the pre-TCJA (Tax Cuts and Jobs Act) rate of 39.6%.
• You would no longer be eligible for a 1031 exchange.
• If you itemize, your deductions would be capped at 28% of their value. Further, the Pease limitation (repealed by the TCJA) would be reinstated, capping certain itemized deductions (e.g., mortgage interest, state and local taxes, charitable contributions, etc.).
• If you are a pass-through business owner, the QBI deduction would be phased out.

Does your household income exceed $1,000,000?

• Current law, long-term capital gains and qualified dividends are taxed at preferential capital gains rates. This rate is now capped at 20%.
• Under Biden's tax plan, long-term capital gains and qualified dividends would be taxed at ordinary income tax rates.

Does the value of your estate exceed $3.5 million (or $7 million, if you are married)?

• Current law, the federal estate and gift tax exemption amount is $11.7 million per person ($23.4 million for a married couple). This amount can pass federal estate tax-free at your death, reduced by any lifetime use of your exemption.
• Under Biden's tax plan, this exemption amount would be reduced. The new exemption could be as low as $3.5 million per person, or revert to the pre-TCJA amount of $5 million per person (indexed for inflation).
• In addition, Biden's tax plan would increase the federal estate and gift tax rate from 40% to 45%.

Are you a small business owner?

• Some potentially positive news, Biden's tax plan would offer credits for adopting workplace retirement savings plans.

Are you an informal caregiver for an individual in need of long-term care services?

• If so, under Biden's tax plan, you could be eligible for a new caregiver credit of up to $5,000.

Do you have significant corporate ownership interests?

• The federal corporate tax rate would increase from 21% to 28%.
• A 15% minimum tax would apply to corporations with book income of $100 million or more.
• If the corporation sends manufacturing and service jobs to foreign nations in order to market goods or services domestically, a 10% surtax would apply.
• The global intangible low-taxed income rate would double, and it would apply on a country-by-country basis.
• A new “Made in America” tax credit of 10% would be available for qualifying expenses.

As always, it's important to talk with a tax professional to ensure you are making the best decision for your own particular situation.


-Paul R. Rossi, CFA

Several determinants play a critical role in why some individuals become value-oriented investors and others become growth-oriented investors. 

With so much research being done on various aspects of investing, surprisingly little effort has been made to explain the factors that influence individual investors’ decision making. The authors (Nerik Cronq, Stephan Siegel, and Frank Yushow) whose published work was in the 'Journal of Financial Economics' shows that an investor’s investment style (i.e., value versus growth) can be derived from two sources: a genetic or biological predisposition and environmental factors. The authors reference several previous studies and provide their own analysis to contribute a new perspective about why investors gravitate toward value or growth investments.

Differences in individual investor behavior stem from: 

1. Genetic predispositions and 
2. Environmental factors

Several factors explain an individual investor’s investment preference for either value- or growth-oriented portfolios. The authors estimate that genetic differences account for approximately 26% of the orientation when measured by Price/Earnings ratio and 27% when measured by Morningstar’s Value-Growth Score. This result is consistent with the findings of previous researchers, who have shown that approximately 30% of the cross-sectional variation in financial risk preferences is explained by genetic predispositions. In addition to biological considerations, the analysis demonstrates that particular individual life experiences have a large impact on investment styles.

For example:

• Experiences in early adulthood can have profound implications on preferences later in life, according to social psychology and neuroscience.
• A person’s core beliefs seem to crystallize during this early period of great neuroplasticity, and those beliefs remain consistent throughout a person’s life.
• Researchers have shown that neural pathways and synapses can dramatically change during these formative years as a result of a person’s environment, behavior, emotions, and even injury.

Significant macroeconomic events (think of Global Financial Crisis, Dotcom Bubble, etc.) that investors experience can also have long-term and persistent effects on that individual’s behavior much later in life.

• The authors find that individual investors who experienced difficult economic conditions and grew up in lower-income homes develop a more value-oriented investment style later in life.
• People who grew up during the Great Depression subsequently favor value-oriented, or “cheaper,” portfolios. These investors hold portfolios with an average P/E that is 11% lower.
• The research also reveals that the timing of an individual’s entrance into the labor market can affect that individual’s future investment decisions. If an investor enters the labor market during a severe recession, they favor more value-oriented portfolios in the future.

Conversely and consistent with previous studies, the research find that investors with:

• More education
• More disposable income, and
• Whose income is correlated with GDP favor growth investments.

Additionally,

• Investors who exhibit more behavioral biases, such as the overconfidence bias, opt for growth investments.
• Individuals who exhibit more behavioral biases are found to have portfolios with a 10% higher P/E at the median.

This research contributes to and supports the growing body of evidence regarding behavioral finance, which demonstrates that life experiences, behavioral biases, and genetics have a dramatic impact on investors’ behavior.

This research, coupled with the growing body of literature on cognitive biases can be extremely helpful for individual investors to help understand their tendencies and why they may lean toward various investment strategies or products. By digging a bit deeper and learning more about ourselves, we can make better informed decisions. 

-Paul R. Rossi, CFA

​

​
Every day we’re bombarded with reports of what’s hot and what’s not – fueling a Fear-Of-Missing-Out (FOMO). Fear of missing out is a phenomenon that affects many aspects of our daily lives, and it’s far more prevalent than you might think.

In fact, FOMO was added to the Oxford English Online Dictionary in 2013, along with such other contemporary expressions as selfie and twerk. The emergence of social media has only compounded the FOMO effect.

The anxiety that we feel when we believe something better is happening elsewhere is ubiquitous, and investors are especially susceptible to its influence. Why? Because who doesn’t want to make money fast? In fact, Wall Street has embraced our susceptibility to this weakness and created an investment fund with FOMO in its name.

Unfortunately, FOMO and your investments are a combustible combination, similar to mixing bleach and ammonia together, a very deadly recipe. And something to avoid at all cost.

At some point, you’ll likely hear your neighbor, your friend, your friends friend, your co-worker, or somebody who made a lot of money quickly. If you are like most people, you’ll likely want to follow whatever they did. Why? Because your investments aren’t achieving the same results. Almost by definition, a well-built “all-weather” portfolio will never achieve stellar results over the very short-term; however, the superpower of this type of investing is in the strategy’s ability to do extraordinarily well over time, just ask Warren Buffett, Peter Lynch, or Sir John Templeton.

There’s a huge temptation to change course and invest in the latest hot streak. Fueling this urge is what’s called recency bias, a well-known cognitive bias that says: what’s happened most recently is more readily available in the mind and therefore the recent past = the future.

But changing your investment strategy to take advantage of a run that has already taken place isn’t a sound investing strategy, it’s FOMO and recency bias working against you. You can think of this way: Many times, this strategy would have you selling assets that may be undervalued, in order to buy expensive assets that have already gone up. This is buying high and selling low, which is the exact opposite of what you want to do, which is buy low and sell high.

Don’t be Fooled by FOMO

History is littered with examples of hot trends that reversed.

• In the late 1990s, some investors wanted to abandon their well-designed portfolios and buy the booming internet stocks. Then in March 2000 cracks began to form, and the technology market collapsed over the course of the next 2 ½ years, losing 78% of its value. It took a full 15 years for the technology sector to get back to where it was. Do you remember Pets.com, eToys, or Webvan? These were just three of the many companies that were going to change the world, what they changed was how quickly investors lost 100% of their money.
  
• In the mid-2000s, it seemed everyone wanted to borrow money to buy investment properties or flip real estate. I think we all remember how that ended, and how long it took to recover.
• Then, a few years after that investors were worried about a double-dip recession and wondered if they should load up on gold. Gold then proceeded to lose over 45% of its value and took almost 10 years to recover.  
• Most recently its cryptocurrency. If history is any guide…

 
In each case, FOMO caused investors to be more afraid of missing out than what the potential loses could be. In hindsight, for those people who changed their long-term investment strategy it was a serious and costly error.

When everyone from those in the media to your own acquaintances tells you to place heavy bets on one or more “hot” stock or sector that has recently done well, be wary. Be very wary.

How does a wise investor avoid falling prey to FOMO?

Remember the simple adage: “If it sounds too good to be true, then it probably is.”
 
-Paul R. Rossi, CFA

​
It’s a debate raging across the country that seemingly everyone has an opinion about. From Main Street to Wall Street, everyone wants to know; will the U.S. stock market suffer a severe correction or keep grinding higher?

Let’s examine a couple of valid arguments why the U.S. stock market might keep charging higher between now and the end of the year.

Reason #1: Earnings have come roaring back from the recent pandemic induced recession. EPS (Earnings Per Share) on the S&P 500 are at an all-time high. The 500 largest public companies in the U.S. generated earnings that are up 29% from pre-pandemic levels (2020) and are up 386% from the depths of the forced shutdown. In a nutshell, the largest U.S. companies have never earned more money than they are earning today. I repeat, the largest U.S. companies have never earned more money than right now. Mic drop.

And it's growth in earnings per share that drive stock prices up.

​See chart below, 32+ years of Earnings Per Share - it's never been higher. 

Reason #2: Interest rates are extremely low (from a historical perspective). Interest rates to valuations are like what gravity is to matter, they are inextricably linked. The higher the level of interest rates, the lower the value of future earnings are worth today, and therefore a downward pull on stock prices. At the same time, higher rates add to the interest on mortgages, business loans, and corporate bonds, which makes it more expensive and harder for individuals and businesses to borrow money. With that said, interest rates are at some of the lowest levels going back decades. Take a look at 10-year Treasury rates over the past 30+ years. 

Reason #1: Valuations are high (at least from a historical perspective). The price-to-earnings ratio (PE ratio) is one metric for valuing a company or an index as it measures a company’s current share price relative to its per-share earnings. PE ratios can be used by investors to compare the relative value of one company’s shares versus another company’s shares or in our case the overall valuation of the market. Currently the market PE is significantly above the 10 year average of 21.30, which could indicate that the market is expensive and needs to come down to a more reasonable level. We've all heard the adage, "what goes up, must come down."

Reason #2: Interest rates have more than doubled in the last year (see chart below). And as stated previously, when interest rates rise, valuations come down. There is a lot of talk about rates continuing to rise especially with the recent rise in inflation.

So there you have it, two compelling reasons why the stock market could continue to rally, and two compelling reasons it won't.

Understanding all of this, what should you do?
​

1. Make sure your financial plan is up to date.
2. Know what you own and why you own it; as not all assets behave similarly under various economic conditions.
3. Make sure your investments are consistent with your time horizon and your tolerance for risk.
4. Take a deep breath, remain calm, and remember what the 13th century eastern monarch is believed to have been told by a group of wise men who were instructed to come up with a phrase that is true in all times and situations, "this too shall pass."

-Paul R. Rossi, CFA

​

Why is GDP So Closely Watched and So Important to Economists, Policy Makers, and Investors?
 
Plain and simple, it's an important way to determine how well a country’s economy is doing. 
 
Because GDP is closely watched by so many different people, organizations, and governments around the world, it’s important to understand exactly what it is, how it’s calculated, and what it’s used for.  
 
What exactly is Gross Domestic Product (GDP)?
Gross Domestic Product (GDP) is the dollar value of all final economic goods and services produced in a country during a specific period of time. It is the broadest financial measurement of a nation’s total economic activity. This includes all the goods and services bought by individuals, government spending, investments, and net exports.
 
In a nutshell it’s the value of all the goods and services produced in the United States.
 
The percentage that GDP grew (or shrank) from one period to another is an important way for people to gauge how the economy is doing. Due to the size of the United States economy, the U.S. GDP is closely watched around the world as an economic barometer.
 
GDP is calculated and produced by the BEA (Bureau of Economic Analysis) which measure the value and makeup of the nation's output, the types of income generated, and how that income is used.
 
The most common way GDP is calculated is using the Expenditure Approach, which is based on the money spent by various groups.
 
GDP = C + G + I + NX
 
where:
C = Consumption or all private consumer spending within a country’s economy, including, durable goods (items with a lifespan greater than three years), non-durable goods (food & clothing), and services.
G = Government expenditures, including salaries of government employees, road construction/repair, public schools, and military expenditure.
I = Investments spent on capital equipment, inventories, and housing.
NX = Net Exports (country’s total exports - total imports).
 
What are the various ways GDP is adjusted?
GPD can be measured in several different ways. Some of the most common are:
 
Nominal GDP – The total value of all goods and services produced at current market prices. This includes all the changes in market prices during the current year due to inflation or deflation.
Real GDP – The sum of all goods and services produced at constant prices. The prices used in determining the Gross Domestic Product are based on a certain base year or the previous year. This provides a more accurate account of economic growth, as it is already an inflation-adjusted measurement, meaning the effects of inflation are taken out.
Actual GDP – Real-time measurement of all outputs at any interval or any given time. It demonstrates the existing state of business of the economy.
Potential GDP – Ideal economic condition with 100% employment across all sectors, steady currency, and stable product prices.​

​The United States GDP most recently passed over 22 trillion dollars, the highest level ever recorded.

Most often, the number you'll hear people refer to as "GDP" is as a percentage. That's the rate of change in real GDP from the previous quarter or year. One way to determine how well a country’s economy is doing, is by its GDP growth rate. This rate reflects the increase or decrease in the percentage of economic output in monthly, quarterly, or yearly periods.

GDP data compiled by the BEA is often seasonally adjusted to remove the effects of yearly patterns, such as winter weather, holidays, or factory production schedules, which helps reflect the true patterns in economic activity. The BEA also releases GDP data that are not seasonally adjusted.
 
Why is Measuring GDP So Important?
 
Government officials, investors, and business people can answer questions like:
How fast is the U.S. economy growing?
Which industries are growing?
Which are slowing?
How can tweak spending and taxing to improve GDP?

The White House, Congress, the Federal Reserve and other government agencies use GDP numbers to plan spending and tax policy. The Federal Reserve uses them when setting monetary policy. State and local governments rely on GDP numbers for planning purposes. Businesses use GDP and other information to help them when making decisions about jobs, expansion, investments, etc.
 
Gross Domestic Product enables economic policymakers to assess whether the economy is weakening or progressing, if it needs improvements or restrictions, and if threats of recession or inflation are imminent. From these assessments, government agencies can determine if expansionary, monetary policies are needed to address economic issues.

As a quick example: The mortgage rate you pay on your home is based upon the 10-year Treasury rate, and the 10-year Treasury rate is affected by the short-term interest rate that is set by the Federal Reserve which is using GDP numbers (as well as other information) to determine their course of action. 
 
Investors place importance on GDP growth rates to decide how the economy is changing so that they can make potentially make adjustments to their asset allocation, savings rates, and spending. When there is an economic slump, businesses experience low profits, which can mean consumers tend to cut spending. Investors are also on the lookout for potential investments, locally and abroad, basing their judgment on countries’ growth rate comparisons.
 
So there you go, the next time you hear the GDP number in the news, you’ll know what it is, how it’s calculated and why it’s important.
 
 
-Paul R. Rossi, CFA

​Link here to 2-page printable explainer "What is GDP?" 
​

“What is the difference between a taxidermist and a tax collector? The taxidermist takes only your skin.” – Mark Twain

​The old adage, “It’s not what you make, but what you keep that matters,” is very real. As we have all heard, the only two things are certain in this world are death and taxes. Uncle Sam always gets paid. So, any way that you can legally pay less in taxes is an instant boost to your income and/or net-worth.

What are some ways to optimize your After-Tax Returns?

Optimize Use of Tax-Advantaged Accounts
Taxes are a major drag on returns, it’s always important to consider the account in which securities are held so as to minimize current and future tax impacts. Account selection is just one of many tax-related factors that must be considered early in an individual’s financial journey. 

Taxable Accounts provide greater liquidity and withdrawal flexibility, but don’t carry any tax advantages. Dividends, interest, or capital gains resulting from an asset sale get taxed each time one occurs. Taxable accounts, such as brokerage accounts, are best suited for tax efficient investments, such as passively managed funds, zero-coupon bonds, or no-dividend stocks. However, there is one way to effect your tax rate, by holding investments for longer than 1-year. If you hold an asset longer than a year before selling, you are then taxed at the current Long-Term Capital Gains Rate which is currently capped at 20% which is much lower than the Ordinary Income Tax Rate of 37%. So, if you need to sell, all else being equal, selling long-term assets is most tax advantaged    

Tax-Deferred Accounts are funded with pre-tax dollars. Though any activity in the account — dividends, interest, capital gains — is exempt from taxes, each distribution is subject to taxation. But, contributions to tax-deferred accounts can be deducted from tax returns, thereby lowering the amount of annual taxable income. This makes tax-deferred accounts like a traditional 401(k) or IRA best for both high-income earners and tax inefficient investments. Another advantage of having assets in these accounts are that you can rebalance your portfolio as much as you’d like without triggering any taxable events.  

​Tax-Free Accounts offer a benefit exactly as the name suggests: they are tax-free. Not only is activity within the account tax-exempt, but distributions occur sans tax as well. Because tax-free accounts like a Roth 401(k) and IRA are subject to income limits, it’s best to contribute as much as possible during periods of lower income, as well as store investments that can return the greatest amount. A Roth 401, Roth IRA, and 529 plans can be a very powerful tool for investors with extremely long-time horizons. See another article I wrote here about tax-free gains by turning $10k into $1 million using a Roth account.  
While is extremely difficult to avoid taxes entirely, optimizing the use of the different accounts based on your unique situation can dramatically impact how much money you actually end up with.

Use Financial Metric Tools to Analyze After-Tax Returns
In addition to a sale event (taxable account) or account withdrawal (tax-deferred account), investors can face additional tax liabilities due to mutual fund or ETF managers’ decision-making. Some useful metrics for evaluating funds potential tax liabilities include:

1. Tax Cost Ratio – the amount that a fund’s annualized return is reduced by taxes that investors pay on distributions. This includes stock and bond dividends as well as capital gains distributions. All else being equal, lower is better. Also known as tax efficiency, is important for investors to look at because it gives a clearer idea of how much the annualized returns will be reduced by taxation. For example, if a fund has a Tax Cost Ratio of (3Y) of 0.8%, it means on average investors lost 0.8% of their assets in taxes each year over the past 3 years.
2. ​​Tax Adjusted Returns – estimates the return an investor may realize after the tax impact of distributions but before selling a mutual fund, ETF, or closed-end fund. These figures use Morningstar’s tax cost ratio and assume the highest income tax bracket, which in turn give a more conservative estimate of tax adjusted returns. All else being equal, higher is better. Formula = ((1 - Tax Cost for the period) x (1 + Total NAV Return (monthly) for the period) - 1) x 100.
3. Turnover Ratio/Rate – the rate at which a fund changes out its holdings. A lower turnover ratio indicates fewer holdings changes and a lower risk of distributions and “churning” (transactions for the sake of trading commissions). The Turnover Ratio is usually between 0% and 100%. All else being equal, lower is better. Formula = Lessor of the purchase or sales value over the past year / Average portfolio value 
4. Potential Capital Gains – an estimated percentage of a fund’s assets that may be distributed as future capital gains. If a fund holds a lot of undistributed gains, investors may be hit with a tax liability for capital gains that occur before they buy into the fund.
5. Dividend Yield – The dividend yield is the sum of a fund or company's annual dividends per share, divided by the current price per share. Dividends can be taxed at more favorable rates depending on the length the security has been held. Formula = Annualized Dividends Per Share / Stock Price
6. Distribution Yield – The distribution yield applies only to mutual funds and ETFs. It is the ratio of all the distributions a fund paid in the past 12 months divided by the current share price of the fund. There is a major difference between the distribution yield and the dividend yield. The dividend yield will show you the percentage of the share price an investor received as dividends. The distribution yield, on the other hand, includes two components: dividends and capital gains. Understanding how these distributions will be taxed is important for tax planning purposes. Formula = All distributions of the fund in the trailing twelve months / price.

​
The Bottom Line
Taxes are rarely clear-cut; as income levels, portfolio values, investment goals, risk tolerances, and life itself change over time—and each factor plays into tax considerations.
 
Having said that, it is possible to plan with various “what-if scenarios” to help maximize returns under various assumptions to limit tax liabilities owed to Uncle Sam. Using these best practices for tax-efficiency with a little up-front planning can lay a roadmap for success and maximize the rewards of a well-built financial plan.
 

​-Paul R. Rossi, CFA

Some investors get lured into high-risk investments being told that they can make 1000%+ returns. Many times, these so-called opportunities are in very-small obscure companies, risky meme stocks, or esoteric private investments with limited or no track record.
 
What’s interesting, is that it was possible to earn 1,000% over the last 10 years and you didn’t have to sell your soul to the devil to do it. Nor did you have to be invested in one of the FAANG (Facebook, Amazon, Apple, Netflix, Google) companies. And yes, if you were invested in these companies and held for the last 10 years, you would have done quite well. But these were not the only companies that did well.
​
There were opportunities abound in all sorts of companies with historically strong fundamental track records. Many of these companies are household names.
 
Can you believe that Domino’s pizza generated a 2,120%+ return over the last 10 years? In fact, this beats Amazon’s 1,760% return? So, let’s put this into real terms, $10,000 invested in Domino's 10 years ago is now worth over $220,000. 

​
​How about investing in a wholesale pool distribution company that dramatically out-performed Netflix? Pool Corp did just that, they turned $10,000 into $183,000 vs. Netflix’s $136,000.

​
​Would you think that Mastercard or Visa would have outperformed Apple over the last 10 years? Well, they both did. Mastercard turned $10,000 into $144,000, Visa grew to 131,000, and Apple $130,000.

So the next time you read an article or a friend talks about some unknown company with unproven technology that suggests there is a huge opportunity, you might pause and think about all the risk that comes with investing in something you don’t know or don’t understand. Then consider researching companies you are already familiar with that have a long runway in front of them and realize the future returns can be quite substantial, and I would argue, less risky.

Below is an abbreviated list of some of the other companies that generated outsized returns for their investors over the last 10 years.

• The Home Depot – 1,000% return
• Moody’s Corporation – 920% return
• NVIDA – 4,600% return
• United Rentals – 1,220% return
• Charter Communications – 1,110% return
• Align Technology – 2,480% return
• Sherwin-Williams – 982% return
• Old Dominion Freight Line – 1,540% return
• Microsoft – 1,230% return      

 
There were 39 companies in the S&P 500 that generated 1,000+ returns over the last 10 years. 38% of which were technology companies, 18% were financial services, 15% were consumer cyclical and 15% in the industrial industry.  
 
So is it possible to generate 100% returns? The short answer is yes.

Is it easy? The short answer is no.  
        
So how do you do it?

That’s where independent research, thoughtful analysis, and maybe just a bit of luck comes into play.
​
 
-Paul R. Rossi, CFA

Just so the math is clear, a 1,000% return = 10x your original investment and over a 10 year period which equates to an annualized return of 25.89%. Future Value Formula is FV = PV * ( 1+r )^t

​

​I'm not sure anyone can accurately predict recessions, the stock market, or anything else with 100% certainty...especially when it involves human interaction, but looking at key economic data might be able to provide some measured insight as to what the future may hold. 

Professor Jeremy Piger of the University of Oregon maintains a recession model that might just be able to do just that...provide some probabilistic numbers to what the economy might experience in the near-term. 

The chart below shows the last 50+ years of U.S. recessions (grey bars). In addition to the grey bars, the orange line is what the professor has produced, called the, "U.S. Recession Probabilities" (Chauvet and Piger) which uses smoothed probabilities of a recession in the U.S. It is calculated from a dynamic factor Markov-switching model using four economic inputs:

1. Non-Farm Payroll Employment
2. Industrial Production Index
3. Real Personal Income
4. Real Manufacturing and Trade Sales

Over the last 50 years, the U.S. has experienced 8 recessions, including our most recent 2020 Covid recession.

My personal prediction is that we will continue to experience recessions going forward...so if nothing else, get used to hearing that another recession is just around the corner, because it probably is. And if the last 50 years is any guide, we can expect a recession about every 6 to 7 years. 

While I don't advocate jumping in and out of the market based upon recent headline news, I do believe understanding where we are in the economic cycle can be valuable for a number of reasons. Here are just a few:

1. Setting proper expectations. 
2. Various industries do better/worse in different stages of the economic cycle.
3. Properly building a financial plan that incorporates various economic conditions.
4. Taking advantage of market opportunities.

While there is no absolute silver bullet to forecasting certainty, the "U.S. Recession Probability" model is a bullet none-the-less, and it never hurts to have another tool in the tool belt.  

-Paul R. Rossi, CFA


Click here to go to Dr. Piger's website and the Recession Probabilities Model.

Many people tend to think of the 529 Education Savings Plan as a good way to save for their children's or grandchildren's education. And they'd be right. 

But that's where it ends for most people...and this is a potentially costly oversight. It can be much more powerful than that.

So what is the 529 and how does it work?
A 529 is a tax-advantaged savings plan designed to help pay for education.

How does it work?
The plans are funded with after-tax dollars, but all money taken out, which includes all the investment gains, are tax-free as long it is spent on qualified education expenses, expenses like: tuition, administration fees, books, room and board, computer, internet access, lab fees, etc., the list is quite extensive. Even for modest savers, the growth in a 529 account which grow tax free can easily equate to tens of thousands of dollars or more of additional money if set up and used properly. 

How much can you contribute?
You can contribute up to $15,000 (the annual gift tax limit) per beneficiary per year. So for a couple, that would be up to $30,000 per year. However, the law permits each account owner to pay up to five years’ contribution upfront without triggering gift taxes, which means a couple can contribute up to $150,000 per beneficiary in one fell swoop. Wow. This $150,000 can then grow tax free every year.

In addition to this, there is no limit to the number of 529's a person or couple can set up. A couple with a large family, say with 10 grandchildren could set aside $1.5 million (10 accounts x 150,000 max contribution). This $1.5 million is then excluded from their estate for taxes purposes - which can have a dramatic impact. 

What happens if money is taken out for non-qualified expense or the original beneficiary (child/grandchild) doesn't go to college? 
The law permits the account holder to change beneficiaries as desired without penalty. This can be used should the original beneficiary not use the money. As an example, the beneficiary account could be transferred from child #1, to child #2, to grandchild #1, etc. 

So in essence, you can move money across generations without taxes as long as you don't hit gift tax exclusions. That's a potentially powerful estate planning tool. 

However, the power of the 529 account can still be very useful if the beneficiary doesn't use the money for educational purposes. While there is a 10% penalty and taxes are due for amounts taken out for non-educational purposes, even factoring this in, the math shows the 529 account balances can be worth tens of thousands or more than simply putting the money into a regular brokerage account.

Some other notable highlights:

• 529 funds can be used for not only undergraduate college education expenses. The funds can be used for K-12th education, vocational & technical schools, certificate programs, graduate schools, and training for a new career from accredited institutions. 
• Unlike income limits for contributing to other types of accounts (Roth IRA, etc.), there are no income limits for contributing to a 529 plan.
• If the beneficiary (child/grandchild) gets a scholarship or gets into a military academy, the law allows the account holder to take the amount of scholarship out of the account penalty free. 
• The 529 assets can be taken out, called a "non-qualified withdrawal," by the account holder at anytime. Under many scenarios the account will have more assets than having put the money into a taxable brokerage account. - Reread this sentence again. 
• There are no limits to the number of 529 plans that can be established. 
• There are no age or time limits as to when the money needs to be used, potentially allowing for decades of tax free growth. 
• Only 5.6% of the value of the account is considered the parent's assets for financial aid consideration.
• 529 accounts can be established with $0 account set up fee and $0 account maintenance. 

Although 529 plans have been around for years, many people do not appreciate the flexibility they offer. While it's a great savings tool for educational purposes, the accounts can be much more than that...it can be a part of a well thought out estate plan.  

- Paul R. Rossi, CFA
​

Now that we have had some time to reflect back over the last year or so, I think it's important to keep things in proper perspective.

Leading up to the Global Pandemic the markets had been performing quite well (see below).

Once it became clear that the world was facing a global pandemic, the United States and most of the rest of the world essentially shut down a large portion of their economies to stem the spread of the virus. And the markets reacted with veracity.

​Here's the 1 month market crash (Feb-March 2020) that will go down in history, for the dramatic speed in which the markets tanked.

​However, the rally from the bottom (see below) will also surely go down in the history books as well.

​The markets are forward looking and determined that the economy would come back. They rallied well ahead of any vaccines being developed, let alone any being approved, and well before Covid rates began to come down.

​When looking back over the past 10 years (see below), we can see that the market volatility in 2020 isn't too much out of the ordinary. The markets don't move in straight lines. Understanding this and not being rattled could be considered a modern day super power. 

How about we go back and look at the profits of some of the largest U.S. companies from the time of the space race to the global pandemic (a little over 50 years). The gray bars show economic recessions.

​This chart is very telling...company profits are volatile, recessions are quite common, and most importantly companies continue to find ways to grow their earnings over time. 

So what can we learn from all of this?

1. Markets are volatile,
2. Earnings are even more volatile,
3. Recessions happen somewhat regularly, and
4. We can expect much of the same in the future.
5. Similar to driving a car, the markets look to the future through the windshield, not the rear view mirror.
6. Investing isn't rocket science, however understanding some of the fundamental drivers of the markets and the economy can provide some psychological comfort when determining how you should be invested.

-Paul R. Rossi, CFA

​As the economy expands and contracts, so do the financial performances of companies across the 11 stock sectors. The 11 sectors are listed below along with some of the industries within each individual sector.

1. Industrial: Aerospace, Airlines, Business Conglomerates, Metal Fabrication, Railroads, Trucking, Waste Management.
2. Basic Materials: Agricultural, Chemicals, Lumber, Steel, Paper, Commodities.
3. Energy: Oil & Gas, Thermal Coal, Uranium.
4. Utilities: Power Producers, Electric, Gas, Water, Renewable.
5. Communication Services: Advertising, Broadcasting, Internet Content & Information, Entertainment, Gaming, Telecom Services.
6. Consumer Cyclical: Manufacturing & Retail Apparel, Auto, Department Stores, Home Improvement Retail, Resorts & Casinos, Lodging, Gambling, Leisure.
7. Consumer Defensive: Beverages, Discount Stores, Education & Training, Farm Products, Grocery Stores, Household & Personal Goods, Packaged Foods, Tobacco.
8. Financial Services: Banks, Captial Markets, Asset Management, Insurance, Mortgage.
9. Health Care: Biotechnology, Drug Manufacturers, Medical Care Facilities, Medical Device, Pharmaceutical.
10. Real Estate: REIT (Healthcare, Hotel, Industrial, Mortgage, Office, Residential, Retail).
11. Technology: Communication Equipment, Computer Hardware, Software, Information Technology Components, Technical Instruments, Semiconductors, Solar.​

When the outlook is positive, economically sensitive companies tend to perform better (at least historically), prompting investors to buy their shares. If the outlook turns bearish, investors might swap out of these types of companies and into companies that can better weather economic downturns. The practice of doing this is known as sector rotation.

Cycles that can trigger sector rotations
The economy goes through cycles, and sector rotations occur at each stage. The 3 most common cycles that investors follow are:

• Changes in the Market Cycle
• Changes in the Economic Cycle
• Oversold vs Overbought Cycles

​The Market Cycle (see below) typically moves ahead of the Economic Cycle, since investors make decisions in anticipation of the future. As such, the current market cycle stage can indicate which sectors will soon become market leaders:

​Market Cycles tend to lead Economic Cycles which is what happened both in the 2008 and 2020 recessions.

In 2008, the S&P 500 peaked months ahead of US Monthly Real GDP's top. Stocks sold off in anticipation of a worsening economy.

When COVID-19 became a pandemic in early 2020, the stock market was ahead of the 8-ball once again. Such is nature of both stock prices that discount future cash flows, and investors who want to be one step ahead. 

In both the Global Financial Crisis and the recent Covid-19 recession, the market rebounded well ahead of the fundamentals, which corresponds to the earlier statement, that Market Cycles lead Economic Cycles. 

Layered underneath the Market Cycle is the Economic Cycle. Because economic data is released less frequently, and investors price in their estimates beforehand, the Economic Cycle lags behind market movements. That said, it can provide solid confirmation of prevailing market trends. Sectors tend to perform differently based on the current Economic Cycle (see below) stage:
​

​
Lastly, oversold and overbought indicators can be used to hone in on investment decisions with sometimes added precision.

A very recent example: In late 2020, the Technology Sector triggered a commonly used overbought signal when its relative strength index (RSI) spiked. The sector immediately sold off by as much as 12.9% over the following months.
 
Sector Rotation in Practice
One argument for using a sector rotation strategy is that share prices of companies within each sector tend to move in the same direction. This is a natural effect of sector classification, companies with similar business models are grouped together as they can be economically affected by many of the same factors. At a minimum, investors can gain baseline exposure to a given sector’s sensitivities using individual stocks. Or, broader exposure can be secured using sector ETFs.

An example is the relationship of crude oil prices with major airliners American Airlines, Delta Airlines, Southwest Airlines, and United Airlines, as well as United Parcel Service and FedEx. Despite operating in different industries, these industrial sector companies all benefit from lower oil prices, causing share prices to move higher when fuel costs decline.

Investors can also use a top down approach and look to macroeconomic indicators to assess the current economic cycle stage. Once favorable sectors are identified, rotations are made out of unfavorable ones and into those that are poised to grow.
 
Other Factors to Consider

Some Important Warnings:

• Sector rotation involves active management, which requires frequent monitoring of market and economic events in order to capture opportunities. As explained earlier, the economic cycle takes longer to catch up to the market cycle—and markets could also fail to digest economic news efficiently.
• Mistiming the market cycle can be dangerous to your portfolio.
• Rotating out of a given sector involves selling shares, and each profitable sale triggers a knock on the door from Uncle Sam to collect capital gains tax.
• Taxable events can diminish overall returns, which is why the level of active portfolio management should be considered in order to avoid unnecessary capital gains tax.
• Industries aren’t as homogenous as broader sectors, and a deviation can throw off a rotation strategy. Using the previous example, low oil prices are a major tailwind for major airlines, but other industrials like railroads might suffer as crude oil shipments decline. It might be thought that a rising tide lifts all boats, but there could be outlying industries which fail to swim, reinforcing the need for thorough investment research such as a full top down approach.

Finally, past performance isn’t always indicative of future results. 

-Paul R. Rossi, CFA

 
“Never confuse genius with luck and a bull market.” - John C Bogle
 
“If you don’t recognize luck when it happens to you can fool yourself into thinking past performance was indicative of skill in a way that leads you to regrettable decisions.” - Morgan Housel

“One lucky break, or one supremely shrewd decision—can we tell them apart?—may count for more than a lifetime of journeyman efforts.” -- Ben Graham
 
"People often assume when a decision is followed by a good outcome, the decision was good, which isn't always true, and can be dangerous if it blinds us to flaws in our thinking." - Philip Tetlock
 
“In a necessarily uncertain world, a good decision doesn’t necessarily lead to a good outcome, and a good outcome doesn’t necessarily imply a good decision or a capable decision maker.” - John Kay
 
“The greatest trick the market plays on beginners is making you think luck is skill. It waits for you to double or triple down on your next bet and then it teaches you your first lesson.” - Ian Cassel
 
"Making money through an early lucky trade is the worst way to win. The bad habits that it reinforces will lead to a lifetime of losses." - Naval Ravikant
 
"During 'bull' markets, many investors tend to give themselves too much credit for favorable results and to give insufficient credit to the positive environment that played a large role in creating the results. This can lead to overconfidence on the part of the investor and resulting mis-assessment of risks." - Ed Wachenheim

"Just because you made money doesn’t mean you were right, and just because you lost money doesn’t mean you were wrong. It is all a matter of probabilities. If you take a bet that has an 80% probability of winning and you lose, it doesn’t mean it was a wrong choice.” - Tom Claugus
 
"Every once in a while, someone makes a risky bet on an improbable or uncertain outcome and ends up looking like a genius. But we should recognize that it happened because of luck and boldness, not skill." - Howard Marks
 
“The absence of loss does not necessarily mean the portfolio was safely constructed. So, risk control can be present in good times, but it isn’t observable because it’s not tested. Ergo, there are no awards. Only a skilled and sophisticated observer can look at a portfolio in good times and divine whether it is a low-risk portfolio or a high-risk portfolio.” - Howard Marks
 
“The correctness of a decision can’t be judged from the outcome. Nevertheless, that's how people assess it. A good decision is one that’s optimal at the time it’s made, when the future is by definition unknown. Thus, correct decisions are often unsuccessful, and vice versa.” - Howard Marks
 
"It is all about believing in yourself and not confusing a bull market with brilliance and a bear market with stupidity.. markets are markets. You can't take it personally." - Mark Kingdon
 
“Just because you did something that worked doesn’t mean that it wasn’t risky or wasn’t smart.” - David Abrams
 
"Numbers can be very misleading because very smart people can struggle and very mediocre people can excel for periods of time." - Jim Chanos
 
"The mere fact an aggressive strategy wins in a winning period doesn't prove it's the right strategy for all periods." - Howard Marks
 
"Just because you buy a stock and it goes up does not mean you are right. Just because you buy a stock and it goes down does not mean you are wrong." - Peter Lynch
 
“One thing about investing is, I think it’s good not to think that one is a genius, because the stock market will bury you.” - Jean Marie Eveillard
 
“It’s dangerous to think you know too much and have your ego all involved in showing how smart you are and all that. It’s not an accident we use all of this self-deprecatory humor at Berkshire. It’s required for sanity. It really is.” - Charlie Munger
 
"When you are having a good run of it, you are not as smart as you think you are, and when you are struggling with it, you are typically not as dumb as you look." - John Harris
 
“Ego is the enemy of investing.” - Jake Rosser
 
“Anytime that you think you’ve become a financial genius – when, in fact, you simply have had good luck to turn a profit – it is time to sit back and do nothing for a while. If you stumble upon success in a bull market and decide that you are gifted, stop right there. Investing at that point is dangerous, because you are starting to think like everybody else. Wait until the mob psychology that is influencing you subsides.” - Jim Rogers
 
“I have seen a lot of people who confuse money with brains and more than a few traders who develop an unbounded view of their own infallibility … and usually such hubris precedes some sort of market retribution. I am sure that most of us in this room have seen that biblical injunction of pride coming before the fall strike someone near us in the trading world — if not hit us directly between the eyes.” - Bruce Kovner
 
“Success tends to breed confidence and then, eventually, overconfidence — and why would one examine what he’s doing when it’s so successful, even if it’s silly!” - David Polen
 
"Any investor can chalk up large returns when stocks soar....In a bull market, one must avoid the error of the preening duck that quacks boastfully after a torrential rainstorm thinking its paddling skills have caused it to rise in the world. A right-thinking duck would instead compare its position after the downpour to that of the other ducks on the pond." - Warren Buffett
 
"Good decision-making can lead to bad outcomes and vice versa. If we believe that we predicted the past better than we did, we may also believe that we can predict the future better than we can." - Peter Bevelin
 
"The riskiest thing is getting lucky - a false positive. You have a positive result, but your process was poor. That's the most dangerous because, after a few false positives, you typically go bigger, and that leads to the old saying of "succeed small, fail big.” So we think about this pretty carefully." - Ken Shubin Stein
 
"We have talked about how a sound investment process likely leads to a good investment result. A good result, though, says nothing about whether the process involved was a good one, and, thus, whether or not the success might be replicable." - Seth Klarman
 
"In a bad year, defensive investors lose less than aggressive investors. Did they add value? Not necessarily. In a good year, aggressive investors make more than defensive investors. Did they do a better job? Few people would say yes without further investigation. A single year says almost nothing about skill, especially when the results would be expected on the basis of the investor's style." - Howard Marks
 
“Short-term performance is an imposter." - Howard Marks
 
"One of the allures of this business is that sometimes the greatest ignoramus can do well. That is unfortunate because it creates the impression that you don't necessarily need any professionalism to do well, and that is a great trap." - Michael Steinhardt
 
“Return alone—and especially return over short periods of time—says very little about the quality of investment decisions.” - Howard Marks
 
“A year is far too short a period to form any kind of an opinion as to investment performance, and measurements based on six months become even more unreliable. One factor that has caused some reluctance on my part to write semi-annual letters is the fear that partners may begin to think in terms of short-term performance which can be most misleading. My own thinking is much more geared to five-year performance, preferably with tests of relative results in both strong and weak markets.” - Warren Buffett 1960 Partnership letter
 
"Short-term performance measurements are meaningless, and it is impossible to forecast with any certainty what the relative performance of a manager will be in any given year. In fact, even a several-year span can be misleading, as a manager may be able to achieve above-average results by owning very high-risk stocks in a generally rising market (as we had in the 1960s) but be virtually wiped out in the same class of stocks in a bear market. The only true test of a money manager's ability is if he can obtain above-average results over a full cycle that includes both bull and bear markets. A great investment manager must be ‘a man for all seasons’." - Barton Biggs
 
"It can take years to judge the quality of an investment decision. Those who believe that they are quite witty because of a few years of strong performance – for a stock or for the whole portfolio – should develop a strong auto-skepticism reflex." - Francois Rochon
 
“If I had to choose a great single fallacy of investing, it’s that when a stock’s price goes up, you’ve made a good investment. People take comfort when their purchase at $5 goes to $6, as if that proves the wisdom of the purchase. Nothing could be further from the truth.” - Peter Lynch
 
“One reason the financial industry mints so many extraordinary egos is because it’s easy to take personal credit for what works and claim to be a victim of what doesn’t. Industrial engineers can’t simply be in the right place at the right time, or blame their failures on the Federal Reserve. But investors can, and do. An iron rule of investing is that almost nothing is certain and the best we can do is put the odds of success in our favor. Since we’re working with odds – not certainties – it’s possible to make good decisions that don’t work, bad decisions that work beautifully, and random decisions that may go either way. Few industries are like that, so it’s easy to ignore. But it’s a central feature of markets. Unless you’ve enjoyed a period of success that you realize you had nothing to do with, or can admit that a long period of loss was due to your own mistake, you’ll have a hard time grasping reality in a way that lets you do at least the average thing when everyone else is losing their minds.” - Morgan Housel
 
“The stock market provides an uneven feedback loop for investment decisions. This unusual economic microcosm may sometimes reward poor decisions and often penalizes good ones… When a blackjack player receives a 3 after he hits on 18, he may celebrate a victory, but clearly the decision to hit was incorrect, based on all available information at the time. Good portfolio managers have this concept ingrained in their thinking They realize positive outcomes are sometimes confirmation of a good decision, and sometimes they are not. What matters is process.” - Brian Bares

-Paul R. Rossi, CFA
​

​Over the weekend (Saturday May 1st), Warren Buffett and Charlie Munger held their annual shareholder meeting for Berkshire Hathaway, and as usual, it was a filled with timeless wisdom for investors and non-investors alike. I highly recommend you listen or watch the entire meeting, as both Warren and Charlie continue to dazzle us with their insightful thoughts and ideas. If you don't have 3+ hours to watch the meeting I would recommend you read the short conversation (see below) between author Robert Hagstrom and Lauren Foster of the CFA Institute. 

If you've ever Googled "Warren Buffett" and "books to read," you'll find Robert Hagstrom's first book on the list, "The Warren Buffett Way."

​The Warren Buffett Way spent five months on the New York Times bestseller list in 1994 and '95, and is routinely included in lists of the best books to read on the Oracle of Omaha. Robert is a CFA charter holder and a Senior Portfolio Manager at Equity Compass, where he launched the global leaders portfolio. He also serves as Chairman of the Investment Management Committee for Stifle Asset Management. A recent conversation between Robert and Lauren Foster of the CFA Institute is all about this concept of a money mind.

What exactly is a money mind?

What are the components?

And importantly for investors, can they be learned? 

Below is a quick excerpt between Lauren Foster of the CFA Institute and Robert Hagstrom. 

• Lauren: "Well, we're going to delve into that a bit more deeply because temperament sounds like a straightforward concept, but it really isn't. I was actually looking in the dictionary ahead of our conversation today thinking, can I come up with a good definition? And I went through several different definitions. And they're all a little bit different. So walk us through temperament and why that is so critical as an element of a money mind."
• ROBERT: "Well, Plato actually talks about temperament in his cardinal virtues. But he doesn't use temperament. He used sound mindedness. And so when you think about sound mindedness, you think about, it is multilayered. It's multifaceted. It is dynamical. And there's many parts to it. And in the book, we go through all of the building blocks of what it takes to construct or actually achieve a money mind. And you're right. It's not just one thing. It's multiple things."

Click the PDF below to get the entire conversation and learn more about the Money Mind.  

-Paul R. Rossi

​Understanding and successfully following the inherited IRA rules can be a bit confusing, but it doesn’t take away from the fact that it’s vitally important to get it right. As there is a 50% penalty of the amount you should have distributed if you don't take the proper RMD's (Required Minimum Distributions). 

Never forget: The IRS wants its money and the IRS gets paid when you distribute money from an IRA account. 

As a result of the SECURE Act that was passed in late 2019, there are now essentially two sets of rules (and some additional sub rules) for inherited IRAs.

How do you determine which set of rules to follow depends on two things:

1. When did the original account owner die, and
2. Who is listed as the beneficiary of the account.

If the original IRA account holder passed away in 2020 or later
If the IRA owner died in 2020 or later, we first must determine whether the beneficiary is an “eligible beneficiary” or not.

Eligible beneficiaries include:

• The surviving spouse of the original account owner,
• A minor child of the original account owner,
• Anybody who is disabled or chronically ill, or
• Any designated beneficiary who is not more than 10 years younger than the original account owner.

 
If the beneficiary is an “eligible beneficiary,” then the more favorable “old” rules apply – go to the section that begins with “Eligible beneficiaries and deaths that took place in 2019 or earlier” below. If the beneficiary isn’t considered an eligible beneficiary, then the “New” Inherited IRA Rule applies – see below.

The “New” Inherited IRA Rule
If the beneficiary is not an “eligible beneficiary” from above, the new rule applies. What’s the new rule say?

It says that the account must be completely distributed within 10 years of the original owner’s death.

The distributions do not, however, require that they be taken evenly over those 10 years. For example, if you wanted, you could take no distributions for the first 9 years, then distribute everything in year 10. However, the account must be fully distributed by 12/31 of the 10th anniversary year of the original owner’s death.

Eligible beneficiaries and deaths that took place in 2019 or earlier
The “old rules” discussed in the remainder of this article apply in situations in which either:

• The IRA owner died in 2019 or earlier, or
• The beneficiary is an “eligible beneficiary” as described above, and therefore able to use the more favorable old rules.

Under the “old rules,” there are still actually two sets of rules: one set of rules that applies if the deceased owner was your spouse, and another set for any other designated beneficiary.

With this, the rules are different depending on the relationship to the original account holder:

1. Spouse Beneficiary 
   
2. Non-spouse beneficiary
3. Multiple beneficiaries

1. Inherited IRA: Spouse Beneficiary
As a spouse beneficiary, you have two primary options:

1. Do a spousal rollover — rolling the account into your own IRA.
2. Continue to own the account as a beneficiary, or 
3. Convert to a Roth IRA account (taxes will be due at the time of conversion).

Note: There is no deadline on a spousal rollover. Should you want to, you can own the account as a spousal beneficiary for several years, then elect to do a spousal rollover.

If you do a spousal rollover, from that point forward it’s just a normal IRA (i.e., it’s just like any other IRA that was yours to begin with), so all the normal IRA rules apply, whether Roth or traditional.
If you continue to own the account as a spousal beneficiary, the rules will be similar to normal IRA rules, but with a few important exceptions.

No 10% Penalty
First, you can take distributions from the account without being subject to the 10% penalty, regardless of your age. So if you expect to need the money prior to age 59.5, this is a good reason not to go the spousal rollover route — at least not yet. (As mentioned above, there’s no deadline on a spousal rollover.)

Withdrawals from Inherited Roth IRA
Second, if the inherited account was a Roth IRA, any withdrawals of earnings taken prior to the point at which the original owner would have satisfied the '5-year rule' will be subject to income tax (though not the 10% penalty).

​Spouse Beneficiary RMDs
Third, you’ll have to start taking required minimum distributions (RMDs) in the year in which the deceased account owner would have been required to take them. (If the original owner — your spouse — was required to take an RMD in the year in which he/she died, but he/she had not yet taken it, you’re required to take it for him/her, calculated in the same way it would be if he/she were still alive.)
Your RMD from the account will be calculated each year based on your own remaining life expectancy from the 'Single Life' table in IRS Publication 590-B. 

​2. Inherited IRA: Non-Spouse Beneficiary
When you inherit an IRA as a non-spouse beneficiary, the account works much like a typical IRA, with three important exceptions.

No 10% Penalty
Distributions from the account are not subject to the 10% penalty, regardless of your age. (This is the same as for a spouse beneficiary.)

Withdrawals from Inherited Roth IRA
If the inherited account was a Roth IRA, any withdrawals of earnings taken prior to the point at which the original owner would have satisfied the 5-year rule will be subject to income tax, though not the 10% penalty. (This is also the same as for a spouse beneficiary.)

Non-Spouse Beneficiary RMDs
Each year, beginning in the year after the death of the account owner, you’ll have to take a required minimum distribution from the account. (If the account owner was required to take an RMD in the year of his death but he had not yet taken one, you’ll be required to take his RMD for him, calculated in the same way it would be if he were still alive.)
The rules for calculating your RMD are similar (but not quite identical) to the rules for a spousal beneficiary. Again, your first RMD from the account will be calculated based on your own remaining life expectancy. However, in following years, instead of looking up your remaining life expectancy again (as a spousal beneficiary would), you simply subtract 1 year from whatever your life expectancy was last year.**

For example, imagine that your father passed away in 2018 at age 65, leaving you his entire IRA. For 2018 (the year of death), you have no RMD. On your birthday in 2019, you turn 30 years old. According to the Single Life table, your remaining life expectancy at age 30 is 53.3 years. As a result, your RMD for 2019 would have been equal to the account balance as of 12/31/2018, divided by 53.3.

For 2020, if it weren’t for the CARES Act eliminating RMDs for 2020, your RMD would have been equal to the account balance at the end of 2019, divided by 52.3. (But because of the CARES Act, the RMD for 2020 would be zero.) In 2021, the RMD will be the 12/31/2020 balance, divided by 51.3.

Important exception: if you want, you can elect to distribute the account over 5 years rather than over your remaining life expectancy. If you elect to do that, you can take the distributions however you’d like over those five years — for example, no distributions in years 1-3 and everything in year 4.

Successor Beneficiary RMDs
If a beneficiary dies before the account has been fully distributed, the new inheriting beneficiary is known as a successor beneficiary.

If the original account owner died in 2020 or later and the original beneficiary (i.e., the first person to inherit the IRA) was a “non-eligible” beneficiary, then the successor beneficiary will have to keep using the same distribution schedule. That is, the successor beneficiary will have to distribute the account within 10 years of the original owner’s death.

Conversely, if the original account owner died before 2019 and/or the original beneficiary was an “eligible” beneficiary, then the successor beneficiary will have to distribute the account over 10 years, but it’s a new 10-year period, beginning with the date of the original beneficiary’s death (rather than beginning with the date of the original owner’s death).

Tips for Non-Spouse Beneficiaries

1. When you retitle the account, be sure to include both your name and the name of the original owner.
2. Name new beneficiaries for the account ASAP.
3. If you decide to move the account to another custodian (to Fidelity from Charles Schwab, for instance), do a direct transfer only. If you attempt to execute a regular rollover and you end up in possession of the funds, it will count as if you had distributed the entire account.

 
3. Inherited IRA: Multiple Beneficiaries
If multiple beneficiaries inherit an IRA, they’re each treated as if they were non-spouse beneficiaries, and they each have to use the life expectancy of the oldest beneficiary when calculating RMDs. This is not a good thing, as it means less ability to “stretch” the IRA.

However, if the beneficiaries split the IRA into separate inherited IRAs by the end of the year following the year of the original owner’s death, then each beneficiary gets to treat his own inherited portion as if he were the sole beneficiary of an IRA of that size.

This is a good thing, because it means that:

• A spouse beneficiary will be treated as a spouse beneficiary rather than as a non-spouse beneficiary (thereby allowing for more distribution options), and
• Each non-spouse beneficiary will get to use his or her own life expectancy for calculating RMDs.

Note: If the original owner dies in 2020 or later and at least one beneficiary is a “non-eligible beneficiary” (per the definition from the beginning in this article), then the whole account will have to be distributed within 10 years, unless the IRA agreement has a provision that immediately divides the IRA into separate IRAs for each beneficiary.

To split an inherited IRA into separate inherited IRAs:

1. Create a separate account for each beneficiary, titled to include both the name of the deceased owner as well as the beneficiary.
2. Use direct, trustee-to-trustee transfers to move the assets from the original IRA to each of the separate inherited IRA accounts.
3. Change the SSN on each account to be that of the applicable beneficiary.

 
Some parting thoughts
When you inherit an IRA, it is imperative that you take the time to learn the applicable rules before doing anything. Don’t move the money or make any changes until you understand all of the potential implications because simple administrative mistakes can be very costly.

​
-Paul R. Rossi, CFA

​

​Before we can answer that, lets first define what a “value stock” is and what is considered a “growth stock.”
 
Keep in mind, the following definitions are not hard and fast rules, but rather broad ideas/principals, and investors will have slightly different definitions or thresholds as to which bucket a stock should be placed.  

Value Stock
Some key characteristics of value stocks are-

• Undervalued Compared to Their Peers. Value stocks trade at lower valuations than other companies in their sector or industry. When share prices fall but a company’s underlying fundamentals remain strong, value stocks become “affordable” in the short-term, and hopefully lead to long-term gains.
• Lower P/E Ratios or Other Valuation Metrics than the Broad Market. Even beyond a company’s closest competitors, value stocks are generally lower-priced than the broader market in terms of price-to-earnings (P/E) ratio, especially compared to growth stocks. Other valuation metrics can include: (P/S) price-to-sales, (DCF) discounted cash flow, (P/B) price-to-book, etc.
• Typically Less Growth but Reliable Income Streams. Usually larger and more established businesses, earnings of value stocks grow at modest but consistent clips. Because of their size, many companies opt to pay significant amounts of earnings directly to shareholders in the form of dividends, rather than reinvest them back into the business.
• Less Volatile than the Broad Market. Because value stocks are priced more conservatively, share prices often move less than the market average, and expectations are lower when companies report earnings. But the trade-off to price stability may be a longer holding period until pay out, so value stocks can be well-suited for long-term investors.

 
Growth Stock
The key characteristics of growth stocks are-

• Track Record of Earnings and Revenue Growth. Growth stocks are typically less mature but have grown their revenue and earnings at a better-than-average rate and are expected to continue doing so. Often, growth companies will ignore profitability to focus on top line growth. Consistently high growth rates for key top and bottom-line metrics can justify their relatively higher valuations…but not always.
• Higher P/E Ratios than the Broad Market. Because investors expect their earnings to continue growing, growth stocks carry high valuations such as above average P/E, price-to-book (P/B), and price-to-sales (P/S) ratios. A strong Forward P/E, which considers estimates made by the company and Wall Street analysts, indicates an expectation of continued growth for these companies.
• Anticipated Higher Growth, Albeit with Less Reliable Return On Investment. Growth companies typically opt to reinvest earnings instead of paying dividends to shareholders. This makes an investor’s ROI dependent on the share price increasing, but when a growth stock plows earnings back into the business, it increases the likelihood of capital appreciation.
• More Volatile than the Broad Market. Due to their higher valuations, prices of growth stocks tend to be more volatile than the broader market average. When share prices are already lofty, they can plummet quickly if a company misses expectations, or when negative news comes out.

In addition to looking at and understanding the value vs. growth question, investors also need to consider whether to purchase individual stocks, mutual funds, or ETF’s to implement these strategies.

Some general rules of thumb-
Growth may be right for you if you’re comfortable with larger price movements and you aren’t in need of current income (by way of dividends). However, you might prefer value if you’re looking for more stable investments that regularly pay dividends. There’s also a case to be made for including both value and growth in your portfolio to smooth out times of volatility and capture the best of both worlds. 
 
Value vs Growth, which is better for you?
Your preference for, or belief in, value vs. growth typically comes down to your investment objectives, risk tolerance, and time horizon. You may prefer to achieve exposure to growth or value, or some combination of both. Again, these are broad strokes, the devil is in the details, so doing a thorough analysis (as always) should be done prior to any investment decision.

-Paul R. Rossi, CFA 

The United States civil war lasted 4 years (1861-1865) and caused more than 1 million casualties. The war accounted for more American deaths than in all other U.S. wars combined.

Now imagine a civil war lasting well over a 100 years.

The period in Japan known as the Sengoku period from 1467 – to roughly 1615 was just such a period. During this time, Japan was in near constant civil war, causing social upheaval, and never-ending political instability. Many regional daimyo (local lords) were continually fighting, vying for land, power, and control during this period, costing countless lives. 

In the late 1560’s Oda Nobunaga, a powerful daimyo began to consolidate and control a large portion of central Japan through a series of successful sieges and battles. And for the first time in over 100 years, he brought some stability to this part of Japan. While his ultimate goal was to unify all of Japan under his control, he succeeded in conquering a portion of Japan before his untimely death, but was unable to accomplish his ultimate goal.

In 1582, taking over where Nobunaga left off, Toyotomi Hideyoshi a top general of Nobunaga, over the next decade continued the process of unifying of Japan, ultimately bringing relative stability to Japan. However, in 1598 Hideyoshi died without leaving an heir who could immediately take over, leaving a vacuum in power that many wanted to fill.

Following Hideyoshi’s death, Tokugawa Ieyasu, a former vassel of Hideyoshi, masterfully positioned himself to seize power and eventually lead the way for him to become Shogun (supreme leader) of Japan, bringing peace to a country that had only known war. He was able to complete the unification of Japan and outlast all the other great leaders of the time by employing several qualities that enabled him to rise to power. He was both careful and bold—at the right times, and in the right places. He was also calculating and subtle; Ieyasu switched alliances when he thought he would benefit from the change. Serving along-side and under both Nobunaga and Hideyoshi, he understood the power of patience. He acted only when the odds were in his favor.

Under his consolidation of power, he used his remaining years to create and solidify what became known as the Tokugawa shogunate which would rule Japan for the next 260 years.

He is thought to have fought in 90 battles throughout his lifetime.

Later in life he took to introspection and said, “The strong ones in life are those who understand the meaning of the word patience. Patience means restraining one's inclinations. There are seven emotions: joy, anger, anxiety, adoration, grief, fear, and hate, and if a man does not give way to these, he can be called patient. I am not as strong as I might be, but I have long known and practiced patience. And if my descendants wish to be as I am, they must study patience.”

Some things just take time. Knowing when to act and when not to act is a powerful skill.

Investing can be thought of similarly. Warren Buffett has said, “Time is the friend of a wonderful company, and the enemy of a mediocre one,’ and “You can’t produce a baby in one month by getting nine women pregnant.”

Warren Buffett also understands the value of patience.

Understanding and appreciating these two quotes by arguably the greatest investor of all time and employing the active patience Ieyasu was so masterfully able to do, will serve you well.

-Paul R. Rossi, CFA
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​What is Bushidō?

Bushidō can be translated to mean, "the way of the warrior." It is a Japanese moral code concerning Samurai behavior, attitudes, and lifestyle. Bushido can be thought of as an overarching term for all the codes, practices, philosophies, and principles of Samurai culture.

​Samurai were the warrior class in Japan that enjoyed high prestige, special privileges, and many military historians consider them to be some of the best swordsmen the world has ever seen.

This “code of conduct” has a long history in Japan which began to take shape with the rise of the warrior caste to power over a thousand years ago during the Heian period (794 -1185) and it was more formally defined over subsequent dynasties and applied into law during the Edo period (1603 - 1867).

So what is the Bushido code of moral conduct?

Bushido formalized earlier Samurai moral values and ethical code, most commonly stressing a combination of these Eight Primary Principles

1. Justice: is a core value of the Samurai. Incorporating the Bushido principle of justice into your life requires reflecting on what is fair and upholding the value of upstanding moral character.
2. Courage: like justice, entails deciphering what is right and wrong. Courage requires the strength not only to perceive but also to act - especially when it’s hard.
3. Compassion: is the ability to manifest love and sympathy through patience. It also requires attempting to see the world from the perspective of another.
4. Respect: means that you acknowledge your regard for the experiences and feelings of others. In order to collaborate with another person, respecting the other person is critical.
5. Integrity: In order to practice many of the other principles, one has to maintain integrity. This mean living honestly and sincerely.
6. Honor: Samurai were warriors who upheld a sense of self-worth and lived by the highest code of conduct. In order to abide by the principle of honor, you must acknowledge your moral responsibilities.
7. Loyalty: First, stay true to yourself. When fealty is given to another, this must not be abandoned even under difficult circumstances. More simply, when you give your word to someone, commit to it.
8. Self-control: Self-control in the Bushido code means adhering to this code under all circumstances. Being able to remain calm when others around you are not. Extremely helpful to remember during stressful times.

These principals were required to be observed in order to become a Samurai and were expected to be mastered.

​The Samurai ruled Japan for over a thousand years using these principals to live, how might you incorporate them in your life? 

Strive to live (and invest) the Bushidō way.


-Paul R. Rossi, CFA

In the the spirt of celebrating St. Patrick's Day today, here are some tidbits to chew on in between your green beer and corn beef.

While many times we think we know the truth, sometimes the truth is quite different from what we think it is.

Who St. Patrick wasn't:

• St. Patrick wasn't Irish.
• He never drove snakes from Ireland.
• He wasn't raised Christian.
• He was not a story book Saint, he wasn't meek or mild.
• He was never canonized a Saint by the Catholic Church.

Here's who he was:

• He was actually born in Roman Britain.
• Ireland never had snakes to begin with, so there were no snakes for him to drive out.
• He was raised Pagan but converted to Christianity.
• When he was young, he was taken captive by Irish pirates and sold as a slave to work in Ireland for 6 years. He escaped his captors and eventually traveled back to Ireland to spread Christianity to the people who enslaved him.
• He was given to fits of depression, self-pity, and violent anger, but was honest enough to recognize his short-comings.
• Throughout all of his difficulties his dogged determination and courage to face difficulties are what made him successful. While not officially a Saint, he did a tremendous amount to spread the word of Christianity.

In fact, many times the truth is stranger than what you might think. Let me explain.

The vast majority of the stock of individual companies since 1926 have returned less 1 month US-Treasury Bills.

Read that last sentence again.

How is this possible when the fact that stock markets provide long-term returns that exceed the returns of low risk investments, such as government obligations? This has been extensively documented for the US stock market as well as for many other countries around the world. We all have read that stock returns are greater than super safe US government bonds. That's why we invest in stock, to earn more than the low rates in savings accounts and short-term bonds.

So prepare for your mind to be blown away.

It gets even worse, the single most frequent outcome (when returns are rounded to the nearest 5%) observed for individual stock over their full lifetime is a loss of 100%. Read that last sentence again and let it sink in. A 100% loss is the most common outcome for individual stock.

The median time that a stock is listed is seven-and-a-half years. What does this mean? Companies don't last long.

The fact that the overall stock market generates long-term positive returns could be considered a puzzle.

While the majority of individual stocks fail to even match Treasury bills, the positive returns can be attributed to how the distribution of individual stock returns. The returns are positively skewed. Simply put, large positive returns of a very few stocks offset the majority of the losers.

The data shows that approximately 25,300 companies that issued stock appearing in the CRSP common stock database since 1926 are collectively responsible for lifetime shareholder wealth creation of nearly $35 trillion (as of December 2016).

However and amazingly, just 5 firms (Exxon Mobile, Apple, Microsoft, General Electric, and IBM) account for 10% of this total wealth creation.

• The 90 top performing companies, which is just 0.36% of the companies that have listed common stock, collectively account for over 1/2 of the wealth creation.
• The 1,092 top performing companies, slightly more than 4% of the total, account for all of the net stock market gains.
• The remaining 96% of companies whose common stock has appeared in the CRSP data collectively generate lifetime dollar gains that matched gains on one-month Treasury bills.

So when you are done drinking your green beer and start thinking about which companies to invest in, keep in mind that "picking winners" is extremely difficult, so you better hope you have some luck of the Irish on your side.

​- Paul R. Rossi, CFA

Here is a link to the published paper by professor Dr. Hendrik Bessembinder that this article references.